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Last week’s market action Fed decision Economic data BHP Billiton’s bid for POT fails Technicals: where is the market going? What’s the trade?
Post FOMC Meeting Rally Play till 3:15 min Thurs. Nov | 4:01 PM ET
Many traders and investors are almost dumbfounded by the rally in the last couple months Everyone thought the market would have sold off after the FOMC meeting Many don’t believe it, but plan on continuing to ride the wave Short sellers have felt lots of PAIN Now might finally be the time to short the market or take profits?
Don’t bet against the Fed, because the Fed will get its way by-any-means-necessary and win
The rally since September has been a losing battle for the bears
The Fed Decision 4:20 min to 8:30min Wed. Nov | 1:08 PM ET
Maximum Employment Price Stability
Continues to anticipate weak economic conditions Unemployment still very high Employers remain reluctant to add to payrolls Measures of underlying inflation are still low Low rates of resource utilization Tight credit, lower household wealth Housing starts continue to be depressed Investment in non-residential structures continues to be weak Business spending on equipment & software rising less rapidly than earlier in the year Progress towards the Fed’s objectives and mandate disappointingly slow
No change in interest rates Keeping the Fed funds rate that banks borrow at, at % for an extended period of time Decided to expand it’s holdings of securities Will purchase a further $600 billion of longer term treasury securities by the end of Q2 2011, at a pace of a$75 billon per month Reinvest $250-$300 billion over the same period at a pace of $35 billion per month Total asset purchasing will be $850-$900 billion over 8 months ($110/month) Decision is with-in the range of market’s expectations FOMC’s “easy” policy decision was voted 10-1, KC’s Hoenig only dissent
Thomas Hoenig Kansas City Fed President Fiscal “Hawk” Believes the risk of additional securities purchases out-weighs the benefits Likes a strong US Dollar Prefers a “tighter” Fed policy
Pros: Fed’s “easy” policy of more QE and low Fed funds rates weakens the US dollar and helps boost exports, it also raises asset & equity/stock prices Fed wants asset & equity prices higher to help preserve people’s 401K’s so they feel wealthier and will spend more When stocks are up, companies feel better about hiring and spending more on investment Fed’s purchasing of US treasuries also helps lower lending rates that consumers borrow at, which will help the housing market
The Fed’s asset purchasing is basically like printing money, which lowers the US Dollar and raises commodity prices such as oil and cotton A weaker US Dollar lowers the purchasing power the US consumer has to buy basic goods like food, gas, and clothing Could hurt consumer spending in the end Fed’s “easy” policy could create asset bubbles Fed now will have about $2.5 Trillion dollars on its balance sheet after Q2 2011, might be hard to unwind all of it and possibly cause the market to react negatively Increases budget deficit
Deflation is the Fed’s greatest concern Leads to higher unemployment and price instability When prices keep dropping, people tend to think things will be cheaper tomorrow and won’t spend The housing market will continue to get weaker under these conditions The risk of “run-away” deflation or a “deflationary spiral” can occur in a recession when people and businesses are deleveraging and trying to pay off debt and can lead to a depression Deflation is very hard to fight once it gets out of control Deflation occurred in the recent financial crisis
The Fed currently has a 2% inflation target Stable levels of inflation are healthy for the economy, allows price stability Inflation causes people to think that prices will be higher tomorrow, so they will spend and invest Fed has more tools to fight high inflation, such as raising the interest rates banks borrow at Hyperinflation—not good
Market Technicals Airtime: Thurs. Nov | 4:23 PM ET
Market needs to rest before it goes higher, otherwise there’s a risk of a major correction Market cannot continue rally without the financials participating and coming back to life Dollar index is basically an inverse relationship or mirror image of the S&P 500
ISM Payroll number/unemployment rate, etc
Canadian Gov’t blocks BHP Billiton’s $40 billion dollar bid for PotashCorp (POT) on Nov 3rd Would have been the biggest M&A deal in 2010 BHP has 30 days to put a better deal on the table Many think the deal is already dead Canadian Gov’t most likely wants to protect it’s strategic assets, POT is the biggest potash producer in the world BHP might go for a smaller fertilizer company than POT like Mosaic (MOS) or Agrium (AGU) next