Ian Woodward's Investing Blog

Helicopter Ben Spoke, Market Yawned, then Reacted in Anticipation

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Fed Chairman Ben Bernanke indicated in a much anticipated speech Thursday that more rate cuts are on the way. “In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary,” Bernanke said in a speech to a business group. Bernanke added the central bankers “stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.” Bernanke said the Fed has seen evidence that banks are cutting back on lending to consumers and businesses as a result of the financial market turmoil. He said the December unemployment report was disappointing. In recent days, the outlook for growth has worsened.

  

As you can see from the minute by minute reaction, Bob Pisani of CNBC summed it up nicely in that “The Market doesn’t want a history lesson”.  However, the Bears had second thoughts and began to cover in anticipation of the next “Big Shoe to Drop!” as shown below:

 

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My purpose in going through all this detail is to focus us on the psychology of how markets turn on a dime and react to the Fed speak and then the actions that follow…”Walk the Talk”.  This now sets up a very interesting situation and let me try to piece together the potential scenarios at play.  I really hope my spending the morning recording all this detail gives you insight in what to do in your own investments.  Some of you are in your foxholes waiting patiently for a Bingo on the NYSE Index.  Some are buying established Fallen Angels like AAPL either for the short term or for an intermediate play.  Others are on the short side and were licking their chops, but now are in a quandary.  They either covered quickly or are waiting for more shoes to fall.  I strongly suggest you review once more the thoughts I expressed on “Big Foot is Back and Others are Looming” in combination with what I now offer.  I felt sure something would be cooking when I asked “What tricks will the FOMC and Administration have up their sleeves in advance of the next Fed meeting towards the end of this month?”  Be sure to read the others as they still apply. 

The entire strategy from here to the next FOMC Meeting at the end of this month is centered on the two questions at the top of the second picture.  Nobody in the audience asked “Bennie and the Feds” as to what he meant by “Substantial”, so there will be a lot of second guessing on that.  In any event, Uncle Ben has signaled: 

  1. A reaffirmation that he is prepared to cut interest rates.  Whatever he meant, it is obvious that the Market will begin to bake in a 50 basis point cut.  Anything less will be a disaster.

  2. It will be done sooner rather than later so that the anticipation is that it will be done before the next meeting around the end of the month.  Patience can soon run out.  Likewise, some of this action today was the news that the Bank of America will bail out Countrywide Credit. 

  3. The Fed, although caught between a rock and hard place, leans to cutting rates at the expense of inflation, a weaker dollar and all the other baggage that goes with that scenario.  They are prepared to bet that although the economy is slowing, and the common or garden man in the street is hurting, we are not yet showing signs that we are into a recession.  Of course a recession can only be established long after we are already in it, but they feel they can pull off a soft landing instead of a hard fall in the economy.

Who said that investing in the stock market was easy?  There are several schools of thought:

  •            We are already in a Bear Market of which this is just the first leg.  There will be rallies along the way, but be rest assured it heads on down for another leg or two.  Not only are we in a bear market, but we are heading into a recession.

  •       We have had yet another correction, which is over 11% for three such corrections in the past six months and once we retest this low, we will trot on up again with a fresh bull rally. 

  •       We have had a third correction in six months, the market is so oversold that we will now have a V bottom and head on back up to new highs.

Take your pick, but I would be very leery of betting on the last one.  The odds are that any MAJOR downside are in favor of being postponed until Uncle Ben shows how big his shoe is and really provides the action to back up his words.  Since the Blue Pencil Line I taught you a good few notes ago says the trend is down, the extent of the medicine the Fed hands out will determine if they can stem the tide long enough to right the ship and change the direction of the market.  In any event, the odds are that we should at least retest the lows for a “W” bottom.  What has changed after today’s events is that the Bears are now caught between two stools, but will only postpone their efforts until any rally peters out.  

