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Maybe A Fed Solution, but…
Author: Bob Lang (info)
Website: http://trade-mentor.com
Posted: March 12th, 2008 at 6:19 pm EST
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What a splash the Fed made on Tuesday. What certainly looked like a cinch break of the January lows, the Fed came to the rescue of the markets once again…I can’t count how many times this has occurred since August 2007…and pushed the market to its largest percentage gains since 2002. Should be a big deal, right? On the surface, it seems a ton of ammunition to help snuff out the problem. The gyst of it is quite simple…exchange bad paper for good paper. Helicopter Ben dropping money outta the sky. The Fed has made available over 200 billion dollars of relief, made a joint effort with Euro zone nations and increased swap levels. In addition, they increased their TAF limits (which is ironic, because it’s been a complete failure to date). Gotta give them credit, they ARE being creative. But once barn door has been opened, it’s hardest to get the animals back in.
Sounds good, but call me a skeptic…
Liquidity is great to help banks in need. The credit crunch has slowed lending considerably. The Fed’s offering of cheap money and accomodative conditions has not freed up the ‘risk taking’ or lending aspect of the banking business. That’s what banks do to make money…lend it out to businesses and consumers. But when there are signs of distress on their clients or an economic slowdown, well…banks pull in the reins. The Fed has done everything possible to shake the trees, but to no avail. Will yesterday’s stroke be enough to get the ‘juices flowing’ again? I’m skeptical here, only because none of the ‘medicine’ administered has worked so far. In fact, markets are down substantially since the Fed toolbox started being used. Financial stocks have been hit the most, the group that was supposed to be helped the most by the various Fed actions. What makes this action better than the previous efforts? I just think that time (and lots of it) is the best medicine here….we have a crisis that will eventually resolve itself. These band aid efforts may help put off the inevitable, but there may be bigger and more damaging affects down the road that we are unable to see. The Fed is late to the party once again and is reacting to the current status…therefore, they are not seeing much into the future, either.
Bond Market says ‘ho hum’
Bond yields shot up Tuesday after this Fed announcment, but only in the context of a downtrend in yield. By and large the bond market gave a collective ‘yawn’ to the plan…clearly more concerned about inflation and how the Fed will address that problem in the future. Spreads continue to be wide between mortgages and treasuries, so this was not taken too seriously. We’ll see how they move in the coming months. Meanwhile, TIPS spreads with treasuries dropped some but it was more profit-taking. Inflation cannot continue to be ignored, and if the market is to take the Fed seriously, they will address the problem sooner rather than later.
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Bob Lang, Options, Psychology
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