Ian Woodward's Investing Blog

Helicopter Ben is Down, Up and Away Again

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  1. U.S. stocks rallied at Tuesday’s start, reversing course after three days of declines, as investors cheered the Federal Reserve’s move to loan as much as $200 billion in securities in a bid to boost liquidity in the financial system.  Can the Fed break the Log Jam and get the banks lending again?  Is there any way to speed up the process of getting a huge amount of Liquidity into the Credit and Mortgage Markets?  The Fed recognizes it has a mess in the Credit Markets.  In another global show of financial force, the Federal Reserve and four other central banks announced significantly expanded loans of cash and securities to banks and securities dealers in an effort to alleviate growing strains in the credit markets. Along with this oversold condition, the Fed and Central Bankers initiated $200 billion injection in cash through loans in order to try and resolve the liquidity crisis this morning.  For the Fed, the steps are yet another attempt to address the credit crisis through means other than steep cuts in short-term interest rates.  But one of the consequences is that its own balance sheet is looking riskier as its composition shifts from super safe Treasury’s to less safe loans, mortgage-backed securities and the like.  This was “perfect timing” that added “high octane fuel” under a historically oversold level. 
  2. Recent market moves have faced “selling into the short term buying” and pit traders will be watching carefully to see if the same reaction will be happening on today’s up move.  They want to see that it can hold, so they are cautiously optimistic.  However, there has to be a screaming follow through and not just for a few days for the sentiment in this market to turn around for a new Bull Rally.  It can turn out to trot up for a few days and then fizzle again for another Bear Trap.  One has only to look at the beaten down FXP…the Chinese reverse ETF, which was down over 17% today to see that they were buying back the same beaten down stocks for a quick pop. 
  3. Too much damage has been done for this to turn into a “V” bottom, but time will tell.  Please recognize that we had a paltry 7 New Highs yesterday, and 26 today, so that is certainly not much to write home about.  I may be watching the wrong Barn Door, but I need to see some re-assurance that the Bulls are in earnest and show their irrational exuberance for more than a couple of days.  Anyway, the Bulls can’t look at a Gift Horse in the mouth, and at least there is some respite from what seemed to be an inevitable spiral downwards.    As usual, the timing couldn’t have been better and the Bears must be scratching their heads as to what they have to do other than to scurry to cover their short positions every now and then when Uncle Ben comes by in his Helicopter dropping his leaflets.  At least it seems they are now thinking out of the box and have begun to realize that the age old tactics of reducing Interest rates is like a wet squib that has done little but slaughter the dollar and exacerbate the inflation problems.  Type 1&2 traders enjoy the respite, but Type 3&4 Longer Term Investors still need to keep their powder dry.

Best Regards, Ian

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