This evening we are getting ready to go out of town and, we think, out of range so there will most likely be no updates all week. This vacation has unfortunate timing written all over it, at least for the stock market. There should be continued volatility in the stock market. The week ahead includes options expiration so there could even be additional volatility, if you can believe that.
We do want to make a few comments while we're here. Friday's action would have been a little different if not for the action of several central banks, notably the ECB, European Central Bank, and our own Fed. We are particularly surprised by the Fed's intervention at this early stage. Perhaps they really think they can "fix" any problems by nipping them in the bud.
Well, we need to remind the Fed that they are responsible for most of the problems that they are now trying to fix. This is Not the bud of the problem. The problem is just now showing the ugly side that we have been talking about for about two years.
The Fed bought Mortgage Backed Securities (MBS's) on Friday giving some hedge funds and others a place to actually sell their, should we say, junk. Normally, the Fed will buy Treasury bonds which have a pretty good reputation of actually paying off their commitments. MBS's in the current world may not. This is almost a crime, but the Fed doesn't have police.
The Fed sometimes do operate in the open market in order to keep the interest rate on interbank loans at their target rate. They always print a statement such as they are doing repo's. On Friday, they made a public statement that "The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets".
It was just Tuesday when the Fed was optimistic about the economy and was most concerned about inflation. Friday they spent $38 billion which is definitely an inflationary move. And, now the market is hoping the Fed will lower interest rates between meetings.
What can we say, except it doesn't really matter what the Fed does? They are in a difficult spot due to the limited ability for debt creation as the mortgage market is tightening up. Good credit can still get loans but subprime is drying up. We recommend looking at Countrywide's statement about how they are having to keep their mortgage paper because no one wants to buy it. Of course, their stock was up 11% this past week.
The bottom line on all of this is that even with the huge well publicized Fed intervention, the stock market could barely get even. That's not to say that it can't really move up from here, just that it couldn't do it with all the visible central banks' help. We continue to be bearish for the near term even though some rallies may pop up now and then. The only ones that matter would be ones that challenge the July highs.
Have a great week and if we can publish we will but, again, we don't think we can so we won't, got it? Good.