Surprise, Surprise, Surprise!

The Fed meets this week, announcing a other decision on interest rates. Some pundits are suggesting the Fed may delay the final wind down of QE3, given the market's recent upheavals, fears of slowing global growth, and the impact of other concerns affecting the economy, from Ebola to ISIS.

I believe the Fed will end QE, as planned. However, I remain committed (until I change my mind :) ) to the notion that the Fed will defer any action on raising interest rates for quite some time to come ... until late next year, or early 2016.

With inflation going in the wrong direction, both domestically and globally, deflation remains the world's most important economic risk. (For a very clear explanation as to why, please tune in to my discussion with former Treasury Secretary, Larry Summers, at roninsana.com. He says deflation is the single biggest economic threat today, and that inflation is being inappropriately hyped by those who simply don't understand monetary policy issues.)

Dual Mandate

I have discussed, many times, the Fed's statutory, dual mandate. Congress has written into the law how the Fed is required to promote maximum, sustainable, employment growth, and stable prices. That includes preventing DEFLATION, as much as it means fighting INFLATION.

Given the speed with which global economies are weakening, the persistence of falling prices in Europe, Japan, and in many other parts of the world, the Fed MUST remain committed to battling deflation, even if the risk is currently outside the US. A renewed strengthening of the dollar, could import overseas deflation, and promote further, unwanted, disinflation here at home.

Faling energy, agricultural and basic materials prices are symptoms of the deflationary pulse again beating in the global economic circulatory system.

Trick or Treat

I suspect the Fed will be unlikely to say anything to spook the markets with respect to rising rates when it announces its policy decisions Wednesday afternoon.

It's Halloween week, and thus we should be prepared for any, and all, unpleasant surpasses. But I doubt the Fed will be the one to yell, "Boo!!"

More likely, the Fed is more likely to treat, than trick, the markets this week.

Ch-ch-ch-changes ...

Last week, VIP members received trade alerts showing that I drew down cash positions in my portfolio (now up 3.2%, inception to date), as I took advantage of falling prices, or a little deflation, in stock prices.

I remain convinced we are in a secular bull market in stocks, and that the most recent correction, effectively, qualifies as the long-awaited 10% pullback. 

I added to some existing positions in the portfolio, but picked up some new favorites, at discounted prices, which have performed nicely as the market recovered.

I full expect the market to chop around this week, as we wait for the Fed, worry more about Ebola, and watch a stream of earnings and economic data report out. However, I think the bottom is in, and as I mentioned last week, averaging into favorite stocks is the wisest course of action going forward.