FSO Market WrapUp "The End of an Era" by Rob Kirby 01.30.2006

Tomorrow’s FOMC [Fed Open Market Committee] meeting will be the last chaired by Alan Greenspan – who hands over the reigns as Chairman of the Federal Reserve to Ben Bernanke on Wednesday, Feb. 1.

That the Fed is expected to raise its short term lending rate [also referred to as the overnight or Fed Funds rate] should come as no surprise to anyone. If tomorrow’s widely expected 25 basis point rate increase follows the pattern set in June of 2004 – it will be the 14th time the Fed has raised the trend setting rate in successive meetings since June 30, 2004.

CHANGE (basis points)
Date	Increase	Decrease	Level (percent)
2005
December 13	25	...	4.25
November 1	25	...	4.00
September 20	25	...	3.75
August 9	25	...	3.50
June 30	25	...	3.25
May 3	25	...	3.00
March 22	25	...	2.75
February 2	25	...	2.50
2004
December 14	25	...	2.25
November 10	25	...	2.00
September 21	25	...	1.75
August 10	25	...	1.50
June 30	25	...	1.25

While it has been the Fed’s stated goal, time and time again, throughout this rate raising regime – “to remove excess accommodation at a measured pace” - there are lingering questions that remain to be adequately answered, namely:

The answers that have been bandied about in the mainstream press regarding question number 1 have ranged from theories that record U.S. deficits are a “sign of economic strength” to charges that foreigners see U.S. debt obligations as the “safest” investment choice in the world. Given that the monies which are actually sopping up the record amounts of U.S. debt are those almost exclusively of Foreign Central Banks – not individual’s private savings - I find that proposition somewhat hard to swallow.

The answer to question number 2 is of utmost importance to investors as well as home and business owners alike. Perhaps, with the changing of the guard - the Fed will seize the opportunity to provide the minions with a greater degree of clarity in their statements that accompany their interest rate decisions. I could think of no better way for Mr. Bernanke to display some much needed probity to start his Chairmanship on the right foot.

Almost lost in the hoop – la of the passing of the chairmanship, President Bush announced on Friday, Jan. 27, 2006 two nominees to fill vacancies on the Federal Reserve’s Board of Governors.

Nominated were Randall Kroszner, 43, an economics professor at the University of Chicago’s graduate school of business and former member of Bush’s Council of Economic Advisers. Also nominated was Kevin Warsh, 35, a special assistant to the President for economic policy at the White House. Previously, Mr. Warsh served as executive director and vice president of mergers and acquisitions in the investment banking division of Morgan Stanley.

Coincidentally, or perhaps not, both of these individuals – no, in fact – all of these individuals have a direct lineage to Harvard – where they all completed post graduate work.

Overseas equity markets began the week on a positive note with Japan’s Nikkei Index gaining 267 points to close at 16,728. North American equities didn’t fare as well with the DOW losing 7.29 to 10,899.92, the NASDAQ added 2.55 to close at 2,306.78, and the S & P gained 1.47 to close at 1,285.19. NYMEX crude oil futures added .38 to close at 68.35 per barrel.

In foreign exchange markets the U.S. Dollar Index gained .09 to close at 89.28. Interest rates were little changed with the benchmark 10-year bond finishing the day at 4.53% and the benchmark 5-year government bond ended the day at 4.46%.

Precious metals firmed with COMEX gold futures adding 7.40 to close at 566.80 per ounce while COMEX silver futures added .18 – closing at 9.78 per ounce. The XAU gold bug index gained 2.89 to 149.68 and the HUI closed at 333.52 – up 9.20 on the day.

On tap for tomorrow, at 10:00 a.m. we anticipate the Jan. Chicago PMI [Purchasing Manager’s Index] data to be released – expected 61.0 vs. prior 61.5. Also at 10:00 a.m. the Conference Board is due to release Jan. Consumer Confidence data – expected 105 vs. prior 103.6. Then, at 2:15 p.m., the FOMC is due to announce their decision on short term interest rates [expected +.25 to 4.50%] as well as their much followed policy statement where market watchers scrutinize the “language” for clues as to future Fed intentions.