Wednesday, September 21, 2011


We are hours away from hearing about the blessings that the Fed will bestow upon us and the market is slightly down.  It is at these times we need to pull back and take a look at a longer perspective and look at what might be ahead.  Wall Street is hoping that Uncle Ben will uncork something truly unanticipated, but in reality his options are pretty limited.

In general, the consensus is that the Fed will go forward with Operation Twist where they attempt to buy longer dated treasuries and sell shorter dated ones.  The impact of this will be to drive longer term interest rates even lower (Grandma, you happy about that?) and possibly move up shorter term rates.

If Operation Twist is implemented and successful, we probably won't see much real improvement on the regular Joe or on business owners as people and businesses simply aren't borrowing and lower rates won't make much of a difference.  It will have an impact on banks though, and this could really hurt them as they essentially fund in the short term and lend long, so this compresses their margins and drives their funding costs higher and reduces their income potential on lending.  I think this is why you are seeing all the bank stock prices fall.

The Fed is already trying to bail out Europe by providing swap lines where ample dollars are available no matter how horrible business conditions are and in fact we are seeing almost everyone BUT the Fed walk, (no run!) away from European banks.  This week we've heard that major corporations in Europe are taking their reserve deposits from  banking institutions and trying to deposit them directly with the ECB rather than risk losing money at a bank.  That is an indication of confidence isn't it?

So here is the deal, we don't really know what the real impact will be besides that it will move the markets.  If Benny doesn't oblige and give us something awesome, you could see the markets drop significantly.  If the Fed gives us some great news and tells us that free money will be available to the financial elite forever without any cost, we could easily rocket to the April highs from earlier this year.  From my perspective I think we are in a no-man's land right now as you look at a 4 year chart of the DJIA.  Dating back to July of 2008, we were right at 11,750 right before a nasty fall all the way into March of 2009.  Guess where we are right now?  You got it, right at 11,350.  We have some support at 11,050.

This chart tells me that we are playing around in a range that I don't want to trade until I have confirmation of a direction.  If we see real disappointment I might hold off and not even attempt a buy till real support at 9,800.  If we rocket higher with a vengeance and blow up and through 11,800 that might be a nice area to buy.

Even if I am a buyer, you cannot forget that Europe is just one week, month, or year away from having Greece default and blowing up the whole Euro experiment.  It is doomed and it is just so amazing to me to see Greek politicians put their citizens through hell to avoid a lesser hell.  The obvious problem is that Greeks are going to hell, it just would seem rational to go to one of your choosing, rather than going to one that is picked by the IMF or ECB.  If the Euro falls, the dollar automatically gets huge inflows and you can wipe away any stock market gains for the last couple of years.  It is hard to say what would happen to gold at that moment, probably a huge spike and then a fall.  I mention these things because they will happen and we need to be aware of it no matter what our independent banking cartel does today.


Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at