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Wednesday, August 02, 2006

Understanding Fed rate hike campaigns & how to protect your portfolio

By Yaser Anwar, CSC of Equity Investment Ideas

Standard & Poor’s chief investment strategist, Sam Stovall, recently studied what he called the “plateau period,” or what he described as “the time between a Fed rate increase and the first in a series of interest rate cuts.”
Stovall pointed out that “Since 1971, there have been eight such turning points in the economy. On average, the time between the end of the tightening cycle and the start of a new easing cycle has been only 7.3 months. Twice in recent history, the Fed raised rates only once before easing.”

Stovall further observed that “If you take out those one-and-out situations, the spread between the last hike and the first decline is only 5.5 months, on average.”

With the Fed meeting next week, I expect another rate hike & possibly another one in October (Click here to read my thesis on two more rate hikes). If the Fed takes the rate hike campaign into overdrive above my 5.75% expectations, it will be a good time to buy stocks on discounts 'cause, as stated above, on average easing cycle begins within 7.3 months.

Till then it would be wise to get in stocks such as BPT, which is my most favourite, as it provides the upside of oil and a hefty 11% dividend with a high pay-out ratio, i like MO too. It's got a good dividend & recent positive news of possible break up, makes it even more attractive.

On a 6 & 12 week Relative Strength basis, the sectors which are doing well are: Tobacco, Food & Beverages.

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