December 28: The best guess as to how far along the Fed is toward raising the Federal Funds Rate is that it is about 70% complete. The most vulnerable area is equities and associated company earnings, all of which appear to have an average of about 10-20 percent more to fall. If you are throwing darts to pick equities, then I’d build up some cash and wait about 6 months or so to start buying. One upside is the equity based CEFs such as those from Eaton Vance have already reduced their dividends to reflect a lack of capital gains making the safer to buy now.

Targeting interest rates also effects the supply-side of the economy through investment and job creation. This is because higher interest rates leave fewer investment projects with ROI greater than the interest rate. Moreover, slowing the economy reduces the ROI on investments as well. With less physical capital fewer jobs a needed. This is something I don’t think the Fed recognizes because it is reducing the level of demand through interest rate hikes so as to be in line with the level of supply and thereby reduce upward pressure on prices. Unfortunately, by assuming it can only effect aggregate demand, it is also reducing some aspects of aggregate supply at the same time and lengthening out its process as a consequence. A better strategy would be to target the money supply because inflation is always too much money chasing too few goods. Just focusing on that would be what we need. To do that, the Fed just needs to sell bonds and mortgages and more abruptly reduce its balance sheet. The resulting recession will be swift, sharp, and expected as opposed to the prolonged slow demise it appears we must continue to endure.

Given our Fed driven situation, some growth stocks to consider include: MUSA, NEX, UAL, SQM, SLCA, DCP, and STM. Growth and dividends can be had from: CALM, CCEP, CEIX, DCP, IMBBY, SQM, SUZ, LAZ, LPG, MPLX, and OKE. Over the last three months the top ETFs were: XLE, VDE, and KBWP. Good Investing and Happy New Year!