It's all about the Fed!

You want to see how rising interest rates puts a break on stock prices double click on this chart.

From the spring of 2004 until last July the Federal Reserve {the Fed} raised interest rates 17 times. The economy grew at above historic rates and corporate earnings continued at record levels. Yet stocks for most of this time barely budged. From the beginning of their tightening until the Fed finished, stocks grew at a bit over 5% {excluding dividends}. However, most of this gain came in a November 2004-February 2005 rally that was attributed to Wall Street's relief that George Bush beat John Kerry. If you take away those gains stocks have traded virtually flat for almost a year and a half. Now notice that when the Fed quits raising rates the market just takes off. An 8% gain in about 4 months. More in fact than in most of the past 2 years.

In short the Fed matters.

Hedge Fund Assets Reach $1.34 Trillion

This from the blog 24-7 Wall Street. http://247wallst.blogspot.com/ {Highlights are mine}.

By Yaser Anwar, CSC of Equity Investment IdeasHedge fund assets rose to $1.34 trillion in the third quarter as investors poured a record $44.5 billion into the industry, according to Hedge Fund Research. The inflow of funds indicates that hedge funds haven’t lost their allure to wealthy investors despite unremarkable performance and the collapse of $6.5 billion Amaranth Advisors. Hedge funds averaged a measly 1% return in the third quarter. The S&P 500, on the other hand, gained 5.66 percent in the third quarter. The MSCI World Index gained 4.05%." While quarterly performance was again less than spectacular, the flow of new assets into the industry remained remarkably strong," said HFR president Joshua Rosenberg, to Dow Jones Newswires. "This may suggest that investors are taking a longer-term perspective with regards to how they allocate assets to hedge funds." HFR says that more than half of the new money was earmarked for relative value arbitrage, equity hedge, and event-driven strategies. The best performance came from convertible arbitrage strategies, which were up 2.74% in the third quarter and emerging market strategies, which climbed 2.6 % in the quarter, says HFR.http://www.equityinvestmentideas.blogspot.com.

Again I like the Hedge Fund Model but I don't like how the game is currently being played.

Big Deal Dow Jones.

So much hoopla about the Dow Jones Industrial Average {Hereafter the Dow} setting new highs, so little meaning to the overall market. First let's face the fact that the Wall Street believes that the man on the street only knows the Dow. Let's also acknowledge that unless you've been hiding under a rock these past couple of weeks and if you have any interest or money in the market you've probably heard that this index of 30 stocks is setting new highs, breeching levels it last saw in the spring of 2000. Today for a brief time the Dow even went over 12,000.

Now for the bad news. On an inflation adjusted basis the Dow is something like 18% below it's 2000 levels. Worse news is that the rest of the market is nowhere near those 2000 prices. Birinyi & Associates published a chart on Oct 13 showing where the rest of the indices are in relation to their 2000 highs. Below are the percentage numbers off their highs that the major indices are currently posting. Their numbers may have changed slightly in the past 2 weeks but they are close enough for you to get the point. Below I've posted the main numbers and a link to the post.

Percentage Off High {based on data from 10/3/06}
S&P 500 -12.6%
Wilshire 5000 -9.7%
Nasdaq Composite -55.6% {Note this number, in some ways still unfathomable!}
Russell 2000 -8.1%
Value Line -5.7
Dow Jones Transports -10.6%

http://tickersense.typepad.com/ticker_sense/2006/10/Dow_new_all_tim.html
Biryni & Associates: Ticker Sense 10/13/06.

Tax Time.

One of my least favorite time of the year is the mid October tax season. What's that you say? Tax season ends in April. "Nay Nay mon ami". For an increasingly large group of people who file an extension, it ends with the government's drop dead filing date of October 15th. (October 16th. this year because of a weekend.) Because of this unfortunate event and because I also have not filed my own taxes, I need to take a few days off to concentrate on clients and get my own house in order. I'll resume commentary sometime after the 16th.

See you then.

September Results

Selected Market Index results for the month of September, 2006. (Results do not include dividends.)

Dow Jones Industrials 2.57%
S&P 500 2.25%
NASDAQ Composite 3.421%
Russell 2000 0.29%

September defied all its market nay-sayers as lower energy costs and a benign interest rate environment topped normal seasonal weakness in stocks. Stocks basically gained momentum all month and finished with nice gains across the board. Note however that indices that are dominated by larger cap stocks strongly outperformed smaller sized issues.

Source: Price data derived from information collected by Q-Charts & or Worden Brothers. Lumen Capital Management, LLC reports this information as a courtesy and is therefore not responsible for the accuracy of this content.