"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

Trader Dan's Work is NOW AVAILABLE AT WWW.TRADERDAN.NET



Tuesday, August 9, 2011

S&P 500 Update - US Dollar sacrificed

The FOMC announcement this afternoon sent the equity markets into a complete turnabout from yesterday's big selloff. The catalyst? Try the fact that the Fed said that the economy is so weak that interest rates will not be raised until at least the middle of 2013 - a full two years away! That acknowledgement, namely, that growth is so sluggish, the economy so moribond and unemployment so chronically high, sent money flowing into BOTH stocks and bonds at the same time.

How's that for a neat trick by the boyz at the Fed?

Here is the deal - the FOMC is attempting to drive money out of bonds and INTO equities based on the fact that they have guaranteed practically no return as far as yields go on short term Treasuries for at least two years. Think about that. As an investor would you want to lock up money for that long for that kind of yield or would you want to buy stocks and attempt to capture a bit better return on your investment capital. After all, something beats nothing as far as returns go, especially if you think that this easy money policy is going to feed into further asset appreciation as the Dollar further succumbs to the news. Forget about the ECB's quasi QE program to buy up Italian and Spanish debt. The Euro was bought like mad while the Dollar was pounded lower as the Fed is obviously sacrificing the Dollar in an attempt to keep a low interest rate environment in which stocks are rising. That is at least, what they hope to create. I suspect that they are going after higher equity prices in an attempt to gin up confidence in the US economy by creating a rising stock market. What more can I say than YIELD. Here we go again - chase and chase yield.

On the technical chart, after plowing through the 38.2% Fibonacci retracement level last evening in Asian trading, the S&P shot right back through it to the upside, at the exact moment in time that it needed to I might add. The next target for the bulls will be to take this index back through the 1200 level. Should they be able to do that, then they have a legitimate shot at taking price back towards the former broken support level at the 1250 level.


I would watch the US Dollar very closely right now as a result of today's FOMC statement. I am coming away with the idea that they are now resorting to currency debasement but in a manner in which it is not so obvious as if they had just come out and said, "We are going to do a QE3". They have effectively told everyone that there is not going to be any growth worth speaking of for the foreseeable future in the US economy and that therefore yield on US Treasuries will be very low. They are also now counting on the market to take this idea of slow growth and bid up the back end of the yield curve without fear of the inflation monster. This is going to be an interesting exercise to observe.


Can the Fed manage to induce investors/traders to plow into stocks without having them also plow money into the commodity sector. If Bernanke and company had come right out and announced another attempt at QE3, commodity prices, particularly energy prices would have shot up immediately producing that same dampening impact on the consumer and the overall economy that it did during QE1 and QE2. By taking this line of approach, the Fed is hoping to convince market players that growth in the economy will be so slow that there will be no increasing consumer or business demand for energy and thus no reason to bid up the price of crude oil and thus gasoline. Same goes for food prices. We will simply have to wait and see how this plays out but for today at least, they managed to take equity prices up while taking commodity prices down. After the linkage we have been seeing between the two for both QE's, this is no mean feat.



9 comments:

  1. excellant analysis as usual dan.

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  2. thank you Dan

    Well Bernankee Panky pulls another rabbit haha

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  3. Once again you've provided the best analysis out there, Dan. Thank you.

    I'm thinking negative real interest rates, which seem a certainty for at least the next two years, will be a tailwind for gold?

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  4. That still doesn’t answer the question of who will buy over 2 trillion of treasuries that will need to be issued according to the new debt ceiling. Leaving apart all the ones that will come to maturity over the next two years.

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  5. Eric, the Fed will buy the $2T of treasuries through their primary dealer conduit.

    Dan, solid analysis. Thank you!

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  6. You nailed the b*st*rds with this outstanding analysis. Thanks for the insight!

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  7. Dan-another great piece, right, no spot on!

    Eric-who will buy $2 trillion of new debt? The gutless, snot nosed sycophants and weasels that bought the last $2 trillion, that's who. :-)

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  8. Dan....great succinct analysis. The Fed can play this trick to goose the market only for a little while because very soon the strategy will have a counter-productive component. The reality is already starting to play out today. By telling the world they will keep the ZIRP for another 2 years, it leaves the U.S. debt with very few buyers. If the Fed starts buying, which it will again, it is effectively QE3 and dollar debasement ensues. There really aren't any good answers left....time will reveal all.

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  9. Hey Dan, as always, your analysis is awesome. Keep up the great work! Btw, have you ever though of opening up your comments section for people who don't want to sign into an account?

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