Where Will These Markets Head Now?

With the FOMC statement due out on Wednesday afternoon most markets are likely to go nowhere on Monday and Tuesday (at least that has been the normal run-up to the statement).

On Tuesday and Wednesday we have the CPI and PPI releases and we would be surprised if these were ‘hot’ (at least if you believe these numbers which seem kind of bogus to us).  Most items we personally buy seem to have gone sky high–and if you try to book a hotel room or a flight the rates are scary high.  We like to visit Duluth MN this time of year, but the motel/hotel room rates are so high we are skipping out normal fall trip–I mean $150-250/night is just a bit beyond what we want to pay for a couple days.  We can say though that auto fuel has been tame and falling and that is a relief.

Wednesday afternoon the FOMC will end the suspense on whether they take the words ‘considerable time’ out of their statement.  This debate knocked the 10 year treasury around last week with the yield ending up around 15 basis points–and our model portfolio ending up with a YTD gain down to around 10% (down from a high this year of just over 11%).  Obviously we are concerned with a wild overreaction to the statement, but we have no plans to try to do anything about it in a significant way.  Certainly one can try to hedge portfolio’s, but our experience is that these hedges are seldom helpful because one has to determine when to take the hedge off and there is always a real money cost to the hedges.

The important housing numbers will be released on Thursday.  We believe that housing will react sharply to movements in interest rates as the marginal buyers is very interest rate sensitive and movements of 1/4 or 1/2% will knock these buyers out of the market—back to the apartment.

Leading economic indicators are released on Friday and this could help confirm (or not) the wording of the FOMC statement.  It almost seems silly to parse the FOMC statement this heavily–but that is the world we live in at this point in time.