Wednesday, January 25, 2012

Reaction is Highly Exothermic

I was busy the second part of the day as some equipment went crazy, so I am a bit pressed for time tonight to get caught up and get some other things done.

Reaction is Highly Exothermic
When I wrote last night's post I had a feeling that the lift in markets was not just do to some wishful thinking and people holding their breathe. I figured some kind of change was on the way that would be seen as positive. I had hoped perhaps FED head Bernanke may want to reel in expectations in the face of high oil and a rising stock market, but nothing like that happened today.

The Thermite Reaction was initiated.

The FED statement was fairly tame, and my first reaction was "is that it?". It was later in the press conference that Bernanke made it clear, more easing is on the way and the FED has even gone greenlight on targeting inflation at 2%. Calculated Risk has a great rundown and you can see it here:
Analysis: Bernanke Paves the Way for QE 3

I would argue that the FED has lost their minds here. They cannot control WHERE cash will flow when prompted by such a policy and there is sure to be serious ramifications from this action going forward. The FED is always behind a curve and inflation may run well ahead of target before unemployment drops by a large margin, if at all. Unemployment is a structural problem, not a cyclical one, but the FED is still stuck in the past. Nothing can be done to stop them. No one really wants to. Sad, but it is what it is.

As is, the last 3 weeks have reminded me of another time and that was in the summer of 2010. In August the FED opened the door to QE2 at the Jackson Hole meeting and markets ran from there all the way to the actual implementation. A small correction happened in November, but it was not large. That run went all the way into February 2011. The whole way many, myself included, thought the run up was nuts and made no sense. Here is a daily chart look:
A million things are different now of course, but I get the same market feel at this point.

Greece is small, and it will take Portugal a while to get bad. It's an election year so the money and promises will be flowing for all kinds of things. The push from the FED today could result in a great trading market environment lasting weeks to a few months.

My plan is to stick with individual stocks. Play the best set ups with the best patterns and observe price action that way. The indices may fluctuate but the 100% correlated market has been broken up. If this is a huge fake out, it will be clear as more and more names start to fail trades.

Sentiment is running very hot here, and that can usually be a contrarian indicator. But nothings ever never, and nothings ever always. When the animal spirits are set loose, calling them back proves a difficult task.

Have a good night.


Sarie (23aloha) said...

Terrific post! I expect that because I had success with my sideline timing last July, that I'm just a slow-poke about getting back in with arms open. But, I've got a toe or two dangling.... Thanks again for the great posts!!

Anonymous said...

Honey badger & randall on yahoo FP

Imagine this was a stock and you "got in" the day you posted that video here. I think you would be retiring in the bahamas now...

EconomicDisconnect said...

Sarie, thanks!

Anon, great point.

GawainsGhost said...

The stock market fluctuates. That's what it does, just like housing prices. Policies affect prices, not the other way around.

I've always said the best investment is an older, well built home near a university. You can rent that out to students till the end of time.

There's a university two blocks from my condo. A couple of years ago, the city council got the brilliant idea of building apartments, duplexes--nice, two bedroom, two bath, utility room, fenced patio, the works--and they kept approving more and more of them.

Problem is, here, most of the students live at home, so they have no motivation to rent an apartment. Now, most of them are vacant. There's a bidding war going on for who can offer the lowest rent. Some have been foreclosed on. And most of the investors who bought into this madness are losing money the hard way.

Ever been to Austin? There are entire blocks of nice houses around the UT campus. Now that's some high priced real estate. See, the students who go to UT have a choice. Either live in a dorm or rent a house close to campus. Nobody wants to live in a dorm.

I suppose it's the same for the neighboring real estate around any major college campus. If I were to invest money, that's where I'd buy.

Stocks, meh, you never know what the stock market is going to do. You do know what the Fed is going to do, something idiotic. And policies affect prices.

Invest in value. There is nothing else to invest in.

Anonymous said...

Can you explain why you (and many others) insist on referring to the Fed as the "FED"? It's quite literally not how it's written.

EconomicDisconnect said...

Gawains, I was in Arlington once in I think 2002, great area. The wife and I really loved it. We talk ofetn about moving there. Is it still nice? I know, stocks are a mess to play with, but I enjoy it and you should know how careful I am with this stuff.

Anon, I don't know, guess I started it a long time ago as a habit.


Interesting chart

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