Yesterday the Fed minutes were released and to cut to the end they
told everyone what they already knew and why the markets have sold off 14% in
the last two weeks. The U.S. economy is slowing and it’s not all
transitory from bad weather and Japan’s tragic tsunami and earthquake.
While people will debate the verbiage what was made abundantly clear was that
the Fed is going to keep interest rates low for a very long time. The
statement said rates would remain low until mid 2013. That the Fed would
commit to such a long time frame is a very unusual event.
The reaction to the announcement, at first, was odd because it seemed
that the market didn’t get it. I can only conclude that this was profit
taking or short covering but it looked like investors didn’t get it.
The Fed had just announced that they were going to keep interest rates a zero
for the next two years. That’s two years of free money! It would not be
very politically correct to say quantitative easing out loud so the Feds had
taken to using code. Coded or not the message was clear. The Feds will do
whatever is necessary toboost asset prices, even if it means
some inflation. So as I wrote, after the announcement stocks
pared back all of the day’s gains and was in the red below yesterdays
low. Then at 2:45, it was like a light bulb was turned on. The market did a
complete about face. It sprinted to the close as if it had suddenly dawned on
investors that the Feds were saying free money for the next two years.
The
Dow soared to the bell up 430 points, or 4 percent to close at 11,240. The
NASDAQ rose 125 points to close at 2482, or 5.3%. The S&P 500 rose
53 points to close at 1172, or 4.7%.
So
in my opinion there were four important points from Tuesday's statement by
the FOMC:
1. The Fed Funds rate will be "exceptionally low" at
least through mid-2013.
2. Three FOMC members voted against this action.
3. The Fed disclosed a range of policy tools to promote a stronger economic
recovery were discussed.
4. Inflation is seen at or below its target.
With
an unprecedented number of dissenters voting against Bernanke's move, it
could suggest the mid-2013 language is just the start of what the Chairman
has up his sleeve and the inflation hawks want no part of it. The statement
also suggests Dr. Bernanke's Jackson Hole speech could prove to be another
major event, like it was in 2010. Bernanke's speech is scheduled for August
26th and it could bring more details on what forms of stealth QE he has in
mind to support growth.
Does
this mean the market is out of the woods? No - far from it. While the Fed can
boost asset prices and support the economy it can only do this at theexpense of
devaluing our currency. As I have written many times a key for this
administration is the continued devaluation of the dollar. They see it as the
only possible way to begin to pay off the debt. As Gerald Loeb taught us it
is not how many dollars you have but rather what the value of the dollar you
have that is important.
Well
it seems that, for today, Dr. Bernanke has pulled another rabbit out of his
hat. The Asian markets soared on the news and the European markets are all
trading higher on the news. Gold is roaring to new highs and it seems there
is no stopping it.
If
there is one thing I have learned in the market it is that the messages you are
expecting are not always delivered gift wrapped with bows. Sometimes they are
so subtle that if you are not paying attention you don’t even notice
them. What I saw in the 600 point rally from 2:45 to the bell was gold sold
off almost $100.00. In the after markets it bounced back but I have been
writing that until gold corrects I would be standing aside. Well the
correction we saw for an hour yesterday may not have been what I was
expecting but it might have been it. The message from the Fed was clear. By
whatever guise possible, there will be more quantitative easing. There will
be further devaluation of the currency. Today will tell the story. Was
yesterday the real thing or a fake out? We will soon know. As I write both
Gold and Silver are roaring in the premarket.
So
in conclusion, how do we play this market? First let me begin by saying that
based on what I heard from the Fed yesterday the bold prediction of Chase
yesterday of gold at $2,500.00 an ounce has almost been assured. If
currencies are continually debased there is no question about it. I would
suggest that you hold your GLD or SGOL or PHYS or whatever ETF you are using
to play the paper trade of gold. Look to add to it because while I expect it
to pullback (as it did for an hour yesterday) the upside potential seems to
be headed for $2500.00. For the moment stand aside of any silver ETF until we
get further clarity. As I have written I have a nagging feeling that silver
seems to be determined to retest $32.50 so until there is evidence to dispute
this just wait. My long term thesis of silver at $55.00 by year’s end
remains intact. If you have been making a shopping list of some equities you
want to own start slowly wading in. Most of all keep your eyes glued to the
VIX and when it spikes up look to wade in as these are buying
opportunities.
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