Wednesday, January 28, 2009

Fed Doublespeak, Bad Bank Idea Signal Bull Run

Forget the idea that earnings move the market. Most of the firms which reported 4Q and full year results between Tuesday and Wednesday's close actually showed negative comparisons to year-ago figures for both revenue and earnings. What mattered most today was that congress is about to pass a nearly $900 billion spending bill and Tim Geithner, the newly-confirmed Treasury Secretary, will go about buying up all of the bad assets on the books of the major banks, in effect, creating a "bad bank" for which to orderly dispose of those nasty ill-advised and now non-performing loans.

It's a great day for inflationists. Unfortunately, it's a bad day for the value of the dollar and not such a great day for anybody who recently lost his or her job. There's nothing in the bill which will actually create new, private sector jobs, which is what - long term - is needed to stabilize and grow the economy.

Never minding the inflationary implications of government boosterism, investors went absolutely ballistic, sending the US indices on a rocket ride higher.

Dow 8,375.45, +200.72 (2.46%)
NASDAQ 1,558.34, +53.44 (3.55%)
S&P 500 874.09, +28.38 (3.36%)
NYSE Composite 5,501.49, +186.05 (3.50%)

The measure passed in the House contains a hodge-podge of government spending and tax relief, though nothing which directly affects either housing or employment, currently the two keys to any kind of economic betterment. Much of the criticism being directed at the government stimulus plan is that it will not begin working soon enough to have a meaningful near-term impact.

The Fed, after meeting for two days, did exactly nothing more than snort out a few missives about how the economy continued to deteriorate and how they were prepared to engage in - though they are not currently - direct purchases of Treasury debt securities. Keeping the key rate at "Zero to 25 basis points" the Fed is effectively out of policy bullets. Clearly, from the release notes of their meeting, deflation is the enemy, though it is not mentioned by name. Included was this nugget, which underscores the Fed's inflation leaning:

Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

Just how the Fed manages to justify the differences of "inflation" and "price stability" was not covered by the release because, of course, their position is impossible to attain.

Today's speculative fling was obviously based on false hopes in that the market "gapped up" at the opening bell. It's a sign that investor optimism has not been fully demolished by recent events. And it was just yesterday that I mentioned that stocks could only gain a few hundred points because they had yet to retest the lows. How prescient of the market... and me!

Markets hate gaps and always find ways to fill them. This market had been stuck between 8149 and 8200 on the Dow. Today, it simply ignored the level. Danger lurks in today's gaps, but the public is being prepared for another onslaught of negative news, most likely not until March, however. Clearly, stocks have further to fall from these levels.

Optimism was as naked today as a bull's backside as advancing issues trounced decliners, 5412-1178. Plenty of pent-up investor demand went to work. Volume was reasonable. New lows outpolled new highs, 111-15.

NYSE Volume 1,548,266,000
NASDAQ Volume 2,160,559,000

Speculators in commodity markets were less convinced. Oil gained a sparing 58 cents, to $42.16. Gold fell $11.40, to $890.00, while silver lost 21 cents, to $11.96. The unmistakable signal from commodities are bearish and deflationary, right in line with slack demand and tight credit markets.

After the bell, Starbucks reported earnings and revenue that missed estimates and says it will cut 6,700 jobs in '09.

Enjoy your latte. The government and Wall Street are supplying the froth.

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