Growing Dead Plants
Research for Online Investors

by John Dalt

9/22/11

Today is ugly.  I read one precious metals blog whose title was “A Bad Day to Quit Sniffing Glue!”  If you can’t laugh at gallows humor, what does it take?  The market fell out of bed yesterday afternoon.  Everyone looks at the Federal Reserve Statement for explanations.  There aren’t any.  If you parse the words, we see an admission “that economic recovery remains slow.”

The statement said, “...there are significant downside risks to the economic outlook, including strains in global financial markets.”  You can read the Federal Open Market Committee (FOMC) statement.

Was the addition of the word “significant” enough to cause the sell off yesterday and now today?  No.  There is more at work against the market than Fed policy.

The Fed is going to do “the twist” which is exactly what many had anticipated.  They are even going one better than a plain twist, they are going to sell short term notes and buy long-term treasuries.  They are also going to reinvest money from maturing securities into mortgage backed securities (MBS).  This will force mortgage rates down even more, or at least hold them down.  The Fed even extended their telegraphed intentions to hold short term rates at “exceptionally low levels” through 2013.  Here is the problem.

It doesn’t do any good to water a dead plant.

Lower interest rates are not going to help.  Mortgages are at historic lows.  Money is awash in the system.  Buyers can’t qualify due to restrictive loan requirements.  Politicians and pundits scream for banks to loan more money, but behind closed doors regulators encourage risk averse loan policies.

No one thought the Fed would surprise us with QE3 yesterday, but evidently some were disappointed they didn’t.  We have plenty of other plagues on the market.  The eurozone is bounding forward towards the precipice.

Fortune magazine has an article titled “Orderly default in Greece?  Good Luck.”  The article points out other countries have defaulted before, but these were always developing countries.  Greece is “essentially” the first developed country to face default.  The austerity measures imposed on their government are slowing economic activity, which makes future growth to pay off the debt unlikely.

This has spooked investors.  "One of the founding pillars is this concept that the debt of industrialized countries is risk free," says Jacob Funk Kirkegaard of the Peterson Institute for International Economics. "Markets are asking if it turns out there's risk in Greece maybe there are other countries in the industrialized world that face the same issues."

We wonder when bond investors question the U.S. ability to repay our principal.

Business activity in Europe fell to the lowest levels since July 2009.  Indicators showed China’s economy slowing.  Crude oil, copper and other commodities were off on concerns about demand in a slowing world economy.

It looks like we are going to test the lows today.  When it all seems negative, it is hard to stand your ground.

Insider selling, by volume, is outpacing insider buying by a 7-1 margin in the current 'uptrend'.  What do you think?—subscriber R.T.

John’s reply:  I saw the same thing.  Doesn’t sound too reassuring, does it?

Thank you. . Great info to know on dividend and utility stocks.  Called my mother in law to make sure she didn’t have any utility stocks and to sell if she did.  I should tell her to check all her high dividend stocks and see what they are up to.  Calling her back now.---subscriber T.M.

John’s reply:  ED is down 1.76% today.

Quote:
Don’t bet on the end of the world, it only comes once.—Art Cashin on CNBC

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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