Wednesday, March 18, 2009

Fed Creates Some Chaos

Top Line: The stock market got a boost from the Fed today in order to jump over the resistance we mentioned yesterday. We are enjoying the rally...trying to relax.

In the morning the market did decide to pull back from resistance. There seemed to be a sense that the Fed would "save" the market with their announcement as the Dow came back from a 150 deficit in the morning to only a 50 point loss just before the Fed's announcement. Of course, off the announcement, the Dow jumped 150 in about ten minutes and was up 100 points before going up another 50 points. Still, the rally didn't hold very well in the Dow.

Meanwhile, over in the Treasury bonds, where the news was greeted with some incredible buying, the 30 year bond was up 7% immediately in probably one of the biggest moves ever in that short a period of time...but it faded into the close, too. So, you have one more good opportunity to refinance your home at low rates. The rates dropped nearly 50bps on the 10 year bond which is the key rate for the mortgages. That means rates could go down a half a point.

Maybe we should mention what the Fed said...that they were going to buy $300 billion of Treasury bonds, plus another $750 billion of mortgage backed securities (MBS), along with $100 billion, or something close to the, of Fannie and Freddie debt. What amazes us is that the Chairman was just on "60 Minutes" on Sunday evening talking about how he was confident in the recovery starting by the end of the year. Well, now we know a little of what he meant, he's gonna make it happen. Of course, there was the obligatory pooh-poohing of the possible inflation threat with all of the money being injected into the system.

So, where could we find out about the market's reaction to the new threat to inflation??? That would be in two major places, gold and the dollar. Gold reversed a drop of $25 to rally to a $30 gain and the dollar dropped hard, both of these events happened right after the news. What those pieces of information tell us is that the market thinks that inflation could indeed be a problem...soon. By the way, the news on February's CPI was that it was up 0.4%...where's that deflation?

With gold reversing to the upside this afternoon, GDX enjoyed a good rally for a change. If you purchased it in the 29's last week, today was a big smile, wasn't it? Even for us, the 10% move was very enjoyable. Patience is required, we have a long ways to go to get to 55 which is our lowest target.

By the way, just because the Fed has now confirmed that it "will" be buying all of these assets, doesn't mean they actually will, does it???

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