David Moenning Daily State of the Markets: 12/14

Singing a Different Song

After almost 18 months of hearing that the Fed intended to �remove excess accommodation at a pace that is likely to be measured,� we finally got a different chorus to the Fed�s song yesterday. And while the exact wording may not sound all that different, traders got the message � the end of the tightening campaign is in sight. In light of the fact that this was the message that the markets were longing to hear; stocks enjoyed a nice little pre-holiday bounce in the afternoon.

The Fed�s new language stated that "The Committee judges that some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance." In English, this means that the Fed no longer views their stance as �accommodative� and that Fed policy is rapidly approaching the desired �neutral� position.

There were several other changes to the language concerning the economy and inflation, though they did not significantly change the overall tone of the statement. Mr. Greenspan suggested that the expansion was "solid" and that while core inflation has remained low, "possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures." However, the language also means that we can expect to see at least one, if not two, additional rate hikes.

Given Mr. Greenspan�s propensity for creativity when combining the English language with economics, it was fitting that, as he prepares to leave his post, he decided to retain the one word that everyone was keying on. Fed watchers everywhere have to appreciate the Fed Chairman�s ability to keep the word �measured� in the statement, yet manage to completely change the meaning. Well played.

There was one key takeaway from the Fed�s announcement. The point is that any further rate hikes from here will signal a �tightening� of the Fed�s policy, rather than a �removal of accommodation.� Thus, we can rest assured that there will be trouble if the markets begin to get the feeling that the Fed plans to spend any more time on the measured path.

Turning to this morning, the markets have had little reaction to the fact that the Nation�s Trade Deficit came in much larger than expected. So it would appear that traders have become quite accustomed to the persistently large trade deficit. In addition, there wasn�t much response to the report on Import Prices, which fell -1.7% and -0.2% when oil is excluded. Running through the rest of the pre-game indicators, oil is little changed this morning and is trading at $61.37. Bond yields are heading lower on the positive data regarding Import Prices, with the yield on the 10-yr is currently at 4.48%. And finally, stock futures are on a little weak at the moment, but have definitely improved over the last hour.

So with the Fed�s intentions now clear, the question at hand is if traders will �sell the fact� or simply celebrate the Fed�s new tune?

Stocks "In Play" This Morning:
BR � Downgraded just about everywhere
COP � Ditto
GDT � Rated Neutral at Prudential
GD � To acquire ANT
IBM � Linux Networx has entered an OEM agreement with IBM

Disclosure: At the time of publication Mr. Moenning and/or related companies are long the following positions: IBM

To see David Moenning�s Trading Record, his (Strong Buy) List, or the rank for any Top Guns Stocks, visit: http://www.AnotherWinningTrade.com/SI

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