The Waiting Begins

Tuesday Will Set the Tone

By Bryan Bottarelli
Monday, August 07, 2006 2:29 PM EST
Mon, 7 Aug 2006 19:29:00 GMT

Dear Bottarelli Research Member,

After last week’s jobs data, the bias has squarely turned to the side of the Fed pausing tomorrow. After 17 straight interest rate hikes, the odds are now four-to-one that the Fed will rest at 5.25%. In my view, this has boxed the Fed into a corner — and neither outcome will appear favorable to Wall Street.

On one hand, the Fed can stop their run of hikes that began in June of 2004 — which would signal inflation is in check but the economy is now weak. Of course, a weak economy comes with a bearish overtone.

On the other hand, if the Fed bumps another quarter point to 5.50%, this would signal that inflation is still not in check despite weakening economic numbers. Of course, this would also bring about a bearish overtone.

Of course, everything could change depending on the Fed’s policy statements, but as it stands right now, the play is to rest comfortably on the sidelines. I did notice that our CAT November 75 Calls (CAT KO) once again traded as high as $4.10 today, so if you were not able to exit them Friday, try to use today or tomorrow’s per-Fed action as a secondary exit opportunity. The same goes for the CSX November 65 Calls (CSX KM) — if you have yet to exit them, try to get out before the Fed announces tomorrow.

As I’ve said before, I plan on re-entering both the CSX and the CAT positions at some point in the future, but the safest play is to exit each of them until we receive further clarity from the Fed. In the meantime, I’ll keep working in your next special report due later this month.

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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