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Yesterday, the FOMC voted unanimously to buy over $1 trillion dollars in U.S. Treasury bills, corporate bonds, mortgages and consumer debt.
Chief economist at Bank of New York Mellon Corp. called it a "Rambo Fed" move in a Bloomberg interview. He said "This is a very powerful and aggressive move…"
Bonds immediately rallied, with the 10-year note putting in the biggest one-day gain since 1962. Stocks rallied, too, which is a bit unusual. Bond and stock prices tend to move in opposite directions. When stocks appear risky, money goes into the safe haven of bonds, and vice versa. But these are strange times, and with the Fed taking unprecedented steps to ward off deflation and get lending moving again, it’s not that surprising that some old relationships are being tested.
Bernanke’s intent is clear – he wants to make sure interest rates stay low. Overnight interest rates are already zero. Any more easing and the Fed would be paying banks to accept Fed money. So buying debt is the next best thing.
*****Analyst are already saying that this move will lower mortgage rates by up to 50 basis points immediately. The hope is clearly that lower real mortgage rates will boost home buying and start to pull the economy out of recession.
Bank stocks loved the announcement. And so did the homebuilder stocks.
SPDR Gold Shares (NYSE:GLD) also rallied on the potential for inflation. "Helicopter" Ben Bernanke is making good on his promise to flood the market with liquidity to avoid a depression like scenario. He once vowed to drop money from a helicopter if necessary.
Of course, the fear is that a massive increase in the money supply will spark inflation down the road. At some point, the Fed will have to act quickly to raise interest rates and sop up liquidity. Otherwise, we’ll see more Greenspan-esque asset bubbles and runaway inflation.
*****In the meantime, I expect stocks to move higher. Investors should be consoled that much is being done to jumpstart the economy. If you’re looking for a trade, now should be a good time to buy some Graham Corp. (AMEX:GHM) or the US Oil Trust (NYSE:USO). Expectations for recovery should show up in oil prices. The potential for inflation should move oil higher, too.
The Fed’s timing couldn’t have been more perfect. The recent rally was extended. A reversal looked imminent. But now, Ii wouldn’t want to be short anything, except maybe the U.S. dollar, and even that would make me nervous.
*****This certainly gives us plenty to discuss at the upcoming TradeMaster video conference that will air on March 25. I’m sure we’ll also have a couple trading ideas for you. If you’d like to sit in, here’s a registration LINK. Plus, when you register, we’ll send you TradeMaster Daily Stock Alerts right up until video conference. That way, you’ll be able to make the most of the information and trading ideas we explore.
That’s it for today. Talk to you tomorrow…