Research for Online Investors
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
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
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
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.
I'd call this
environment a bull trap but the VIX is below $20 therefore a bull market conditions is
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
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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