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Another nice day for stocks has pushed the S&P
500 right to resistance at 1,335 as the first quarter winds down. If
funds are buying stocks and “window dressing”, as I suggested yesterday,
then we may see them dump those stocks during the first couple of days of
the second quarter.
Over the past couple of years, the first day of
the month has usually been an up day. But with the S&P 500 up against
resistance, and earnings season right around the corner, I’d say a
moderate decline is warranted.
The stock market has been amazingly strong
essentially since August. Even the events in Japan and the
Middle East only
resulted in a minor correction. But let’s not get complacent: the end of
QE2 in June has the potential to bring a more serious stock market
correction.
Recent comments from Fed governors suggest that
the Fed is prepared to stand down on its liquidity-producing operations
and see if the U.S. economy can stand on its own strengths. There are enough
question marks about U.S.
economic growth in the absence of stimulus that we
should expect a correction.
However, the Fed will likely be ready to unleash
QE3 at a moment’s notice. And fund managers and institutional investors
know the Fed will backstop the stock market, so any weakness as we move
through the end of QE2 will be a buying opportunity. Make a note of this
to start looking around then.
*****Speaking of the Fed, it has apparently turned
down an offer by AIG (NYSE:AIG) to buy back some of the toxic assets the Fed holds as a
result of TARP.
This is an incredibly ironic situation.
Back in 2008, the Fed lent money, guaranteed
existing loans and took on toxic assets to help improve banks’ balance
sheets and stabilize the financial system. We should also remember the
TALF program that was supposed to create a market for toxic assets. The
program failed, because banks believed these toxic assets were more
valuable than the prevailing “mark to market” prices indicated.
Now, the Fed recently announced it would be
selling some of the toxic assets it holds. Institutional investors,
including PIMCO and Blackrock (NYSE:BLK), have raised cash to buy
toxic assets. And AIG wants in on the action.
AIG received $182
billion in loans and guarantees from the U.S. government and the Fed
during the financial crisis. Some of that money went right out the back
door as cash payments to Goldman Sachs (NYSE:GS) and other banks with
which AIG had
entered into credit default swaps.
AIG is
now 92% owned by the government. Yes, you read that correctly: 92% owned
by the government, or you, the taxpayer. And it wants to spend $15
billion to buy back some of the very same toxic assets that brought about
its downfall. The Fed has denied AIG‘s offer, and rightfully
so. AIG would
essentially be using government to buy government owned assets.
I suppose the proposed transaction would
help AIG repay its debt. But it is high time for the Fed (and Treasury)
to stop aiding financial companies with favorable treatment, particularly
when they