Despite Premonitions, Tightening Bias Startled the Street

After the announcement, defensive stocks lagged, tech issues rebounded. Also, the gold market is still in flux.
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No Biggie

SAN FRANCISCO -- Judging by the final tallies

today, the

Federal Open Market Committee

meeting was a nonevent. Just don't tell that to the bond market, where the price of the 30-year Treasury slumped 1 5/32, its yield rising to 6.18%, the highest close since Aug. 12. (For more, see the

Bond Focus.)

Of course, looking only at the final figures for stock averages would obscure the fact that the

Dow Jones Industrial Average

was as high as 10,509.19 before the FOMC announcement and as low as 10,277.11 in its wake. The index closed down a fraction at 10,400.59.


tried to paint it as if the


decision to leave interest rates unchanged but move the bias to tightening was a no-brainer. Well, maybe the network slipped a hidden camera into

Alan Greenspan's

briefcase, because many of the market players with whom we spoke seemed downright unprepared for the change in bias.

"The more aggressive people were saying no raise and neutral

bias is what's coming out," the head trader at one New York desk said shortly before the 2:15 p.m. Fed

statement. "All of a sudden it's starting to flow around the Street that 25-basis-point

tightening and a neutral" bias would be the outcome.

A rate hike would be the "right thing" for those long, the trader said, suggesting the preannouncement rally was fostered partially by an expectation (blind hope?) the Fed would shock the world (ala

Muhammed Ali

) and raise rates, the logic being that a rate hike today would remove the uncertainty about future rate hikes this year.

Horse hockey, said Bill Meehan, chief market analyst at

Cantor Fitzgerald

(in so many words), suggesting "we would have clearly gone much lower than today's low" if many market players felt a rate hike was forthcoming.

But Meehan agreed many players were not expecting the bias change, recalling that Sunday's article by John Berry of

The Washington Post

forecast no tightening and no bias change.

"It seemed certain to me not only a bias to tighten was justified but a rate hike too, especially after" Friday's


report, Meehan said. "But I could not come to the conclusion the Greenspan Fed would do anything. I thought a move of the bias to tighten would not sit well with the stock jocks" (which appeared to be the case).

But Meehan, who has been steadfastly

bearish (in case you'd forgotten), disagreed that that expectation was because the Fed kowtows to the stock market, as others argue.

Rather than prostrating itself, the Fed has been "managing" the market with its "open mouth" policy, the strategist said. "They've been doing a good job of preparing the market. There was no chance -- no matter what the data was -- the Greenspan Fed was going to really surprise the market and potentially undo" it with a rate hike today.

Today's rebound from the postannouncement lows was "impressive considering the damage done in the bonds," Meehan said. But his dour (market) outlook remains intact.

"I thought after the Fed meeting we'd see better relative performance from defensive stocks, but it was

those with the biggest multiples and Internet names that came back the strongest," he said. "There's a lot of optimism and demand for tech. That's where the performance has been and where the greatest risk is."

In the aftermath of today's session, Meehan said the "last stand" for the bulls is third-quarter earnings. However, "most of the good news about third-quarter earnings is already discounted," he said. "Even my 9-year-old daughter knows third-quarter earnings are expected to be strong."

No word on what the young Miss Meehan is recommending to her clients these days.

All That Glitters

Now I know why

Ashanti Goldfields


didn't return my phone calls


Today, the stock tumbled 41.3% to 5 1/2 on word


is in talks to buy the two-thirds of Ashanti it doesn't already own.

Goldman Sachs

is advising Ashanti, while

Morgan Stanley Dean Witter

is in Lonmin's corner.

The development comes after Ashanti disclosed it may face margin calls because lease rates have risen markedly.

Since the European central banks' Sept. 26 announcement regarding future gold sales, the rates on one-month gold loans have climbed to 5.17% from an average of 1.6% over the past four years, according to


. The increase has tripped margin calls for some of Ashanti's hedged positions.

Reached today at Ashanti's headquarters in Accra, Ghana, James Anaman, the firm's corporate affairs manager, said rising lease rates caused the company to "restructure" its hedged book. However, that occurrence and the merger talks with Lonmin are "separate developments," he declared.

Umm, right. Now what's that old line about everybody having "coincidences" and they all stink?

Meanwhile, the price of gold rose $8.50, or 2.7%, to $326.50 today amid reports of additional short-covering by those previously betting against the metal.

"There were a lot of uncovered short positions in options and a lot of those uncovered options were covered at the beginning of the session," said Gregg Schreiber, a vice president in institutional futures sales at

Bear Stearns

. "A lot

of positions were covered last week, but those uncovered were covered this morning."

Producers were selling at the market's high today -- at $338 on the


December futures contract, Schreiber said, suggesting mining companies will continue to sell forward their future production "if the market ratchets higher" in order to "lock in" these higher prices.

Today's highs might prove to be a "balancing point" for gold prices, the trader said, noting "good selling" at that $338 level, which wasn't subsequently revisited. But "the market is still in play," he added. "It's just a question of where equilibrium comes in."

Another source said at least three other producers have hedged positions similar to Ashanti, including



, which fell 20.3% to 3 3/16 today.

Cambior's investor relations department referred me to the firm's CFO, who was unavailable.

Meanwhile, rumors continue to circulate about bullion banks facing potential losses with their own hedged positions and other participants in the options market losing their jobs as well as their shirts (although not necessarily in that order).

I don't have enough detail or evidence to name names at this juncture, but the scuttlebutt suggests the gold market remains far from equilibrium.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at .