Logic – according to the dictionary, a proper or reasonable way of thinking about or understanding something. According to that definition none existed at 2 pm today when the Federal Reserve released the results of the vote relative to interest rates and the stimulus in place. The loud thud you heard was all the analyst and investing public as the Fed decided to leaves rates unchanged as well as the current stimulus of $85 billion per month going into bonds unchanged. That sent the markets up 1.25% and yields down to 3.75% on the 30 year bond. In essence what the Fed was saying in their comments was that the economy was still too weak to cut the help the Fed was providing and unemployment was still at a point of not achieving the standards the Fed was looking for. That said, logic would believe the downside risk to earnings growth was greater than most believe. Thus, marking up stock prices makes perfect sense in light of slower growth. No one ever accused investors or Wall Street of being logical or smart. All said, the jury is out on how this will play out going forward. For today it played out on the upside as buyers jumped into the market yet again.
I stated in my notes yesterday that I was willing to wait and see how this came down versus attempting to bet on the outcome. I would have be wrong based on the research published from analyst, wrong based on my beliefs of what the Fed would do, and wrong to think the markets would move lower in light of the data. For that reason there is always tomorrow! We will get a better picture in trading tomorrow how this will turn out and what direction we want to go. Thus, tomorrow it is, patience is a virtue.
Commodities were the big winner on the news as gold climbed 3.5%, oil was up 2.7%, silver 4.5% on the upside, base metals up 2%. The money dump is deemed to be inflationary, but to this point has not produced any inflation, according to Mr. Bernanke’s comments following the meeting. No increase in the demand side or shortage in supply, just good old fashion speculation. Raise stops if you own them because the ride is going to get interesting.
Bernanke spent plenty of time following the announcement today offering is rationale for the actions taken by the Fed. They were very well presented, no logic whatsoever, but well presented. I felt like the first day of my Econ 101 class in college… confused. It all sounded good in theory, but in the end it was just confusing. I will summarize the rationale as this… spineless. No ability to make a hard decision or willingness to accept the consequences of them. Thus, punt and act like you know what you are talking about. Bonds rose as yields fell, the dollar tanked, commodities jumped and stocks rose to new highs. Was that the intended results? You bet it was. These people are not stupid, they just play the part on TV.
For now we take what the market gives as it helped our positions, but we are now evaluating risk management and what the potential outcome of all this will be. Tomorrow is another day and we will focus on how to manage the process with the least amount of risk possible. Relax and enjoy for tomorrow you may need the energy to deal with the new hand that his dealt by the Fed.