Fed Up Thursday – Bernanke Needs to Go Big or Go Home!

"Fed Prepares to Act." 

That’s the big headline in today’s WSJ and that’s why we’re up 500 points in 2 days on the Dow.  Bernanke is speaking at 1pm this afternoon and the Journal is already predicting BIG THINGS coming out of the Fed’s Sept 20-21 meeting.  Being treated as a given already is "Operation Twist" (see this week’s Stock World Weekly for a full explanation), which is what is sending long bond rates to record lows as, IN THEORY, the Fed is going to swap that $1.5Tn in blue and purple notes (left chart) into $1.5Tn worth of red notes.  

Sure this seems, on the surface, to be insane as the Fed will be taking all that stupid, inflation-denying paper off bondholder’s hands (ie. Banksters and the top 1%) and handing them cash with which they will be able to drive up the price of short-term paper so that people and small businesses, who tend to get loans that are less than 10 years – would effectively be priced out of the market.  So Ben is crazy like a fox – as this is the perfect vehicle to serve his Corporate masters and screw over the American people by saddling them (through Fed purchases) with Trillions of Dollars worth of underperforming bonds for decades while inflation chews up the redemption value and Big Business crushes what little is left of their competition.  BRILLIANT!  

Even more so as Banksters will be able to borrow at long-term rates and lend at short-term rates, increasing their interest crack spread 2-3 times.  Never before have so many been screwed by so few so hard…  

Already 10-year rates have dropped from 3% in July to 2% in August, giving an almost 20% boost to note-holders from QE2.  

So, in QE2, the Fed lent out $600Bn over 6 months and if their favored IBanks simply bought 10-year notes with the money, they’d be up $120Bn already – isn’t that special?  Now the Fed "twists" their program and buys back the 10-year notes at the new, higher prices, giving the Banksters now $720Bn back which they can then lend out for a spread to their longer borrowing costs.  This is why we like XLF long-term – how can they lose?  

Obviously, this is not going to create any jobs or stabilize the economy, other than the economy of the Bankers and, although we got nice and bullish early this week, we were already preparing to flip back to bearish in yesterday’s Member Chat if we fail to hold Dow 11,300, S&P 1,190, Nas 2,525, NYSE 7,150 and RUT 700 – which were intra-day targets we hit yesterday and finished above.  I’m already not thrilled with Obama’s planned jobs package and, if all the Fed has for us is enriching their buddies again – what on earth are we being bullish about?  

Yesterday’s Beige Book was not great, or even good – but it certainly was not recessionary.  The market is up 5% in two days and the Dollar is up 3.5% as well (from 73.50 to 76) and that’s an 8.5% combined move up at the above levels and we need more than "not in a recession yet" to justify a move back above our Must Hold levels (around a 10% gain overall).  

As we discussed over the weekend – we are in a trading range and those trading ranges are usually a 10% band and, at the moment, that band is the lower end or our range and we are struggling to get back to the middle (+ and – 5% of the Must Hold lines) but we need REAL STIMULUS and REAL JOB CREATION to get there – not this nonsense!  

In Member Chat I proposed a job creating tax-break I would get behind:  

Credit back 25% of increased workers salaries (more US head count than 2010) towards taxes paid (not unpaid). That is a 100% credit to small businesses who make new hires but nothing for GE and others who pay no taxes anyway and nothing for people who outsource.  It’s revenue positive for the Government because you are giving the business a $10,000 credit on a $40,000 salary but the salary is new and the worker pays $14,000 in taxes and gets off unemployment.  See how easy that is?  

As noted on Dave Fry’s chart (above) we’ve had a shocking global bounce this week on no particular news and no changes so I’m beginning to worry that this low-volume, pre-Obama, pre-Fed bounce is nothing more than the market moving in anticipation of an event that’s not likely to happen – the expectation that the President or the Fed actually come up with a better plan than giving more money to people who are already rich and hoping they will be kind enough to "trickle down" on the poor people below them… 

8:30 Update:   It’s not the usual 414,000 pink slips handed out last week that are sending our futures down 1% but a 0.5% leap in the Dollar as the ECB holds rates steady but Trichet opens the door for additional cuts by lowering thier forecast for 2011 Euro-Zone growth by about 20%, to 1.4-1.8%.  That sent the Euro flying back down to $1.39 (and sent the SNB scrambling!) and the Pound (not really part of the Zone) UP to $1.60 and the Dollar flying up from 75.6 to 76.06.  Gold went up again on that move, now back to $1,859 and silver shot back up to $42.50 but oil fell from $89.5 to $88.80 – a totally crazy market!  

In response to a question, Trichet says inflation concern has gone from "upside risk" to "balanced," and the growth outlook has gone from "balanced" to "downside risk."  It’s about as clear a signal as you’ll get that the bank has rate cuts on its mind.  Morgan Stanley says there is: "The chance of a coordinated monetary policy easing move… perhaps as early as the G7 meeting this weekend. The Fed, the ECB, the BoJ, and the BoE could all participate."

We shorted oil yesterday as it approached $90 and we’re hoping for a nice drop to $85 by next week (see yesterday’s post for oil status) or maybe even this week if there is a disappointing build in inventories or evidence of exceptionally low holiday demand.  Those were our two favorite shorts this week – USO and TLT – both of which are iffy so far or, an optimist might say, both of which are still giving us very good entry points!  

The key is going to be able to hold our Dow 11,300 and RUT 700 levels on the morning dip as we wait out Bernanke at 1pm and Obama at 7pm.  Very likely we drift into those speeches as the move up already happened and now it’s up to the dynamic duo not to disappoint the markets but no disappointing us may not be enough to take us over our goal lines (Must Hold levels) and that means we’ll have to start layering in our protection again in a range that has the danger of becoming tedious into Q3 earnings next month.