The Market Rallies as the Fed Stands Pat
Jan 29, 2009
Posted by Jody Eisenman | Filed under Uncategorized
As I stated over the weekend, “I think it is likely we could get another bounce to the upside here”. In response, the DJIA has rallied about 300 points in the last three days. If we continue through the end of the week, we could actually have our first positive month since August. To no one’s surprise, the Fed announced that the economy continued to worsen and as such, they were continuing in their target of zero to one quarter of one percent. They also said that they were prepared to purchase long term treasuries in order to stimulate the credit markets.
The layoffs on Main Street have accelerated. Already this week, tens of thousands of layoffs have been announced at Boeing, Caterpillar, Home Depot and Corning among others. As the economy continues to contract, and the banks continue to announce further write downs, President Obama has announced plans of a “bad bank” in order to purchase toxic debt. The plan is to take these underwater loans and bonds off the banks’s books in order to free up their capital for lending. A key unanswered question is exactly how much the govt will buy these loans at. If they buy them at current market values, it won’t help the banks very much. On the other hand, if they purchase these assets at full (original) value, then the government is vastly overpaying. My guess is that they will reach some sort of compromise.
I do not know how long this rally will continue. However, under evidence is shown to the contrary, it is still just a short term rally within the context of a bear market. Although the trend is now positive, I still see this as a traders’ market. Therefore, the higher we go may merely set the stage for a steep decline.
