Hey traders, listen up. Unless you have been on vacation or without power like some of my neighbors here in New York, you should know that the Federal Open Market Committee (FOMC) is today (August 8th).   

This is an important one for you traders out there. It is important because it will give you insight as to what the people who set our monetary policy are thinking with regard to our economy.  

They will decide whether or not to increase interest rates again. They have raised interest rates 17 times, from 1% in 2004 to 5.25%, where it stands right now.  

The unemployment rate rose to 4.8% in July from 4.6% in June, which indicates a slowing of the economy, and would suggest that the Fed has less of a reason to raise rates. 

As mentioned in my last article, the economy grew at a sluggish 2.5% annual pace, while in the first quarter it grew at 5.6%. There are many signs of an economic slowdown.  

Bond prices rose last week. This is an indication that bond buyers think that the Fed will not raise rates. When interest rates go up, bond prices go down, and vice versa.

Remember that the present value of any investment is the discounted value of its future cash flow streams. When interest rates go up, this increases borrowing costs for businesses and consumers, and thus slows the economy down.  

Interest rate increases make it so future value of the cash flow streams are discounted by a higher interest rate, therefore making the present value of the investment less valuable.  

If someone gives you $1,000 one year from now when interest rates are, say, 5.25%, this $1,000 today is worth $950.12(1000/1.0525).  

If someone gives you $1,000 one year from now when interest rates are, say, 5.5%, that $1,000 today is worth $947.88 (1000/1.055). This number is obviously less than the number when interest rates are lower.  

There have been mixed signals on the inflation front. Average hourly wages for production workers rose .4% in July to $16.76, up 3.8% over the past year. Uncertainty is the case as usual in the Middle East.  

Also, remember that the November elections are right around the corner. There will be promises made (as usual) from politicians who will affect fiscal policy as well as foreign policy (e.g. the Joe Lieberman race in Connecticut) for which the people who set monetary policy (the Fed) will always have to take into consideration.  

I personally believe that the chance that the fed WILL NOT raise rates today are 80%; 20% that they WILL. This subject is not that simple. We need to pay close attention to what the future bias will be.  

Remember that Wall Street is all about expectations. This is very much like the Type A parent who always expects their child to be the best at everything. The parent who is vicariously living through their child because of their own shortcomings. If the child does not live up to the parent’s expectations, then heaven help him.  

How can you profit?  

The short answer is to buy what you like on the open. Make sure that the stock or the option on the underlying stock has strong fundamentals, because there will be uncertainty in this market for a while.  

More thoughts … 

There is no company other than Berkshire Hathaway that I absolutely love at this point that I have not already recommended. I know that most of you aren’t going to run out there and buy Berkshire because it is trading over $90,000 for the A shares (BRKA). Remember, I will never give a recommendation just for the sake of giving one. 

Position Update … 

I don’t like to give position updates unless there is something that fundamentally changed about one of my recommendations, and in this situation this is NOT the case. I am only doing it because this is a unique situation. One of my past recommendations (SYMBOL: ANSW) www.answers.com is headquartered in Israel which is in a war right now (Do you think Mel Gibson is happy?). I am still bullish on the company and my position has not changed.  

I have no evidence that the war will impact their business. They are primarily an online company with no major assets that are at risk of being destroyed. They also have an office in New York.  

They also just announced 31% sequential revenue growth for the second quarter. The fact that Hezbollah is close to attacking the area they are headquartered in might scare some people and have caused the stock to be slightly down, but in the long term the company provides quality information that you can trust.  

This is different from other online information companies where some nut case in his basement could be the so called expert providing you the information that you may act on.  

As information becomes more and more ubiquitous, I believe that getting information from a source that you can really trust will be a big value add. Answers.com has won numerous awards for the information that they provide. They have relationships with top libraries as well as top academic institutions just to name a couple.  

Until the next time folks, spend your hard earned money wisely.