Lastly, one thing is certain.  UNTIL we see sustained New Highs greater than 150 per day, any hopes of a strong rally are a pipedream.  Today’s action should convince anyone that they cannot participate unless they can turn on a dime and are short term oriented to go either way.

Best Regards, Ian. 

4 Responses to “Helicopter Ben Spoke, Market Yawned, then Reacted in Anticipation”

  1. Paul R Says:

    Ian,

    You amaze me with the analysis Oh Master!

    Since Britain and the ECB did not cut rates today, I’m leaning toward less than 50 basis points from Helicopter Ben. BTW, the foxhole is nice and warm this winter day!

    Paul R

  2. ian Says:

    Hi Paul: I am glad you like the analysis. There was a reason I took the time and that was to imbed in your minds that it pays to watch carefully the reaction of Wall Street on such occasions, and I am glad I happened to be watching at the time.

    I may be wet, but if they pussy-foot around with less than 50 basis points, the STREET will clobber them. Unfortunately, another 25 basis points like the last time was like a wet squibb that fizzled almost as soon as they annnounced it. They have put themselves in this untenable position by not making a bolder move back then, but who am I to suggest what they should do…just an opinion with regard to HOW THE STREET WILL REACT given the choice of their words.

    I am not for one moment discounting the potential damage it will have on the Inflation and weak dollar front. It seems they feel they can take the risk to lean in the direction of reduction, but my point is that their choice of words with SUBSTANTIVE ACTION puts pressure on them to act aggressively this time. There may be other things up their sleeves but that is the only item on the table at this time.

    It will be interesting to see how this all plays out. Best regards, Ian.

  3. Maynard Says:

    Ian,

    I love the way you think and how you encourage others to do the same.

    Just a thought. Is the Fed supposed to save the market or is the priority NOW to save the Financial structure of the USA. It is interesting that Merrill and Citi are asking for Billions of Investment money overseas. Who knows who else? And at what interest rates? In the meantime the 10 and the 20 year bond rates are dropping in anticipation of the Fed action.

    Why does anyone want to be President now?

    Maynard

  4. ian Says:

    Ah Maynard…my good friend, you always contribute so much to any discussion and you bring out the best in those around you.

    You hit the nail right on the head with your two alternatives. Ron and I were talking on a similar point just yesterday.

    1. The operative word is “NOW”…and their purpose is always to champion the Financial Markets which they have done before now, and the shading can NOW be interpreted to save the Financial Structure of the USA. As you say, who would have thought that bulwark companies like Merrill and Citi would be going hat in hand for money overseas? Maybe the wiser men of Wall Street are scratching their heads more-so today with the DOW down 158 as I write. This kind of predicament is bigger than whether they should reduce 25 or 50 basis points at the next Fed Meeting, or whether we will have a Bingo Signal or not!

    2. Ron and I could not understand why the long bond rates were going up yesterday, but at least they seem to be going down today in anticipation of the Fed action.

    3. I don’t mean to be cynical, but if I say that then some will feel I am providing a caveat…you can be rest assured that officially the Fed is never supposed to save the market, but if it does so along the way then it is killing several birds with one stone. How else does one provide global stability than to have a strong economy and hence a strong Stock Market? Net-net, this stuff is all intertwined and you can bet in the unofficial cloakrooms of the Fed not only now but in the 56 years of history that you and I have used to discuss this stuff, why is it that we have never had a Bear Market in the 4th year of a Presidential Cycle? Maybe it is a coincidence, but it will be interesting to see if it happens on the 15th sampling…i.e, 60 year history.

    For those who may interpret this discussion as political, Maynard knows that I never discuss politics at the seminars or the newsletters. Nor does Ron. So please understand that all of this is in the context of how do we act with regard to our own personal investments to protect our Capital and to use it wisely.

    We have just ten weeks to go before we see your smiling faces at the March Seminar and I thank you for all your support and for yet another ‘newbie’ who has signed up from your neck of the woods. Best regards, Ian.

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