MASTERING
THE TRADE
ORIGINAL, INTERACTIVE SEMINAR ON TRADING USING
TECHNICAL ANALYSIS 

 SEC FILINGS

Mickey Mouse cheered yesterday as better than expected earnings from Disney lit a spark under the stock market, and bond traders were given a day of rest after a Nor'easter forced the cancellation of day one of Greenspan on the Hill, but despite the day's solid gains neither mouse nor snow is likely to prevent a relapse of Fed Induced Sensory Trauma (which we shall refer to hereafter, for brevity's sake (and because everyone loves a cute acronym), as F.I.S.T.).

F.I.S.T. has been fighting it out with its rival Stellar Earnings over the past few weeks in the battle to be the apple of the media's (and trader's) eye, but with a snow delayed Greenspan scheduled to speak today and the next FOMC meeting looming around the bend, we have a sneaking suspicion our old friend F.I.S.T. will take center stage--and with the jitters once again scheduled for a turn in the limelight, it is perhaps time for a quick look back at Monday's journey to the Guynn-sian Rate Jitters Chasm.

Atlanta Fed President Jack Guynn sent the stock market into a tailspin on Monday when he stated the already known: three rate hikes have failed to put the brakes on the runaway consumer spending locomotive.  Although recent economic data has told a similar story, the market, cursed with a short term memory, panicked as visions of a 50 basis point hike danced through the minds of traders.

While we continue to believe that a 50 basis point hike will be necessary if the Fed hopes to stop the recent acceleration of consumer demand dead in its tracks,  the presence of the ever cautious Fed Chairman tilts the odds in favor of a 25 basis point move.

Yesterday's record consumer confidence figures indicate that in the battle between Wealth Effect and FOMC, next week's expected 25 basis point hike is likely to prove to be little more than a futile waste of energy on the part of the Fed.

The Conference Board's Consumer Confidence Index rose to a record 144.7 in January as rising stock prices and the best jobs market in decades more than compensated for the slight annoyance of rising bond yields and mortgage rates.  Perhaps more important than the headline figure, the Future Expectation component of the survey surged to 119.7 from December's 115.0--important because a consumer who sees nothing but blue skies ahead is unlikely to cut back on his or hers spending.

Yesterday's consumer confidence figures indicate the economy will remain strong throughout the first half, continuing to grow at a better than 4% clip-- a rate of growth that is likely to bring with it a rise in inflationary pressures as strong domestic consumer-driven growth and rising demand for exports from a rebounding global economy bring wage pressures bubbling to the surface as businesses scramble to meet rising demand and find few available qualified workers left to hire.

Inflationary pressures are unlikely to be limited to the wage front, however. Imports are at a record level, and with the days of falling import prices a fading memory as the world recovers from the depth's of 1998's Asia crisis and prices begin to creep up, the American consumer will be forced to pay a higher price for that new Toyota car or Electrolux vacuum--and with that higher price comes imported inflation.

The industrialized world is rapidly moving from the deflationary trend of two years ago to a period of rising prices--and rising interest rates.  This week saw the release of stronger than expected consumer inflation numbers from the U.K. and Germany--putting pressure on the Bank of England and European Central Bank to raise rates, and putting pressure on the Fed to take steps to slow the demand for imported goods.

The need to avoid a global outbreak of inflation will force the Fed to take far more severe action in the coming months than many expect, and with that action F.I.S.T., Fed Induced Sensory Trauma, is likely to rule the stock markets of the U.S., U.K., and Europe with an iron fist as the first half progresses and it becomes apparent that the rate hike cycle is far from over.