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FOMC Meeting Creates Curiousity
Posted On Tuesday, June 23, 2009 at at 4:11 PM by Finance Fanatic
The Fed's recent activity is a big contributor to the recent, slow growth we've seen in some sectors. One big reason has been their massive spending they have been involved in, not only by participating in trillions of spending through corporate and bank bailouts, but also by their massive purchasing of government debt (The Fed being the #1 buyer), which has allowed the government to offer trillions in bonds and notes without much increase, relatively, to yields.
Another big reason is their decision to allow banks to borrow for free. Several months ago, The Fed lowered the discount rate to essentially 0, in hopes to stimulate lending and allow consumers to receive favorable rates to spur mortgage activity. As a result, we have seen moderate activity, especially in the mortgage sector, however, other aspects of lending (especially commercial real estate) have remained pretty much frozen.
Tomorrow, The Fed will report on their two day meeting, in which they announce their decision of what to do with interest rates. Most feel that the rate will remain at 0, as the economy remains in a very fragile state, especially after the losses experienced the past week in Wall Street. However, the rates will not remain at 0 forever. In fact, this is one of the biggest tools Bernanke has to help regulate inflation, when that becomes more of a problem in the future. When the rate is indeed raised again, you can expect mortgage rates to follow. As a result we could see another slump created in the residential sector. I will talk about some serious concerns in the residential market and why I don't feel we are near bottom on the podcast tomorrow.
Today, we saw some slight bounce back down in the shorts. FAZ and SRS were down slightly, mostly due to many taking profits from yesterday's big gains. Commodities rallied in the afternoon, which was not surprising when you consider the beating they took yesterday as well. Depending on tomorrow's FOMC announcement, we should see this downward trend continue. Today, we did not rebound, mostly due to the housing report, but a rebound could be bound tomorrow, which would provide an opportunity for me to load up a bit.
Options should start showing some strength as VIX levels continue to creep up. The fear index grows stronger as downward momentum increases. This should weather quite well for many of my options (which by the way TradeKing has great rates for option purchases). Tomorrow should have some fireworks and I will be on chat to discuss with all of you. Happy Trading.
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