The Bernanke uncertainty

After all the last week's turmoil, people are much more uncomfortable. We are like in a big nine meters sea, particularly if you look to the volatility: The Chicago Board Options Exchange Volatility Index stayed near the highest since 2003 after the Fed unexpectedly reduced the rate it charges banks for loans on Aug. 17 .

The Friday's comeback, probably was a technical rebound together with an emotional reaction to the FED's reduction. This confirms our vision: The Fed said it reduced the discount rate to 5.75 percent because risks to economic growth have risen ``appreciably.'' The statement was a departure from the previous week, when central bankers kept rates unchanged a ninth straight time and reiterated inflation was their ``predominant'' concern.

But after all, we will focus in these two main issues:

• Goldman Sachs Group Inc., whose hedge funds lost $3 billion in August after the S&P 500 declined 6.9 percent from a July 19 record, said in a letter to investors last week that a ``significant investment opportunity'' now exists.
• The Fed's actions have been less predictable for investors since Chairman Ben S. Bernanke took over in February 2006 after more than 18 years under Alan Greenspan's leadership.

Moral hazard versus bail out

That's the decision which is being balanced. The ideal move would be to let the market enforce the pedagogy of punishing the banks that made the foolishness of lending money to subprime borrowers. But reality prevails over ideals and the move had, and will continue to be - until crash do us part -, to cautiously bail the banks, and indirectly the hedge funds that should receive the "moral hazard".

The problem now is that the financial markets and the "real economy" are, completely and immediately, interconnected and the real economy suffers with its upturns and downturns. I don't ignore the lessons this crisis permits but, for the time being, the priority, for Bernanke and the bunch (and Bill the Butcher also...) is to sustain the market. I think Jim Cramer's alert was fundamental to ignite an answer from the FED.

Fed Meeting Tomorrow

The U.S. Federal Reserve meeting tomorrow may determine the course of interest rates and direction of the gold metal.

So if you have gold stocks pay attention to these meet.

High 2007

Read this: U.S. consumer confidence rebounded in December. The Conference Board said its index of consumer sentiment climbed to 109.0 in December. Economists polled by Reuters on average had forecast a December reading of 102.0.

And this: The National Association of Purchasing Management-Chicago business barometer rose to 52.4 from 49.9 in November. Economists had forecast the index at 50.5. A reading above 50 indicates expansion.

Finnally this: The number of workers applying for jobless benefits rose a smaller-than-expected 1,000 to 317,000 in the week ended Dec. 23. Wall Street economists had forecast that claims in the Dec. 23 week would be a seasonally adjusted 320,000.

Despite, next FED rate decision, 2007 will have a good start.

Stagcrisis

Fed's decision to mantain its current interest rates - federal funds rate now at 5,25% - doesn't seem to cool the markets turbulence. Furthermore, the threat of stagflation persists over promises of soft landing...

US: soft or hard landing?

The FED is praying for a soft landing. Bernanke is threatening with a new rate increase. Unemployment is at a good level: 4.5%.

Nevertheless, the currencies traders believe in a hard landing, because of this:

• They appear to be trading on the belief that, while US interest rates will fall in an effort to counter a slowdown, European rates will continue to rise – and, by implication, that Europe’s economic upswing has some way to go.

Pay attention, during next weeks.