Two things happened yesterday that sent the Dow up 171 points. First the Federal Open Market Committee Chairman, Ben Bernanke, seemed to indicate he would lower interest rates by 50 basis points (0.5 percent) in a speech last week. This could happen before the January 29-30 FOMC meeting according to some analysts. Second, he assured the American people he would speak more forcefully and more often about the plight of the nation's economy.
Coupled together, these two statements instigated worry among short-sellers and put-option holders. Nervous and weary, short-sellers and put-option holders would sell at the first sign of anymore good news. Nonetheless, more good news came when IBM publicly disclosed their higher than expected profit earnings for the first quarter 2008.
This news shot the Dow up almost 50 points, the rest was short covering and bargain hunting. The question now is how much of this gain will disappear and how much will remain? The FOMC's Beige Book, a report that gathers and publishes subjective data on current economic conditions eight times per year, may provide that answer. The Beige Book is expected to reveal an incessantly weakening U.S. economy according to a consensus of analysts.
It is estimated GDP will finish around 1.5 percent in the first quarter 2008. If the Beige Book happens to cast doubt on this expectation, giving the impression GDP will finish lower, the expectation that the FOMC will lower interest rates an additional 50 basis points will greaten. This would prove positive for the Dow from that time until the Fed's rate action is made public.
On the other hand, you could expect a massive Dow sell-off if the FOMC allots any less than a 50 point rate cut. I intend to play it safe. I plan to wait until the FOMC takes action before I put together the 2008 portfolio. The only thing that would change my mind is if the Beige Book concludes that the American economy is better off than currently realized, then I will take action, informing you via updates on the website.
Kenneth Coleman
