04/27/11   News Flash: Fed Can’t Create Oil, Just Money

Editor’s Corner

Investor Heat Map: 4/27/11News Flash: Fed Can’t Create Oil, Just Money

Ron Rowland

Today’s news is all about the Federal Reserve.  Aside from a normal policy meeting, we were also treated to the spectacle of the Fed chairman facing reporters for a news conference afterward.

First, let’s look at what the Fed did at its two-day meeting: Not much.  Fed statements rarely contain surprises, and this one was no different.  Following a careful review of the latest data, the committee decided that economic recovery is proceeding at a “moderate pace” and the current inflation pressure will be “transitory.”  They kept short-term interest rates unchanged and renewed their pledge to be accommodative for an “extended period.”  The QE2 stimulus program will go on through June as scheduled.

The Fed will also continue to reinvest proceeds from maturing assets in its mortgage debt portfolio.  This last point may be today’s most important revelation: it tells us that, whatever Fed officials may say, they still see the housing market as unable to stabilize without substantial support.  By providing such support, they ease the pain for some while extending the agony for everyone.

Ben Bernanke’s post-meeting press conference was an unprecedented novelty for the Fed, though other central bank leaders have been doing so for years.  The U.S. media was fairly docile, allowing Bernanke to be even more non-specific than usual.  He conceded unemployment is a very difficult problem, made even more so by rising food and fuel prices.  The chairman is well aware that nothing will solve the problem other than time – but of course he cannot say so.  For some reason, the markets feel better when no one faces reality.

Stocks rose steadily prior to the Fed announcement and continued up during and after Bernanke’s remarks.  The S&P 500 traded all day above 1344, the level it reached in February but that proved too tough to surpass in the interim.  Major benchmarks are back where they were in the summer of 2008.  This is still short of recovering the 2007 all-time highs but is definitely progress.  Nothing said or done today appears likely to change the major trends.


Health Care held on to its new lead over all other domestic sectors for another week. The various industries – biotechnology, pharmaceuticals, delivery, and equipment – are finally all showing relative strength at the same time.  This is a positive sign for Health Care, but Energy still has a shot at retaking the top of the chart.  Materials also bounced, though like Energy the resource stocks were laggards in today’s action.  Consumer Staples lost some of its relative strength but remains in a solid uptrend.  Technology stocks, encouraged by some good earnings reports, recovered enough to pull ahead of Utilities.  Financials are still at the bottom but showed slight improvement.


A broad market advance in the last few days helped all Styles gain strength without altering their relative positions very much.  Growth is now favored over Value at all levels of capitalization.  The inverse-capitalization pattern has not changed: Small Cap Growth still has a lock on the top spot while Mega Cap is still on the bottom.  The divergence between Small Cap Growth and Small Cap Value remains unresolved.  Nevertheless, when even the worst-ranked categories are moving up at double-digit annualized rates, we have to say that bulls are in control.


Pacific ex-Japan remained on top of the world, relatively speaking, as strength in Australia and Singapore outweighed weakness in Hong Kong.  Last week we mentioned that Europe was still in the leadership race despite Euro-related pressure.  Now the EU region is back up to the #2 spot, moving ahead of Emerging Markets and China.  Canada slipped in the rankings despite showing improvement by most measures.  Everything is good in Canada, but on a relative basis is even better elsewhere.  Latin America stayed near the bottom as its recent sideways pattern continued.  Japan bounced a bit but is nowhere near recovering its pre-earthquake strength.  The duration of the downturn is making Japan’s trend indicators drop fast.  If we don’t see a selling climax in Tokyo soon, the bearish momentum will be much harder to reverse.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

“There’s not much that the Federal Reserve can do about gas prices per se. At least not without derailing growth entirely, which is certainly not the right way to go. After all, the Fed can’t create more oil.”

Ben Bernanke, 4/27/11


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