Bernanke Engineers Bullish Bolstering

After yesterday's "surprise" rally off the 12,500 mark on the Dow, today's action was a little more predictable, as apparently the fate of the US economy hangs on every word uttered by Federal Reserve Chairman Ben Bernanke.

At 1:00 today, Bernanke gave a speech at the Women in Housing and Finance and Exchequer Club Joint Luncheon in Washington, D.C. The full text of the speech was posted to the Federal Reserve web site, here.

The key points, in my view, can be boiled down to the following italicized phrases with my comments following in plain text:

More-expensive and less-available credit seems likely to impose a measure of financial restraint on economic growth.

Banks aren't being so loose with lending. Expanding a business or buying a new house? Unless you have perfect credit, forget it.

...notwithstanding the effects of multi-billion dollar write-downs on the earnings and share prices of some large institutions, the banking system remains sound.

Thanks to our friends in Aub-Dhabi, Singapore, China and Dubai, Citibank, Merrill Lynch, Bank of American and other big national banks have avoided shutting down completely.

Thus far, inflation expectations appear to have remained reasonably well anchored...

There's no inflation unless you buy gas, home heating oil or food.

...we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.

Are we going to cut interest rates and destroy the dollar? You bet we are.

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So there you have it. According to Chairman Ben, the Fed will cut, inflate and keep Wall Street happy until the 2008 elections. Then when we select another Republican president, we can allow everything to go to hell in a hand basket because we'll have four years to fix it, lie about it, blame it on Congress, etc. If you are a middle class wage earner. you lose. Rich investors will win. Good night.

The reaction on Wall Street wasn't exactly as the Fed had planned, though the volume was extraordinarily strong. After yesterday turned in the highest volume of the new year, today's was the best in terms of shares traded since November 8, when the Dow went on a 462-point round-trip journey.

Stocks actually struggled before, during and after Bernanke's speech, so the PPT apparently was called to action about 2:15, engineering a 200-point spike over the next hour. After that, things settled down, closing about 73 points below the day's high.

At around 2:30 news emerged that Bank of America (BAC) was in talks to buy troubled mortgage lender Countrywide Financial (CFC). Stocks took off on a tear at that point. Well, timing is everything.

Dow 12,853.09 +117.78; NASDAQ 2,488.52 +13.97; S&P 500 1,420.33 +11.20; NYSE Composite 9,490.76 Up 66.07

So, the Dow is up 350 points in just one day and two hours of trading. That's perfectly normal, but hardly indicative of either a bottom or a turn around. It's a bounce and a fairly technical one at that, though in a completely unrestricted market, the downside would have been greater and the upside less abrupt and smaller.

On Thursday, advancers took the lead from declining issues, 4060-2294. New lows contracted considerably from yesterday, though still besting new highs, 531-111.

Oil was down again, suggesting that futures traders are responding to expected slack demand in months ahead, losing $1.96 to close at $93.71. Gold, however, exploded to another new high, gaining $11.90 per ounce to $893.60. Silver went along for the ride, rising 44 cents to $16.48. Fed head Ben can downplay inflation all he likes, but don't tell that to the gold bugs. They're in the midst of a major bull run.

The next policy meeting of the FOMC is January 29/30, so expect another bounce when they decide to cut rates by at least 25 basis points, possibly 50. Until then, prepare for some serious choppiness, with a downward bias. Corporate earnings reports will be heaviest from the 16th to the 25th, and they're expected to manifest the overall sluggishness in the economy. In other words, they're not going to inspire much buying of stocks.

NYSE Volume 5,132,203,000
NASDAQ Volume 2,640,165,500