The bear market rally continued today, this time thanks to never before seen moves by the US Federal Reserve. They not only dropped the Fed Funds rate by .50%, but also made it very clear in their forward looking comments that they would provide record amounts of liquidity to the markets going forward and that they would purchase "large quantities of agency debt and mortgage-backed securities," adding that "it stands ready to expand its purchases."
This is Fed speak for “get ready folks…you think we’ve thrown a lot of money at the problem so far? You ain’t seen nothing yet!”
The dollar sold off hard on the news and prompted another $20 move higher in gold and a similar move in silver. The message from the government is clear; they will do whatever we need to do to stop the economy from deflating, damn the long term consequences. This is especially true when it comes to interest rates on mortgages, and with this move today they are targeting an interest rate move to below 4% on 30 year mortgages. It will not happen overnight, but if they have their way, it will happen.
On the surface, this looks to be great news for the economy, and it certainly was for the stock market today as the Dow rose over 350 points. Investors should never fight the tape (primary direction of the stock market) or the FED, and with trillions of dollars being artificially inserted into the economy its clear that you will be in a bare-knuckled brawl with the governments balance sheet if you are betting on the stock market to go lower…at least for the next few weeks. As I’ve been writing, the Obama Christmas rally is here, and now we know for certain that the FED and Treasury are determined not to be remembered as Scrooge.
Yes, the fix is in! Absolutely no doubt about it. We’ve had bad news after bad news hit us right between the eyes yet the market continues to climb a wall of worry. This is one of the most important “tells” of investing. When the stock market continues to go higher in the face of the worst news possible, you know you’re playing in either a rigged game or you have one heck of a bull market. In this case its all about the game being rigged, but at the end of the day, does it really matter? The markets going higher….and that’s the bottom line…for now.
I look for the gains to continue from here…likely into the New Year and the inauguration. The move will not be straight up, but it should be good enough to continue with long positions for some time.
Over the next 2-6 weeks we’ll see:
· 4th quarter window dressing by money managers
· The January Effect will continue to kick in (end of year beaten up stocks rally…post tax selling)
· Second Tarp from Uncle Sam
· Artificial Housing Stimulus (mortgage rates dropping like a rock and the government buying mortgages directly)
· Auto Bailout
Also, there is over $3 trillion sitting in money market funds looking for a place to make money.
This move will likely not last past the inauguration, but it could potentially be an explosive move higher. In this market, you’ll take it however you can get it… before we go short again.
Kip Herriage
Editor, VRA