Fed Calms Fears

Market Action:
The Fed statement “lit ‘em up” due to the dovish statement.  (Really, we don’t need to talk about anything before the Fed announcement, do we?)  The main item of focus seemed to be the deleted statement, that being the reference to possible “additional firming” with regard to interest rates.  Clearly, the Fed is not clear…but the Fed did want to ease some concerns in the markets with their statement.  

The Dow cruised up at warp speed to add a cool 60 points in about a minute before going on to a close of up 159 on the day.  The late afternoon rally took the Dow very close to our 12,500 figure but just couldn’t make it trading around 12,480.  

Opinion/Analysis:
We here at the Wednesday Update have been saying for months that the Fed was not going to raise rates again, at least until after they lowered them first.  The market however felt that the Fed was threatening a little upside action on rates for the past several months which is why the market’s advance seemed to slow to a halt, or so the media would have us believe.

We find the Fed’s statement on inflation to be a little contradictory to the positioning on interest rates.  They have been telling us that they are watching core inflation and that they don’t like it above 2%.  They have been saying that inflation is peaking and we should let the past interest rate hikes do their magic on inflation.  Their announcement said that inflation has been somewhat elevated compared with their January stance that there had been some modest improvement there.  Their official position now is that economic growth will moderate and inflation would back down a bit.

The stock market moved ahead with some strength after the announcement.  We were not surprised because the market was looking for just about any positive words from the Fed which we knew would be delivered as ordered.  

Our current position on the market is that we are very near the top of this corrective move.  As we have mentioned in the past few weeks, this first corrective wave should be fairly strong because bullish enthusiasm is still prevalent.  The next few days should see the end of the up wave and then we should see a dramatic down wave.  

Real Estate:
We heard that the WSJ had a good article on the mortgage situation and thought we would bring it to your attention.  In Wednesday’s edition on page A19, Andy Laperriere wrote a commentary in the opinion section of the paper called “Mortgage Meltdown”.  It is a fairly short article but has a lot of pertinent facts in it related to the current situation.  We quote a couple of lines directly but we highly recommend you try to find and read the full article…

“As the home price boom gained momentum and delinquencies dropped, lenders offered progressively easier and riskier lending terms. Common sense suggests that the boom-time mania that led banks (and investors in mortgage-backed securities) to offer dangerous loans to individuals with poor credit histories also led them to offer the same kinds of risky loans (no income verification, no down payments, high payments as a share of income, low teaser rates) to individuals with good credit scores.

“Far from being limited to the subprime market, the data show these risky loan features have become widespread. According to Credit Suisse, the number of no or low documentation loans -- so-called "liar loans" -- has increased to 49% last year from 18% of purchase loans in 2001, a nearly three-fold increase. The investment bank also found that borrowers put up less than a 5% down payment in 46% of all home purchases last year. Inside Mortgage Finance estimates that nontraditional mortgages -- mostly interest-only and pay-option ARMs that allow the borrower to defer paying back principal or even increase the loan balance each month -- which barely existed five years ago, grew to close to a third of all mortgages last year.”

Our Moves:
We haven’t done any options trades this week and Wednesday’s market gave us some much better prices to make some trades in the next week or so.  With the market moving up, we think we need to change the option of choice.  We traded the June 44 put on the QQQQ’s but with the QQQQ’s rallying we may want to move up a strike price or two so we are indicating the June 46 in the table below.  We won’t know which options we will buy until we do but we like the highest leverage possible if we are risking the capital.

Dow Industrials:  12,447.52  +159.42
VIX: 12.19
HUI:  341.83
QQQQ:  44.42
QQQRR: 1.10 bid (we need to move to a higher strike)
QQQRT:  2.05 bid (this is the 46 put for June)
RYVNX:   16.45 (nice buying price)
RYAIX:  21.21
RYCWX:  35.84
TLT:  89.75
BEGBX:  14.00 (dollar nearing a low)