Oil and the Fed

by Larry Levin

The market got off to a rocky start early today with another increase in oil prices. However, the market was also prepared to continue ignoring oil as a reason to take profits: as oil continued to rise, so did the market. It was the Federal Reserve minutes that caused stocks to plummet.

Try as they might, Fed officials just can't ignore headline inflation anymore. Surging prices for gasoline, food and other commodities forced the Fed to sharply boost its inflation outlook for this year. At the same time, their forecast for economic growth for the remainder of this year was revised much lower.

In its latest forecast, the Fed said that headline inflation, as measured by the personal consumption expenditure (PCE) price index, could spike to 3.4% this year, up 1.3% percentage points from its previous forecast of 2.1% in January.

In light of the fact that the Fed has already slashed rates form 5.25% to 2.00%, and opened its balance sheet allowing banks to exchange garbage CDOs for cash, many Fed members felt they have done enough. "In that regard, several members noted that it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term," according to the summary.

Dallas Fed President Richard Fisher said the rate cuts were pushing down the dollar's exchange rate and this was contributing to higher commodity and import prices, cutting consumer spending and hurting the economy. The Kangaroo Court on Capitol Hill, however, doesn't see the connection yet and probably never will. Philadelphia Fed President Charles Plosser cited money supply data to show that the economy already had ample liquidity from the past rate cuts.

Result - don't expect more rate cuts any time soon. That is, unless the stock market continues to slide. If that happens, analysts and portfolio managers across the country will squeak like baby chicks demanding more worms.

And then there was oil. What more can I say about it? Oil set another record today and last check, was trading +$5.04 higher on the day (in the aftermarket). But don't worry; your elected circus clowns on Capitol Hill are going to get to the bottom of it.

Hmmm, come to think of it, there is a "new wrinkle" in oil. Since the tax rebate was passed several months ago, oil has gone up $40-barrel. That increase equates to approximately $300-billion more to be spent on gasoline across the nation. Therefore, it is safe to say that 100% of the $150-billion "stimulus" will be spent filling up our cars with gasoline. Said another way, 200% of the $150-billion "economic stimulus" boondoggle will actually be helping OPEC sheiks buy more yachts and Ferrari's. Of course, all of that money is being borrowed from China and Japan , so we'll owe interest on that as well.

Real Time Trading Signals*for

Trade Date: 5/21/08

E-Mini S&P Trades*
(before fees and commissions):

1) VA sell @ 8:35am at 1418.00 = +1.75 (1 lot)

2) PP buy @ 9:50am at 1410.00 = -.50 (1 lot)

3) VA sell @ 10:25am at 1412.00 = b/e (1 lot)

4) VA sell @ 11:20am at 1412.50 = b/e (1 lot)

5) Engf sell @ 1:30pm at 1395.75 = +2.50 (1 lot)

6) Algorithm trades (7)...combined total...+12.25

E-Mini Russell Trades*
(before fees and commissions):

1) Sell @ 9:05am at 739.9 = +1.6 (1 lot)

2) Sell @ 9:34pm at 739.0 = b/e (1 lot)

3) Sell @ 10:14am at 736.3 = +.5 (1 lot)

4) Sell @ 1:06pm at 734.5 = +2.5 (1 lot)

5) Sell @ 2:45pm at 727.4 = -1.0 (1 lot)...+$360.00


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