The Fed Sits on the Fence as Inflation Looms and the Economy Sinks

June 27, 2008
Gary Kaltbaum

Gary Kaltbaum is an investment advisor with over 18 years experience, and a Fox News Channel Business Contributor. Gary is the author of The Investors Edge. Mr. Kaltbaum is also the host of the nationally syndicated radio show “Investors Edge” on over 50 radio stations. Gary is also editor and publisher of “Gary Kaltbaum’s Trendwatch”… a weekly and monthly technical analysis research report for the institutional investor. If you would like a free trial to Gary’s Daily Market Alerts click here or call 888.484.8220 ext. 1.

Well, if there was ever a week to be in Hawaii, this is it.

George Carlin was one of my 2 favorite comedians… the other being Rodney Dangerfield. George Carlin would rail against all the supposed smart people who turned out to be nothing more than a title and an empty head. With that thought in mind, I present to you the notes out of the Fed. George Carlin would have a great laugh as the Fed said nothing… took both sides of every issue and was uncertain about everything. Please recall, this is a Fed that told us for 2 years that housing was not a problem… subprime was not an issue… and to this day, says inflation is anchored and while energy and food is higher… dont worry because it will get better. The seven words you could not say on television should be yelled out whenever the Fed says anything. They are good at one thing… reporting the news after it already happened and always too late to do anything about. Oh yeah, and the other goof was out yesterday saying it was better than 50-50 we are going into recession…hey thanks! So here you go… Einstein couldn’t even decipher the following message:

“The Federal Open Market Committee decided today to keep its target for the Federal funds rate at 2 percent. Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters. The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high. The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.”

As you know, I believe the market is smarter than everyone. During the whole 2-month bounce off the lows, I took pains to make sure you knew the permabulls did not have a clue as everything consumer refused to rally and leadership was narrow with commodities and some big cap nasdaq-typed leading. That kind of narrow leadership almost always leads to lower prices…and you are now seeing it. The stock market, not only ours but all over the globe, is imploding as a major slowdown in economic growth and a good dousing of inflation is always a negative for equities. So…let’s go over some things I have been saying …to make sure you stay in gear.

First off, and most importantly, bear markets take things down farther than anyone can fathom. Typically the groups that led down – continue to lead down. That means FINANCIALS of all kinds as well as HOUSING. I have battled many over the past few months accusing me of being nuts when I went on TV to say there is nothing in the rulebook that says a CITIPUKE cannot go single digits or that many names would go under. Not many are battling me anymore. This same thing happened in the technology bear of 2000 as names like Lucent and Worldcom and others were destroyed. No one would ever believe Lucent would go to $2 or Worldcom would go bust. Continue to ignore the calls of cheap “value” or “oversold” by people who just don’t get it. Many of these financials made up their numbers because no one was watching. They lived in their own universe where no one could tell them what to do. They had financials where the footnotes were twice as large as the financial statements… where Lehman
(
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PowerRating) can move a decimal or a product off the balance sheet at any time to make things look better, a world where they lobbied the FASB to come up with new rules so that they could just make up revenues and earnings. Very simply, there are not enough jail cells for all these people down the food chain at these companies. These are not business titans. These people are creeps… and they are doing a great job of destroying all trust and credibility in the financial markets.

As far as the rest of the market, the bear areas I have been telling you about continue to melt down and including anything consumer, such as AUTOS, AIRLINES,CRUISE LINES, GAMING, HOTELS, HOUSING, LENDERS, as well as anything RETAIL… well, you get the hint. Also of note:

Other stuff:

GOLDMAN puts a SELL on CITI and General Motors
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PowerRating). Hey thanks. They watch CITI go from $57 to $18 and GM from $43 to $11 and then they say to sell. Yup… that’s why they get the big bucks.

Meredith Whitney… banking analyst for Oppenheimer
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Many are calling for the Fed to raise rates in order to fight inflation. Everyone needs to know that the Fed cannot do anything to fend off inflation. Once inflation is in the system, it is like that movie…”The Blob!”

Bottom line… go to Hawaii. I have been in cash…and am staying in cash. I believe there is a real lack of trust and credibility in the people that should count the most… and looking forward, one has to worry about earnings as the double wallop of higher prices and lower spending will eat into earnings… and in case you dont know, when it is all said and done, it always comes back to earnings.

The only thing I have interest in is some of the commodity areas I have previously mentioned but only on pullbacks… as well as shorting into any bounces. Average bear markets take major indices down 25-30%… you add it up.

Heading to Maui this weekend. Wish you were here.

Disclaimer: The opinions expressed herein are those of the writer and may not reflect those of Wunderlich Securities, Inc. or any of its affiliates. The information herein has been obtained from sources believed to be reliable, but we can not assure its accuracy or completeness. Neither the information or any opinion expressed constitutes a solicitation for the purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results.

The Fed Sits on the Fence as Inflation Looms and the Economy Sinks

BUY THE FEAR, SELL THE GREED

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