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bernanke's dilemma

Mayan volcano eruption worse during full moon period because of gravitational pull. Search google for effect of full moon on mayan volcano. When the wolves howl -watch out for market weakness.

 

Excellent article by mark hulbert. As for the moon and it's significance search google for -lunar pdases and stock returns-Are stock investors moonstruck?

 

ANNANDALE, Va. (MarketWatch) -- Returning from my two-week vacation, and after reading through hundreds of newsletter issues and e-mails, I am struck by how many advisers are hoping the Fed will choose not to raise rates at its Tuesday afternoon meeting.

This is very curious.

One could just as easily, indeed, I think more plausibly, argue that a Fed decision not to raise rates is more bad news than good. Yet very few of the advisers I monitor are even entertaining this alternate perspective.

The fact that advisers are inclined to put such a positive spin on a possible end of the Fed's rate-hike cycle is yet more evidence of the discouraging sentiment picture that I wrote about just before leaving on vacation. See column

Why would a Fed decision not to raise rates be anything less than positive news?

For starters, consider the historical precedents. As I have on a couple of similar occasions over the past several months, I turn to James Stack, editor of the InvesTech Research Portfolio Strategy newsletter. Stack has one of the better risk-adjusted performances of any newsletter editor I have tracked over the past 20 years.

In a study competed earlier this year, Stack showed that, over the months following the final hike in a series of Fed rate hikes, the stock market more often than not went down.

Specifically, Stack looked at all instances in the Federal Reserve's history in which it raised interest rates at least two times in succession. He then measured the S&P 500's gain or loss following the final rate hike in each of these instances.

On average, the S&P 500 index was lower three months later, in six months, and a year later.

This finding is not as surprising as it may seem. The Fed stops raising rates when it senses that its previous hikes have started to work. That means that it sees signs that the pace of economic growth is slowing.

The counter-argument, of course, is that the stock market reflects the net present value of companies' future earnings. And, other things being equal, a lower interest rate means that, when calculating a company's net present value, future earnings can be discounted to a lesser extent than they otherwise would. That in turn means companies' valuations would be higher than otherwise.

The Achilles' heel of this counter-argument is that other things are never equal. Companies' future earnings are not set in granite. They most likely will be lower than they otherwise would be if expected economic growth and inflation have slowed enough to convince the Fed to stop raising rates. So, just as the interest rate used to discount future earnings comes down, so do those earnings as well.

Investors often are blind to this relationship between interest rates and earnings growth because they extrapolate recent earnings growth rates into the indefinite future. Economists sometimes refer to this blindness as money illusion or inflation illusion. It renders investors too optimistic at the end of a rate-hike cycle, and too pessimistic at the beginning.

This perspective suggests a contrarian way of exploiting the Fed's announcement Tuesday afternoon. If the Fed chooses not to raise rates, and the stock market soars in reaction, then you might use the occasion to lighten up your equity exposure or even initiate a few bets that the market will soon decline.

If, in contrast, the Fed chooses to continue raising rates, and the stock market plunges on the news, then you might want to use the occasion to increase your equity exposure. The Fed's decision will be good news, even if investors don't see it that way, and the market's decline could provide you with the opportunity to exploit that good news.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

 

A rate pause is likely scenario saying he will expect to leave more room for interest rate hike if it is require and leaving w/o a doubtful tot,

 

HI newmoon .. 15th affecting the stk market ? interesting .. any reason behind the logic. Just curious

 

If he holds interest rate steady it means that the economy is weak-if increases interest rate he could collapse the housing bubble and consumer spending bubble. The tech bubble was followed by the housing bubble but don't know what is the next bubble on the horizon?-answer print more reserve currency? and hope for a miracle but the business cycle runs its own course like day follows night and new moon follws full moon. By the way today is 15th day of the lunar calendar -market volatility on the downside more likely.