Fed Up

There are a lot of stocks that are currently running up in anticipation of some postitive signal from the Fed but oil is destroying any chance of that. Here is the meat of the statement from the last Fed (1/31) meeting: Although recent economic data have been uneven, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures. The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives. Don’t forget this was a transitional meeting where Bernanke was moving in so he had a hand in this. Notice the statement “possible increases in resource utilization as well as elevated energy prices…” was what had them worried. Well oil was $65 and heading down from $70 at the time and copper was at $225 (now $244) while gold was the same around $565 (not really used in the economy per se). So if anything, this run in commodities will cause the Fed to tighten more, not less! In addition, the labor market has tightened further so wage inflation is a big concern. Notice also that oil stocks also ran up into the last Fed meeting and took a dive shortly thereafter so I want to take the opportunity to take the following (BUT NOTING THAT ALL TRADES ARE OFF IF VALERO BREAKS $61 AND XOM BREAKS $62 AFTER THE STATEMENT). Also, if oil breaks $66 take these off the table! Use a 20% rule and be prepared to lose it or don’t even think about this bet!!! VLO $60 puts for $1.75 XOM $60 puts for .40 SU $75 puts for $1.80 COP $65 puts for $1.55 MUR $50 puts for $1.30 SLB $115 puts for $1.50 (yes, way down there). The keywords we are listening for is another quarter point hike (obviously) and essentially the same language as above. Anything else, like a press conference or a speech by Bernanke will throw in a wildcard that could cause chaos so be very careful! – Phil