"The last few trading days have been what I have been expecting for the last several months and they finally happened. The Market is behaving like a petulant teenager throwing a temper tantrum because it is not getting its way. The improving economy has brought the Fed to the point of perhaps reducing the amount of stimulus that they are providing. Also, as expected, the Fed is telegraphing way ahead of time what and when they will be doing it. All of this should come as no surprise to any of the Market participants. So why the big selloff? The Market wants an unending supply of free money and Fed backstopping of the economy. Now that the economy will need to stand more on its own, just like the teenager, it does not like it. It wants parental support to go on forever. How dare you kick me out of the nest? The reality is that all of this is good news and we should see sanity return to the Market soon. As you know, I see us riding on an escalator while playing with a yo-yo. The economy is the escalator and the yo-yo is the stock Market. The important thing is to keep our eyes on the escalator. What the yo-yo is doing at the time is actually irrelevant. It is the trend of the economy that drives everything. So lets look at the facts. What did the Fed chairman say and why? Ben Bernanke, speaking after a two-day meeting by the Federal Open Market Committee, said the Fed may begin reducing its bond-buying this year and end it in mid-2014 if the economy achieves the Fed’s objectives. The Fed is forecasting growth of as much as 2.6 percent this year and 3.5 percent in 2014. Growth of 3.5% would accelerate corporate profits and, therefore, the stock Market. This implies that the escalator is rising. If such gains are maintained, “we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year,” he said. But Dad, I want the free car and free gas and free insurance. You mean you will be taking that away from me? I HATE YOU!! Federal Reserve officials forecast the U.S. unemployment rate will fall to 6.5 percent to 6.8 percent by the end of 2014, possibly reaching its stated threshold to raise the benchmark lending rate. If they are correct, this will mean millions of people will have jobs that do not have one now. This will spur consumer spending and will have a very positive effect on corporate profits, which will help the Market. Once again, a rising escalator scenario. At the same time, 15 of 19 participants on the Federal Open Market Committee expect the first rise in the federal funds rate to occur in 2015 or later. If so, then money will continue to be cheap for a while and will be available to all these new job holders for new cars, houses etc. Seems pretty good doesn’t it? History tells us that the Market actually rises more than 80% of the time when interest rates are rising. Why? Because, if the Fed is raising interest rates, it usually is because the economy is improving." Ken Moraif
Posted on: Tue, 25 Jun 2013 00:34:53 +0000
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