“No QE3″, Retracement Level Stalls Financials
Since financial stocks make up 14% of the S&P 500 Index, it is difficult to sustain a rally without strength in banks and financial services firms. With the Fed and ECB opening up the liquidity fire hydrant in late December 2011, bank stocks experienced another in a series of monster bailout rallies. As outlined below, the Financials Select Sector ETF (XLF) may be poised to give back some gains over the coming sessions based on numerous factors including reduced odds of QE3.
Unfortunately in the debt-saddled world we live in, central banks may be the most important driver of asset prices. Dallas Fed President Richard Fisher told reporters after a speech Wednesday:
There will be no QE3. I will support no QE3, no additional mortgage-backed securities, no additional Treasuries. Wall Street keeps dangling QE3 out there – I think it’s a fantasy of Wall Street – it’s not going to happen, it’s not necessary.
As we outlined in a January 16 video, the Fed, via currency swaps, and the ECB, via unlimited three-year loans, are already keeping the money printers busy. While there is no formal QE, the Fed is still injecting new money into the global financial system in a “QE-like” fashion (see How QE Boosts Stocks).
It is not unusual for markets to hesitate at key Fibonacci retracement levels, such as 61.8%. Therefore, the comments below will take on more meaning if the financials ETF shows signs of a reversal. A close below 14.42 would increase the odds of more sustained weakness. The 61.8% retracement of the losses from the spring high to October low sits at 14.61 (see right side of chart below). One more push toward 14.91 would fit well into an intermediate-term topping process; the same can be said for an S&P 500 move toward 1,363. Continue reading
The Fed Resumes Printing
By Bud Conrad, Casey Research
The Federal Reserve recently announced important policy changes after its Federal Open Market Committee (FOMC) meeting. Here are the three most important takeaways, in its own words:
- The Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
- The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. In the most recent projections, FOMC participants’ estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent.
- The Fed released FOMC participants’ target federal funds rate for the next few years.
Immediate Reactions Continue reading
Fed To ‘Hold Off’ On QE 3
We noted extreme levels of optimism earlier today. What could possibly trigger a correction in stocks and commodities? If the Fed fails to signal and/or announce another round of quantitative easing (QE), it would undoubtedly leave the markets disappointed.
The Fed uses the Wall Street Journal (WSJ) as a medium to communicate with the markets. It is possible someone at the Fed picked up the phone and said, “We need to temper short-term expectations for another round of QE. Can you help us out?” Friday’s WSJ has an article titled “Fed Holds Off For Now on Bond Buys”. Notice the word “may” is not included. Here is the first paragraph of the article:
Federal Reserve officials are waiting to see how the economy performs before deciding whether to launch another bond-buying program.
The statement above is very direct; it does not contain “expected to” or “analysts believe the Fed will”. While anything can happen next week, the WSJ is always Continue reading
Market Turbulence
Alan Greenspan was appointed Fed chairman by Ronald Reagan in August 1987, he was reappointed by Bush and Clinton, at successive four-year intervals until retiring after a record-setting tenure on January 31, 2006.
During that time period he was one of the most powerful men in the world. The stock markets literally hung on his every word. People made it their full time job to try and decipher what cryptic meaning might be obtained from his press releases.
At times his words boosted the market as he dealt with issues like the Black Monday stock market crash that occurred shortly after he first became chairman. At other times he tried to talk the market down and he referred to the “dot-com” economic boom of the 1990s as “irrational exuberance”.
During his tenure as FED chairman Greenspan was famous for purposely giving technical and confusing speeches. U.S. News & World Report reported that, “Few can confuse Wall Street as thoroughly as Federal Reserve Board Chairman Alan Greenspan can.”
Greenspan even mocked his own speaking style in 1988 when he said, Continue reading
Understanding the Federal Reserve Bank
What’s a greater threat to the U.S. economy — inflation or deflation?
To decide that… it helps to understand what role the U.S. Federal Reserve plays.
Despite so much focus on the policies of the Fed, its operations remain somewhat of a mystery to most investors — in no smaller measure, due to their complexity.
Here’s an excerpt of a 35-page report that explains the Fed, its goals and, very importantly, its limitations in layman’s terms. Continue reading
The Long Swim – How the Fed Could Become Insolvent
You’ve seen the proof in real time. Once-dominant industrial companies, e.g., General Motors, can run out of money. The biggest banks, e.g., Bank of America, can run out of money. Even sovereign governments, e.g., Greece, can run out of money. Yes, all those organizations are still limping along, but only after being rescued by other giant institutions, such as the U.S. government, the less unhealthy European governments, the European Central Bank, and the International Monetary Fund.
So far, it’s been easy to get rescued. The people who run giant institutions seem to shudder at the thought of other giant institutions being shown up as anything less than indestructible. Of course, the rescues weaken the rescuers and push them toward the day when they, too, may join the ranks of the desperate. Continue reading
What is the Federal Reserve – Part 3
Money, Credit and the Federal Reserve Banking System
Conquer the Crash, Chapter 10
By Robert Prechter
How the Federal Reserve Has Encouraged the Growth of Credit
Congress authorized the Fed not only to create money for the government but also to “smooth out” the economy by manipulating credit (which also happens to be a re-election tool for incumbents). Politics being what they are, this manipulation has been almost exclusively in the direction of making credit easy to obtain. The Fed used to make more credit available to the banking system by monetizing federal debt, that is, by creating money. Under the structure of our “fractional reserve” system, banks were authorized to employ that new money as “reserves” against which they could make new loans. Thus, new money meant new credit.
It meant a lot of new credit because banks were allowed by regulation to lend out 90 percent of their deposits, which meant that banks had to keep 10 percent of deposits on hand (“in reserve”) to cover withdrawals. When the Fed increased a bank’s reserves, that bank could lend 90 percent of those new dollars. Those dollars, in turn, would make their way to other banks as new deposits. Those other banks could lend 90 percent of those deposits, and so on. The expansion of reserves and deposits throughout the banking system this way is called the “multiplier effect.” This process expanded the supply of credit well beyond the supply of money. Continue reading
What is the Federal Reserve – Part 2
This is Part II of our three-part series “Robert Prechter Explains The Fed.” In part 1 we saw how Central Banks came into being and money went from something tangible and of value like Gold or Silver to paper backed by Gold to paper backed by nothing. You can read Part I in “What is the Federal Reserve – Part 1” — and come back later this week for Part III. “Let’s attempt to define what gives the dollar objective value. As we will see in the next section, the dollar is ‘backed’ primarily by government bonds, which are promises to pay dollars. So today, the dollar is a promise backed by a promise…”
What is the Federal Reserve – Part 1
Do you really know What a Dollar is?
Or how the FED controls interest rates?
What is quantitative easing? Or (QE2)? Or monetary stimulus?
For answers, let’s turn to someone who has spent a considerable amount of time studying the Fed and its functions: EWI president Robert Prechter. Today we begin a 3-part series that we believe will help you understand the Fed as well as he does. (Excerpted from Prechter’s Conquer the Crash and the free Club EWI report, “Understanding the Federal Reserve System.”)
Here is Part I. Continue reading
How The FED Prints Money- Part 4
This is part 4 in the video series on the effects of Quantitative Easing by Chris Ciovacco the Chief Investment Officer for Ciovacco Capital Management. To see the other parts How the FED Prints Money, How the FED Prints Money – Part 2, How The FED Prints Money- Part 3
