Hurray for the Fed

The stock market staged a big rally on Tuesday with the Dow surging almost 200 points, the largest one day up move since last April 21st when it went up 206 points.  That move was sandwiched between a down 115 and a down 60 but it was a thousand Dow points lower.  That means the Dow is up approximately 10% in a year, not bad.

There were two pieces of news that helped the Dow and the rest of the market move up on Tuesday.  You probably already know that they are both related to the Fed stopping their campaign of raising interest rates.  The first was the housing starts number for March which was announced before the market opened.  The number was down about the same amount as February, 7.8%.  Don’t you know this is good news because the Fed won’t have to raise interest rates much longer?!?  The other piece of news was the minutes to the Fed meeting which brought big headlines stating the end of the interest rate hikes.

We think the market has been using the end of rate hikes for an excuse to go up for quite a while now.  This may not be the last time we see a price spike based on the Fed being done raising rates.  We do think that the Fed will have to stop raising rates sometime soon but as we said in yesterday’s post, the reason they have been raising is not due to strong economic data or inflationary pressures but because the dollar needs a boost.  Today’s news didn’t do much for the dollar as you can imagine.

That brings us to Erick’s comment in yesterday’s post.  He’s questioning how best to position yourself given the dollar will be weak over the next year.  In his comment, Erick mentions some key thoughts that we share such as the reason oil prices have gone up is due to the weaker dollar and could we use gold to buy oil?  He even makes a reference to the housing market in relation to the price of oil.  He then asks some very difficult questions that we thought we would try to address but we don’t think there is a very good answer in today’s world.

He basically wants to know what assets to hold given the dollar will go down and will the dollar buy less next year?  So, here goes and if anyone else cares to comment on this very important topic please post a comment, either anonymously or sign it.

We continue to believe that the very nature of the credit bubble we are in is that credit will collapse onto itself.  We firmly believe that the powers that be are today trying to hold up the illusion that you can borrow yourself out of financial trouble, both at the government level and the personal level.  We here at the Wednesday Update have tried to push the idea of reducing your debt levels and prepare for the inevitable credit bubble decrease.  The problem is that if deflation does occur, debt gets more difficult to repay.

We believe that the deflation problem is a ways off and maybe more than a year off but it is a consideration at this time.  The housing slowdown is not something that should be good news to the stock market.  The full problem of slower housing means that the liquidity that has spurred the market will not be there much longer.  

With the PPI out today in all of its absurdity, meaning it’s so low it’s ridiculous, the Fed can claim victory over inflation.  With oil and gold and all commodities up, and in some cases large amounts, how can the PPI be taken seriously?   On Wednesday we get to see another meaningless number called the CPI.  

We will have more to say on Erick’s comment in tomorrow’s post.  Please add your own comments and we can have a good discussion on it.

Back to the market action, after the market closed there was a bullish interpretation of the news from YHOO pushing that stock up in after hours trading as well as giving GOOG a little push too.  These stocks are not good leaders for this market but it looks like the market thinks they are.  This rally is typical of the violent short covering that can occur when a market is trending down (not to mention when the news is interpreted so poorly, as the Fed rate news was today).

Be careful out there…and now you have another good selling opportunity, go for it.

Dow Industrials:  11,268.77  +194.99
RYVNX:   17.84
RYAIX:  21.57
TLT:  84.90
BEGBX:  13.03