Three Ways to Kill a Bear

After a very successful election in Iraq, the market felt comfortable enough to tack on some gains. The election was a huge victory for democracy and world safety…stock markets eat this stuff up like thanksgiving dinner. But with the election behind us, what does the market have to look forward to now? To put it simply, interest rates, the President and jobs…in that order.

As of this writing, Fed Chairman Alan Greenspan and the rest of his cohorts are meeting to determine the future of interest rates. By this time tomorrow, we’ll all know their decision. Analysts’ are expecting Mr. G. to increase benchmark rates by 25 basis points to 2.5%. This would be the sixth rate increase since the Fed held rates at 1% back in June of ’04. While a vast majority of analysts are certain Greenspan will raise rates, there is an outside chance no movement will occur at all.

Inflation, as measured by the consumer price index came in at 3.3% for all of 2004, 2.2% when you exclude energy and food. While inflation is accelerating, it is still well below historical standards. This is where the outside chance for no increase comes in. Energy prices have stabilized and personal income has risen to a record 3.7% in December…consumers now have more wiggle room with these small price increases.

While this is an outside shot, your best bet is on a 25 basis point hike. The market will probably ignore a quarter point hike as it is already priced in. Should the Fed hit us with a curveball and raise rates by 50 basis points, stocks will surely dip. But this is equally as unlikely as no change at all. More important than tomorrow’s decision is Greenspan’s wording. The market will be looking for the Fed to stick to its plan and keep rates increasing at a measured pace.

Wednesday night will bring us President Bush’s state of the union address. While much focus will likely be on Iraq and the war on terror, the market will be looking for the President to talk about a social security overhaul and a simplification of the tax code. Stock markets like nothing more than cash influx. The plan to privatize parts of social security will add billions of dollars to the market. In real estate the key is location, location, location. In stocks, the key is volume, volume, volume. Likewise, a revision of the tax code, and possible complete overhaul, could add billions to the market as well. You can bet the market will have both ears wide open during the Presidents speech and will be looking for these two key subjects.

Last, but not least, is the January jobs data due out this Friday. The average estimate for new jobs creation is 191,000 with unemployment staying steady at 5.4%. Some analysts estimate growth of 250,000 new jobs with unemployment falling to 5.3%. Just one job more than the average estimate and stocks will head into the weekend on a winning note. Let me preemptively congratulate all of you who found work in January.

What we have this week is three ways to kill a bear. Lets all hope this nasty bruin goes back into hibernation and the mighty bull charges ahead.

Luke Hodgens is the editor of
Powerhouse Profits a conservative investment newsletter. Click here to read more of his cogent analysis."