A typical pre-Fed surge?
Stocks are screaming higher Tuesday ahead of Wednesday's Federal Reserve decision. Here's what to expect, and few reasons to be skeptical.
Equities gapped higher on Tuesday over what was initially blamed on better-than-expected German business confidence but has since evolved into positive expectations for Wednesday's Federal Reserve decision and press conference. As I've said before, Wall Street is looking for the Fed to maintain its current $85 billion-a-month bond purchase tempo.
But the kicker is that it will replace its expiring $45 billion-a-month Operation Twist program -- in which it sells short-term bonds to buy long-term bonds -- with a fourth round of quantitative easing, or QE4, that will keep the purchases the same, but fund them with newly created dollars instead. That's a more aggressive form of stimulus.
But, despite Tuesday's gains, there are seasons to be skeptical both of the positive impact of QE4 and the longevity of the market bump. Here's why.
First, it's worth noting that QE3 -- the $40 billion-a-month mortgage bond purchase program announced in September -- has largely been a disappointment. Both stock prices and mortgage security prices are below their post-September Fed meeting levels.
Moreover, if the Fed does this, it smacks of desperation. The European Central Bank is already talking about cutting interest rates into negative territory. If the world's major central banks do this, they will be essentially forcing savers to pay for the benefit of depositing their cash.
Clearly, that's dangerous and could affect the functioning of the financial systems in ways not yet fully understood.
Despite all the monetary stimulus that's been doled out already, with the monetary base here at home rising from around $800 billion before the financial crisis to nearly $3 trillion now, we don't have much to show for it. The employment-to-population ratio is mired at early 1980s levels. Small business confidence has just plunged to record lows.
The Greek debt buyback wasn't as strong as expected. The Italian government is dissolving. The major banks are making major layoffs. Consumer confidence is down. General Motors (GM) is ramping up new car incentives to clear excess inventory. Best Buy (BBY) is selling cellphones at a loss to drive holiday traffic. And one in 6.5 Americans are now on food stamps.
The problem is that the credit channel remains constrained, something ECB chief Mario Draghi himself admitted. If people don't have any confidence, because they are worried about a default by the U.S. Treasury or higher tax rates, they're not going to be interested in leveraging up with credit.
That could make any market selloff related to the fiscal cliff/debt ceiling very scary indeed if people start to believe the Fed -- and other central banks -- are growing increasingly helpless to do anything about it.
And what of Tuesday's pre-Fed market surge? It's worth noting that stocks rallied ahead of five of the last seven Fed meetings this year. In three of the five rallied, the market sold off the day after the meeting.
Also, there is plenty of evidence that market was becoming overbought and vulnerable to a pullback. Sentiment had made a historic shift from the pessimism seen in late November to full-throated optimism now. Market internals have started to weaken with breadth narrowing as fewer and fewer stocks participate in the rallies. And other assets, such as industrial commodities, aren't participating.
To my eyes, this looks like a last gasp rally before a pullback develops. I remain focused on short positions including the ProShares UltraShort Crude Oil (SCO).
Disclosure: Anthony has recommended EUO long to his clients.
Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at firstname.lastname@example.org and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
This will not end well... You cannot Print your way to prosperity, no matter what the imbecile Obama and Helicopter Ben tell you...
Inflation is a TAX of the worst kind. Raising Taxes has always SLOWED an ECONOMY, this will have the same effect.
Brute.....Strange, maybe we could go back a "couple years" with the homes & heartbeat....?
Maybe 10-20 years ?? Guess you probably never heard or knew of A."greenjeans" Greenspan.
Of course there are others?....See the top 10 or 15 (it should be).
Let's judge QE after most of it's over...
Anthony quit trying to scare me ........
I see the head, but don't really see the shoulders...??
You tell me why I am buying....??
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The idea of US crude being a shelter from turmoil abroad may not be as far fetched as it seems.
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