Thursday, June 29, 2006

All eyes on the Fed

Tomorrow's inevitable rate hike is one more step towards the Fed's final rate hike (of which it could very well be) and the point at which one can think of future rate declines. Unfortunately, the need to cut rates is a product of recession - so life will likely get rougher before it gets better. It will be interesting to see how the Business Week listed forecasters do by years end; certainly some of the more optimistic projections are looking far fetched at the half-way point.

I had noted in early May how the dollar was approaching a level of support typical of a reversal head-and-shoulder pattern. This bounce is now underway but I am skeptical of it lasting as the turnaround occurred at a point when the dollar was not sufficiently oversold to support a strong rally. What could this mean for the dollar? Don't be surprised to see another swing back to 84 which should put in place a decent bottom.

A strengthening dollar will help the Fed as the dollar acts as a disinflationary pressure on commodity prices - keenly felt by copper, gold and silver but as yet, not oil prices. A strong dollar will put less pressure on the Fed to raise rates in the future.

So assuming a rate decline is the near future what sectors should one be looking at? Traditionally utility stocks perform strongly in a falling rate environment. As a recession takes hold consumer staple stocks become favored and once rate cuts bottom look to financials.

For investors, look to accumulate stocks like American Electric Power ($33.87 Yield 4.40%), Middlesex Water ($17.10 Yield 4.00%) and Ameren Corp. ($50.18 Yield 5.10%)

Yahoo! carries a good list of diversified utility stocks.