Week 38 Performance: LiveRocket up 0.12%

Week 38
Dow 3.26%
S&P 3.15%
NASDAQ 3.66%
LiveRocket 0.12%

YTD
Dow 4.69%
S&P 2.48%
NASDAQ -5.03%
LiveRocket 19.38%

Since Inception (Nov 4, 2005)
Dow 6.6%
S&P 4.9%
NASDAQ -3.5%
LiveRocket 30.74%

With the exception of EMT, we have been in cash. As I explained last week, I wanted to see how the market would react to the housing results. Housing reports showed much steeper declines as well as price drops in key markets. The market didn't care.

I also wanted to see a consistent consolidation in the markets and that seems to be happening. The week was very strong.

The remaining question is whether the Fed will raise rates again. The market has voted in favor of no more rate increases. It believes that a slowdown is acceptable as long as there is interest rate visibility. In fact, the market surged on Bernanke comments that were interpreted to mean no more rate hikes.

I am still not on board yet. First of all, I think much of the recovery last week was partly a recovery from the prior week's drop from the Israel/Lebanon conflict. Second, I am not convinced that rate hikes are over. And a rate hike will hit the market hard.

While GDP is dropping (from 5% in Q1 to ~2.5% in Q2) inflation continues to rise. The Fed may assume that its efforts to slow down the GDP may be sufficient to create the desired inflationary slowdown as well. Indeed, many people think that the Fed should ignore the increasing inflation rate. Inflation is a lagging metric - so future inflation may be lower. Second, housing and oil drive most of the increase - take out housing, food and oil and prices are tame.

But that is a false reading of the facts. The reality is that inflation is very present. The May CPI drop was actually driven by a large drop in oil prices. The June core CPI (which excludes oil and food) was UP MORE THAN EXPECTED. It hit 0.3% and was higher than 0.2% expected. This is the 4th straight month that the core CPI has hit 0.3%. The Fed wants a much lower rate.

The challenge is that the inflation is caused by oil. For example, airplane ticket prices drove up some of the CPI - those ticket increases caused by higher fuel costs.

I think the Fed has a challenge: it can not control oil prices but it can not ignore inflation. The only thing the Fed can do is to accpet a new, higher inflation target that reflects the higher costs of oil. In which case no more rate hikes.
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Last week I suggested taking LEAPs if you wanted to invest in the market.
Specifically, I pointed to the Jan 08 ESV $40, then trading at $7.70. They now trade for $12.

ESV was, as I predicted, a massive hit - price doubled 20%.