Save Your Portfolio From Katrina and the Fed

The bond market has decided that Hurricane Katrina will soon put an end to the Federal Reserve's interest rate hikes.

Treasury bonds moved sharply higher in price on Wednesday, Sept. 1, tacking another 0.06% onto recent increases. The yield curve has inverted, with two-year Treasury notes yielding more than three-year notes, a sure sign that bond traders think that interest rates are headed down. The yield on a 10-year Treasury note is now 4%, just 0.3 percentage points higher than the yield on a two-year note.

And, finally, the fed funds futures market, where traders place their bets on the direction of interest rates, is now pricing in a 76% chance that the Federal Reserve will raise interest rates again when it meets on Sept. 20. But that's down from a 90% chance on Aug. 31 and the 100% odds reflected in prices during most of August. The odds for another rate increase in November have tumbled to 21% from 52%.

But hold on. The argument for a quick end to interest rate hikes isn't nearly as overwhelming as it seems at the moment, while everyone is reeling from the daily reports of destruction coming in from the Gulf Coast.

A New Sort of Conundrum

I think the Federal Reserve is facing a huge dilemma right now. It's uncertain which way the interest rate decisions will go at the September, November and December meetings of the Fed's Open Market Committee.

That uncertainty certainly makes the stock markets tough to read. But I think investors can put together a strategy, not just for coping with that uncertainty but also for profiting from the Fed's Katrina dilemma. In this column I'll offer you 10 stock picks particularly well-suited to this uncertainty.

Here's the problem facing Alan Greenspan and Co. at the Federal Reserve. Even before Katrina, economists were worried that rising energy prices were finally starting to take a bite out of consumer spending, the engine for the economic growth in the recovery that started in 2001. Even if $40-a-barrel oil or $50-a-barrel oil weren't enough to slow the economy, surely $60 or $70 oil would be, economists argued.