1. The Federal Reserve is Irrelevant… for Now
Well, that was fun wasn’t it? All that waiting and waiting yesterday afternoon, and for what? Just a brief statement churned out from a laser printer, an obligatory nod to “weak economic activity.” But there’s more here than meets the eye, and it’s not about what the Federal Reserve will do, it’s about what they can’t do; namely, stimulate credit expansion.
The key nugget from the Fed statement was this:
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
What that means is the Federal Reserve won’t be tightening interest rates anytime soon, which is fine — we already knew that. But stocks sold off on the news anyway, largely because of this piece of the statement:
To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.
The stock market took a dim view of this, perceiving it to be a back-door attempt at tightening. Which may be true, but as we shall see momentarily, is nonetheless irrelevant.
Meanwhile, the frenzied buying of credit continued unabated, with a little more than $3 billion in new corporate bond issues priced yesterday — on a Fed day no less — and junk-issue spreads actually narrowing in the face of that supply.
Who’s buying all of this new supply of debt? The real question is, who isn’t? Because the sources are almost exactly the same this time as last, credit hedge funds (with a significant amount of credit shorts still being taken in), banks employing the carry trade — the usual suspects, all with leverage.
Wait, as we edge closer to October 2009, isn’t this exactly how we arrived at October 2008? Yes. And so won’t this end just as badly? Yes again. In fact, the same mistakes aren’t even being thinly disguised as new mistakes, they’re simply being repeated as if scripted.
2. It Just Doesn’t Matter
And now back to the Fed’s irrelevance. We’ve run this chart before, the last time was back in 2007.
Here it is updated.
3. DeMark Indicator Update
Just a quick update on where we stand via DeMark indicators for the major indices. On a quarterly and monthly basis, of course, there’s little change. The S&P 500 and Dow Industrials are on bar seven this quarter of a potential buy setup. The Russell 2000 is on bar eight.