Technically, the month of May begins the worst 6 months of the year for the market indexes. This being said, I have come up with a few reasons why we should not anticipate a pause by the Fed any time soon.
1) Everyone is talking about it. Anytime the crowd or the majority begins to anticipate something, rarely does the event happen.
2) Experts have been coming out in droves saying there is no way the Fed will raise rates enough to invert the yield curve. Oh yeah, how about the "Tow Truck" approach. Raise short term rates close to yields on the 3, 5, and 10 year Treasury's. The thoery here is the short term rates will nudge rates up along the yield curve.
Now, how can this be done? The Fed funds rate is currently at 3%, while market rates as measured by the 3 month T-Bill is 2.8%. Greenspan is already ahead of market rates, and because of this occurrence, everyone is anticipating a pause in Fed action. Maybe Uncle Alan has a different idea.
The "Tow Truck" approach I mentioned above is not only possible, but may be exactly what the Federal Reserve has in mind. Since long term rates are being controlled by China, Japan, and Hedge Fund jockeying, recent Fed action has done little to curb inflation or real estate speculation. If the Fed raises the Fed funds rate another .50 basis points to 3.5%, then the Fed funds rate would yield almost as much as the 2, 3, and 5 year Treasury, and only 1/2% lower than the 10 year.
Now this is very simple. Most investors would rather own a 6 month CD versus a 2, 3, 5, or 10 year bond with almost the same yield. Why tie up your money at 4% for 10 years when you can get 3.5% for 6 months. Greenspan is betting that investors will realize the yield/time difference also. I know I may be a little ahead of the crowd on this one, but it makes perfect sense.
By time the market figures this one out, it will be bombs away in the stock market. Today, we are selling 2 stocks. Sell Eli Lilly (LLY), Texas Instruments (TXN). We are going to use this rally to raise cash.
