And The Fed Does…

It’s A Fed Day!

OK, today is a Federal Reserve Bank Day (FOMC announcement). They announce what they are going to to with interest rates and make comments about goals like, oh, more “Quantitative Easing”. Then the markets tend to go wonky for an hour or two until folks figure out what this will mean.

That’s part of why I went to cash last week (and part was just to take a break and bank some money). But the risks go up on a Fed Day (and the potential gain), but it’s a crap shoot, so I’m watching, not participating today.

As we saw in https://chiefio.wordpress.com/2010/09/07/sailing-qe2-or-titanic-stimulus/; The Fed has been on a binge of buying assets, inflating their balance sheet, and issuing money in the process. This can prevent a deflation (deflation is a very bad thing) but in the long run can lead to inflation (also a very bad thing). So if The Fed says they are doing more, the fear will be of inflation and a bad economy needing life support. But if The Fed does less, the fear would be that they are not doing enough to keep the economy afloat.

Yes, nutty. Folks want to panic, and will look to panic over the fear of either ‘too much’ or ‘too little’. So often it is more important to see which way the market goes about 5 minutes after The Fed announcement than the actual text of what they say. The sum total of all the bets being placed by all the market participants tells you how they, net, evaluated the whole thing.

I’m expecting no interest rate change (so little impact on bonds) but ‘happy talk’ about more Q.E. on the cards (and that spooking some of the market a little with more future inflation fears). With $100 Trillion of shortfall on Social Security (once you figure in the demographics) over the next decade or two and a similar $100 Trillion of shortfall in Medicaid and similar ‘entitlement’ programs, IMHO, the only choice our government and The Fed has is to “inflate away the debt” longer term. So I’m pretty sure they will say “QE2” is being prepared to sail if needed. And that will cause commodities to rise and stocks to fall. We’ll see if I’m right when The Fed announces.

Live Market Chart

Here is a live chart of the market. Currently the Dow is off 13 points and the S&P is off 3.4 points.

Dow Industrials, S&P 500, Nasdaq 100, Russell 2000, Gold, and Dollar Down

DIA  -  Dow 30 Industrials
SPY  -  S&P 500 largest market capitalization
IWM  -  Russell 2000 small cap
QQQQ -  Nasdaq 100 tech stocks
GLD  -  Gold Exchange Traded Fund
UDN  -  Bet on "dollar down" Exchange Traded Note

With gold presently on a rocket ride and UDN rising (meaning the dollar is falling) the market sentiment now is that The Fed is going to inflate. We’ll see if that holds up after The Fed announcement.

And The Fed Said:

Interest Rates: Held at 0% to 1/4%

QE2: Will continue policy of investment (QE). Keeping loan rates stable and low.

Sentiment: Recovery underway, modest, but needs ongoing management and help.

Evaluation: Sounds like “More QE Maybe” and keeping the present QE in place. Looks like a set up for more QE next time. I’d expect the dollar to fall more, gold to rise more, and stocks to go nowhere much.

Looks like a bit of euphoria on the news today, probably with a drop tomorrow as the buzz wears off. News flow has the stock traders interpreting it as more QE soon, so somehow good for stocks. It may keep a deflationary recession away, but inflation is not kind to stock values. All I can figure is it’s a short term rise and longer term drop.

UPDATE: After market close we have this chart:

Fed Mtg FOMC Day 21Sept2010 10 Day 5 min

This has the “time scope” Zoomed waaaay in tight to a 5 minute tick. So we have 5 days here. First, notice that each day has more volume early and late with a fade in the middle. Then look at the last day. Volume dries up to nearly nothing as everyone waits for The Fed. Then volume rises as prices shoot up (but fades quickly). As price turns around and runs down, volume accelerates into the close. More total on the dropping period than the rising as momentum fails. We end the day about where we began.

This looks to me like a failed rally as folks figured out that not much good was happening after all.

I know the charts say to still be in this market, but I just don’t like the way it’s moving. Really up on one day, a schitzo day today. Volume building into the close / drop.

I think I’m going to be doing more with metals and commodities for a while…