Helicopter Ben is Now B-52 Ben
Tuesday’s Federal Reserve action is still dominating the headlines as analysts try to get a grip on what sort of new world we just entered. With target rates now, for all practical purposes, sitting at zero, Ben Bernanke and his monetary commandos might appear to be out of ammunition in their mission to rebuild the U.S. economy. They think otherwise; they are simply changing tactics. Instead of being the “lender of last resort,” the Fed will now act as “buyer of last resort.” With the power to create infinite cash out of thin air, the Fed now intends to buy mass quantities of Treasury securities, mortgage-backed securities, commercial paper, and any other asset class it deems appropriate. The proceeds from those transactions will, it is hoped, serve to stimulate the economy out of recession. “Helicopter Ben” has been upgraded to “B-52 Ben.”
The hazard in this approach is that dropping so much fiat money into the economy will have to stoke inflationary pressure. The response is that a little inflation is just what the doctor ordered; the Consumer Price Index just posted its biggest 3-month decline since the 1930s. Clearly, deflation is the greater threat for now. As for long-term problems – Bernanke no doubt figures he will cross that bridge when he gets to it. We are dubious that this new strategy will have the desired impact. The problem we face is not lack of liquidity; it is lack of trust. Bank executives know full well how much worthless paper remains on their books to be marked down, and they quite reasonably conclude other banks are in a similar state. Hence, they will not lend, not to their fellow bankers and certainly not to businesses and consumers. Until the balance sheet problems are addressed, it will be very hard for the economy to recover anything resembling normalcy.
As a result of all this, Treasury yields are reaching unprecedented levels and the yield curve is almost as flat as West Texas. The 30-year T-bond went as low as 2.58% today, the 10-year stands at 2.19%, and the lowly 3-month bill is effectively yielding zero. We will not be surprised to see long-term yields drop further if the Fed follows through on its stated plans. It is certainly hard to imagine a scenario where yields move much higher any time soon.
Equities moved up sharply following the Fed announcement, but there was little follow-through today. That suggests the initial reaction was probably short-covering that has now exhausted itself. Even so, the S&P 500 on Tuesday did manage to close above its 50-day moving average for the first time since August. Resistance at this level appears to be stiff, however, so unless there is more good news this uptrend may have already run its course.
In commodities, gold was trending up even before the Fed news and accelerated its climb afterward. Crude oil had been climbing in anticipation of OPEC production cuts, but the cartel has still not found a way to prevent its members from cheating. The market appears to understand this, and crude is now falling once again. The U.S. dollar is being slammed against almost all other currencies and shows little sign of a turnaround.
Finally, we must note the downfall of Wall Street titan Bernie Madoff. His alleged Ponzi scheme carries lessons all financial advisors should take to heart. Investment returns that appear too good to be true are probably not true. The intermediaries who directed clients to Madoff without even the most basic due diligence checks are unlikely to survive the lawsuits and reputational damage. When clients demand high returns and low risk, it is our role as professionals to help them do the right thing. Madoff’s victims are now learning this the hard way.
The Materials sector had a good week, but it was still not enough to move the sector up from the bottom of our rankings. Technology also remained weak despite some strength in the semiconductor stocks. Consumer Staples remains on top, and Health Care recovered enough to reclaim the #2 position.
The relative position of the Style categories was mostly unchanged with Mega Caps and Large Caps on top. All the categories improved their absolute momentum scores but remain in intermediate-term downtrends. The best you can say is they are trending down somewhat less speedily than last week.
You probably need a magnifying glass to see it, but China is slightly green in our chart today. This is the first actual upward momentum we have seen in several months. Positive numbers are always pleasing, but we caution you not to get used to it just yet. China is still very volatile and could easily resume its downtrend any time. Latin America made a very strong jump this week but is still far below its highs. Much of this week’s gain in international stocks is due to dollar weakness. The CurrencyShares Euro ETF (FXE) gained +8.6% in the last week, which explains most of the gain in EU markets.
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.
“The possession of gold has ruined fewer men than the lack of it.”
Thomas Bailey Aldridge (1903)
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