Moment of Truth
Research for Online Investors

6/20/12

The Federal Open Market Committee’s meeting ends today with release of their statement at 12:30 p.m.  The Bernank will hold a press conference at 2:15 this afternoon.  The statement release will be a “market mover.”  He will use the press conference to “walk back” any wild move in the market in reaction to the statement.

The market has invested on a hope and prayer the G-20 would address the eurozone credit crisis.  Traders started bidding stocks higher last Thursday on an announcement that central banks were prepared to take coordinated action in case Greece fell apart. It didn’t happen and they didn’t have too.

So where are we?  The G-20 issued a pablum statement that supports the efforts made to stabilize the eurozone banking and credit system.  Reporters hang on every statement out of Germany to see if there is an opening in Germany’s refusal to loosen credit for troubled economies.

European Leaders will meet in Brussels next week.  It is widely expected for the EFSF or the ESM to change policies and start buying bonds from Greece, Spain and Italy to lower their interest rates.  The market is giddy.  We think there will be disappointment.

The ESFS requires all countries put in their share of money before it can take action.  Committing funds requires parliamentary approval in some countries, most notably Germany.  The ESM has not been ratified by all countries in the eurozone yet.

The ESM would not require prior approval by individual governments but since it is not active yet it is not available.  Sky News has a good article wrapping up the G-20 summit.

The FOMC meeting comes at a time when many U.S. economic reports indicate a slowing recovery.  Unemployment took an uptick last month.  These inputs should push the Fed to another round of quantitative easing.  The market looks at this as the natural course or for the FOMC to at least extend “Operation Twist.”

Operation Twist is the program the Federal Reserve started last year to sell short term treasuries and buy long term treasuries.  The Fed has also invested funds from interest received and the selling of mortgage backed securities (MBS) into long term treasuries.

So far the Fed has shifted $388 billion dollars into long term maturities.  Bloomberg reports the present cap on Operation Twist is $400 billion.  Nomura Securities calculates the Fed has about $190 billion left in short term securities that could be moved into long term treasuries if the Fed wanted to continue Operation Twist.

We believe the FOMC will let Operation Twist end as planned so they can announce a new program at their July meeting.  Even continuing Operation Twist will disappoint the market at this point.  We are sending this out early to help you make decisions as the announcement approaches, plus we expect to be busy in the market after the statement is released.

Prepare accordingly.  We are suggesting ultra-short etfs such as TZA be used to hedge risk going into the FOMC statement release.  We are also using covered calls to take the sting out of falling prices if the market reacts negatively.  We have had a good run in our investments in the last week.  A little protection at this point seems in order.

The Mailbag:
I'd call this environment a bull trap but the VIX is below $20 therefore a bull market conditions is intact?---subscriber S.B.

John’s reply:  I believe it is a trap.  If not, I am hopelessly out of whack with the market.

Great newsletter. . . You hit on that plunge protection team.  FOR SURE IT IS IN ACTION.  Been in action !!  We are almost 13,000.  The Cartel is at work!  They are going to try to do everything they can to get our money legally…How can you stand to watch and pay so close attention to this soap opera each day.  Give you lots of credit John.  I’ve lost much of my interest.—Long-Term subscriber T.M.

John’s reply:  It’s my job.  I think tomorrow will be interesting if the FOMC does not do anything.  We could see a plunge.  I don't know.  Sometimes I feel like the lonely boy crying "the sky is falling."

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