Beware the “Bernanke Put”; short-term pleasure for Wall Street, long-term pain for everyone else….
Mayer and Amoss on how to “price in” the Fed’s move…
The dollar index drops to a 15-year low; the Chinese move to protect the yuan…
Oil hits a record $82; how you can still invest in this mega-trend
Gold: Why today’s 27-year high isn’t like the 2006 spike; multiple ways to play this trend
BoE promises to bail out Northern Rock; the mob grows
Unless you’ve been under your bed, or traveling on a bus in rural France, you know the Fed cut its overnight rate by 50 points on Tuesday.
The Dow loved it, jumping 336 for that day. Both the Dow and the S&P 500 are up about 3.5% so far this week.
Helicopter Ben to the rescue, right?
Not so fast.
“Don’t assume rate cuts are bullish for stocks,”
warns our Chris Mayer. “The last time the Fed cut rates was from January 2001-2003. The fed funds target went from 6.5% to 1% and the stock market fell anyway. In Japan, during the 1990s, even after the central bank cut rates to near zero, the Nikkei still got cut in half.”
“One little interest rate doesn’t make or break the economy,” Chris advises. “Look for situations where you stand to make a lot if you’re right and lose little if you’re wrong. We’ll still need water, we still need to eat, we still need energy and our infrastructure is still old as hell. It’s very simple, and the federal funds rate has nothing to do with any of that.”
“Don’t mistake the Street’s knee-jerk reaction for a bullish trend,”
agrees Dan Amoss from Strategic Investment. “Who’s holding the bag on bad and fraudulent loans? That’s what we should be asking. And not even the all-knowing Ben Bernanke can answer that question.”
“There’s going to be a few more quarters of high volatility in the financial sector. Brokers, super-sized banks and hedge funds will come clean about their exposure to bad loans. And earnings will tank. They’re likely to explain that last year’s earnings were based on projections that didn’t include those loans. But their stocks will fall anyway.”
Dan’s been scouting out great prospects for shorting the financials in his new Strategic Short Report. You should have seen the first two editions already. If you missed them, click here
— they’re free to paid readers of Agora Financial.
“What central planners don’t seem to understand,”
says Dan, on another tangent, “is that they can’t control where the money goes once it’s created. I expect that a good portion of it will aggressively bid up the price of commodities, especially oil.”
Oil soared after the Fed’s decision.
It jumped to $82 on Wednesday… up 11% in September alone.
Supply of the black goo is already low. The Energy Department reported an eight-month low U.S. crude inventory of 318 million barrels yesterday.
“Looking ahead,” says Byron King, “oil and natural gas in the ground, as booked reserves, will be more valuable. Oil service companies with a lock on technology, and the skills needed to exploit those resources will also more valuable.” Outstanding Investments subscribers have added at least four of such companies to their portfolio this year alone. For more on Byron’s 2008 forecast, click here.
Here’s another question about Fed rate cuts: How are foreign creditors going to react?
There are clear signs that foreign central banks are slowing their purchases of U.S. Treasuries and mortgage-backed securities. The Chinese, in particular, are reaching the point where they see no benefit from expanding their portfolio of U.S. Treasuries.
In the end, that doesn’t bode well for the dollar. As if on cue, the dollar index dropped to 78 yesterday — a 15-year low. The euro has twice broken through the $1.40 mark this week — a record high.
Gold loves this environment.
Following the Fed decision, gold busted through its $720 high of 2006. In fact, at $733 this morning, gold is trading at a 27-year high.
“This move in gold is very different from the spike of May 2006,” says Adrian Ash of bullionvault.com.
“Back then, gold moved higher with stocks and bonds. Now stocks and bonds are slipping back while gold attracts a genuine safe-haven bid from private investors and — more crucially — from savers.”
Gold is rising against the euro and the pound, too, not just the dollar, stocks and bonds. “Gold is trading within a few euro cents of a 16-month high against the euro,” Adrian writes, “and it has jumped more than 10% against the pound over the last month.”
Playing this trend, Kevin Kerr took 97% on his latest gold calls in Resource Trader Alert. Click here for his latest projections.
England is faced with its share of mayhem from the mortgage crisis.
We showed you lines outside Northern Rock on Monday… well, they’ve grown:
Not exactly an “orderly queue,” but getting ornery. Bank customers on Tuesday
Mobs dissipated after the Bank of England promised to back up every NR deposit later that day… effectively nationalizing the bank. U.K. depositors probably found relief, until they read this morning’s paper. The BoE forgot to mention this footnote: The guarantee applies only to current customers… anyone who opened an account at NRK this week or does so in the future is on their own.
“Northern Rock is probably insolvent,” opines our friend James Turk of goldmoney.com. “Like countless other banks before it, NR ‘lent long and borrowed short’ — the fatal disease that has sunk banks throughout the ages. The excesses of the last ‘boom’ have not yet been purged, so the current ‘bust’ has further to run.”
Shares in Northern Rock are down another 32% this week… bringing the total loss to 75%.
The 5 Min. Forecast
P.S. “Sirs, I have not received my 5 Min. Forecast for the last two days,”
wrote a distressed reader this morning, “If I was deleted, please put me back on the list.”
The 5 responds: Apologies all around. We were traveling in France on Tuesday and Wednesday, making our way back from a financial publisher’s jamboree. We didn’t publish The 5 Min. Forecast. Today, we’re back on the job in Baltimore…