Fed Intervenes With More Bailouts - Good or Bad News?

federal reserve bailoutI said there would be fireworks today and indeed there was. I have to admit, even though I was considering it as an option, I was quite surprised to see the Fed do what they did today. As most found it time to cheer and buy, I was looking deeper into the decision and wondered why they would do such a move? This decision exposes a lot of the concerns the Fed has about the economy, and although it seems as though it will bring relief to the credit crisis, the side effects of such a move could have some serious repercussions on the market.

So the day reacted in my "B" scenario of what I expected to happen in the market place. Honestly, I was leaning more towards my plan "A" scenario, which was to have the market open up, due to expectation of the meeting, with a disappointing sell off after the announcement. However, the Fed decided to surprise the world with their plan. Luckily, I set up myself prepared for either direction, however, I would have done better with an ending sell off. Indeed my FAZ options purchased yesterday took a strong hit, but a lot of those losses were eaten up by my SSO gains. The options expire in July as well, so I have plenty of time for the banks to go sour once more. I'm not too worried.

So lets break down today's announcement. The Fed announced their plan to spend $300 billion over the next 6 months in buying up long term US government bonds. In addition to that, they announced that they would spend an additional $750 billion on buying mortgage-backed securities guaranteed by Fannie Mae, which now brings the total to a whopping $1.25 trillion. Also, yes also, they will be increasing their purchase of Fannie and Freddie debt to $200 billion. Those are a lot of bullets to fire in one meeting. In fact, I was very surprised to see the market only close up 90 points after such an artillery of news. So, how do I feel about all this?


Honestly, I think it shows the desperation of the Fed. Notice a big key missing ingredient of today's announcement. After Bernanke so proudly declared his expectation of the recession to maybe be over by 2009 in the CBS interview, there was absolutely no mention of a 2009 ending recession in the FOMC notes. At least they're not fudging the numbers too badly.

As with buying the government bonds, I believe it was something that needed to happen. There has recently been a scare of China pulling out a lot of their money that are in US Treasuries, which they own A LOT. Such an action from China would derail interest rates, only freezing the markets more. Instead, the move today sent Treasury rates sailing down, which in turn should hypothetically lead to lower lending rates. This is something the Fed hasn't done since the 1960's. So, if indeed China does pull out, this won't make that much of a net difference, just keep the Treasuries from plummeting.

The amount of money being put toward mortgage backed securities may put a door-ding in the debt that is hanging over these banks. Although it seems as $1.25 trillion is huge, it is nothing compared to the debt that is coming due and will be considered delinquent for CMBS loans. This makes a total of $4 trillion that the Fed has now spent (which will come out of your pocket), without asking the American people. Sorry folks.

fed bailout rally
This indeed is just more supporting my theory of massive inflation that will come later on, following the deflationary spiral hitting the markets. We have now had 3 consecutive months of declining PPI, which is very discouraging for the markets and which is why the Fed is acting in such a panic. Expect a beating from the dollar in the near future as well as more spikes from gold.

Already, many are on the wagon of the "we have reached bottom" club and are beginning to position themselves on the long side. Although I do believe we could rally a couple more weeks, especially with this recent news, I still very much believe that there are much tougher roads ahead. In fact, such news released today, only supports the models in setting up for capitulation. At least, that's my opinion. So I will remain patient, but the time is getting closer to getting back in the shorts.

So, it will be interesting to see how tomorrow reacts. I think, as with other plans that were a surprise to the market, people will begin to see the side effects of such a move, and its halo will begin to fade. For those looking for a good brokerage company, TradeKing is offering some really good rates for trades. Happy Trading everyone, see you tomorrow.

8 comments:

  1. Newbie Says:

    ... and absolutely no mention was made of where this 1.25T is going to come from. Eventually, it will come from the taxpayers, but in the short term I gather they will be printing the money because no one is going to buy our bonds anymore. Inflation is definitely coming and quicker than I had expected. I thought perhaps in the next 12 - 24 months we begin to experience the repercussions of all this borrowing, but now it could be 3 - 6 months if not sooner.

    Hyperinflation could follow. I for one am going to load up on more gold, silver and oil stocks and even some that pay dividends in foreign currency. I had what I thought was enough for the short term, but this is ridiculous. I'm going to double my overall position ASAP.

    I guess I'll also have to go and pick up some physical gold and silver as well. There's no way I'm leaving my cash in the bank where it's just going to loose value.

    None of this borrowing and printing is going to make us stronger in 6 months, 1 year or even 5 years. It's going to hinder us. There's a reason they call it "toxic" assets.

  2. Finance Fanatic Says:

    Agreed Newbie, well said.

  3. sid Says:

    keep up the good work, wish you wouldn't wait so late in the day to post :)

  4. Finance Fanatic Says:

    Sorry Sid... Usually try to get it out earlier, had some obligations today. Late night for the loyals.

  5. Erin Says:

    What do think the likelihood is of a bear market rally that lasts 6-9 months and then a crash of approximately 2 years thereafter? That would closely echo the pattern that other crashes have followed (Great Depression, NASDAQ in the early 2000's).

    In general though, I love your site and check it daily - I find your advice is usually spot on, so thanks for all the good advice!

  6. Anonymous Says:

    I am new in investing. Please give suggestions where to buy physical gold and silver both online and local North CA stores. Thanks.

  7. Dinadur Says:

    I actually buy gold on ebay... I find it is often the cheapest place in conjunction with the live.com promotion (just bought a 1 oz gold buffalo coin yesterday for $1008 shipped (hard to find em anywhere else)

  8. QUALITY STOCKS UNDER 5 DOLLARS Says:

    More of the same.