FRI. MAR. 20- Fed Takes Over

On Wednesday (and then again yesterday), the markets as a general grouping had one of their most extraordinary showings in recent memory- even in an extraordinary time. Equities traded lower for a chunk of the day before vaulting higher…and then selling off anew with gains of about 1.5% across the board (after trading up over 3%). But that does not tell the story. The bond market (specifically the 10 year bond) had its best performance since October 19, 1987 aka ‘Black Monday.’ Oil in the last two days breached 2009 highs in trading over $50/barrel. And gold. Gold shot up over $70. In the interim, the dollar has gotten dramatically hit with a decline of several yen against the Japanese currency as a simple example. So, what exactly happened? With interest rates near zero, the U.S. central bank has been forced to find ‘creative’ measures in its efforts to help the economy to recover. Well, about the only other thing left on the table is to create new money out of, well, nothing. The way this is done is through aggressive purchase of securities of some sort- in this case it makes the Fed a buyer of 10-year bonds specifically to the tune of several hundred billion dollars. Furthermore, the Fed will be buying an additional $750 billion worth of government-guaranteed mortgage-backed securities. Now, let’s play long-term and short-term (with the corollary that the long-term stuff in particular is theoretical based on past economic events like the panic which took place in the 1890’s). Gold first- The wholesale printing of money is inflationary thus it dilutes the value of the dollar over the long-run which causes gold to rally. In the short-run, many shorts in particular are nervous by this prospect so gold still rallied. The dollar- same story; more dollars floating around has caused weakness in the immediate-term and people worry about the long-term. The exception here is this: what if, say, the EU does the same thing? Does it suddenly cause the dollar to be stronger against the Euro? Bonds- in the immediate-term, this is an artificial means of keeping lower interest rates with the hopes of spurring borrowing via cheaper borrowing costs all the while making the government a buyer of bonds. In the long-run, it is theoretically terrible for bonds because it implies inflation will come back into play in time. And of course equities- in the long-run, the printing of artificial money makes all paper assets worth less so it’d seem this would be a negative for the stock market. Yet, in the short-run amidst a time of deflation if not near zero inflation, it helps provide a cushion for a hole in the provision of capital and shows the government is willing to do anything it takes. Thus, all this liquidity being pumped into the economy definitely has an impact in the here and now because the theory goes that the money will start flowing once again because there is so much of it. Furthermore, with yields on bonds falling, it makes riskier investments like equities look better. From a day trading standpoint, what occurs is a massive tug-of-war between those establishing longer-run positions with the entities trying to operate in a ‘here and now’ schematic. Thus, look for many more wild bursts of activity such as what occurred Wednesday after the Fed announcement and the very busy market morning which occurred yesterday as well at least through earnings season in mid-April when we’ll have a clearer picture of any more write-offs which have to be done by the world’s banks.

Markets in Asia were generally lower overnight with Hong Kong down 2%. In Europe, stocks opened lower, but bounced and as of this writing (7:45AM ET), the bourses are mixed with London’s FTSE down slightly and the German DAX up slightly. Oil is down a little, the dollar is bouncing back a bit, and metals are also a tinge lower. As for today, it is as likely to be a ‘throw-away’ day as you’ll see for awhile. News flow is relatively light with the two main topics dominating conversations in trading rooms being the ’bonus’ tax imposed by Congress and the NCAA tournament- and not necessarily in that order. It is also an options expiration day today. Thus, look for relatively quiet trade with the bulk of the action coming at the very beginning of the day and the very end of the day- even moreso than usual. Trade particularly nimbly in picking your spots as making any attempt to scalp will likely result in net losses. Yesterday morning was a great trading morning, but it’d appear that this morning will resemble yesterday afternoon much more than the terrific environment of the AM yesterday.

Watch list:

03202009Eriklist.zip

Reiterating-
Please understand that if the ideas do not get to the hoped for set-ups cited below, more often than not, one should not blindly trade the symbol next to said idea.
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specifiedIf something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-



Good- The following stocks have good news and/or a strong technical pattern

TRW- one of the auto suppliers which got a guarantee from the Fed that their current deliveries would be paid for; stock closed near a high

SA- closed near a high; looking to buy when/if it approaches 23

LAMR- closed at the high of the day

REXX- among the tiny energy stocks that had a nice rebound; closed near the high of the day

BPT- mentioned positively on “Mad Money” last night

Bad-The following stocks have bad news and/or a weak technical pattern

PALM- poor earnings and sees current weakness persisting into next quarter

LNC- debt ratings cut

BAC, C, JPM, WFC, PNC, USB, STT, STI – among the bigger banks which closed near a low

MS, GS, NITE- among the big brokers which closed near their lows

PRU, MET- among the big insurers which closed near their lows after Moody’s cut the debt ratings of PRU by two notches

DFS- closed near a low after posting poor earnings

SPG- announced concurrent debt and stock offerings

TKTM- poor earnings

KIM, PLD- mentioned on the Sell Block on “Mad Money” last night



Earnings:

FRI MAR 20

none

Good luck today.

Epiphany Trading, LLC

http://www.epiphanytrading.com/

Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President