Interesting article on the economy and the Fed

[canceled.2021.1]

So lots of news and excitement over the Fed's announcement this past week that they would taper its bond purchases. Of note is that the market seems to be all over the place.

When the fed announces it is increasing its bond purchases the market goes up which makes some sense. So conversely it would hold that when the fed announces it is decreasing its bond purchases the market would go down. That didn't happen the other day. The market rebounded sharply. One thing I have noted when I went back and looked at the charts is that over the past year, the market has made BIG moves during and after a Fed announcement (something I need to factor into my technical analysis).

But, anyway, here is a great piece on short and long term interest rates.


http://finance.yahoo.com/blogs/talking-numbers/does-fed-handle-interest-rates-150510216.html

Now some may ask why this is important. Well, it is important for this reason. One of the most common ways to value a stock price is using discounted cash flow (DCF). It is a fairly easy and straight forward calculation. You merely take the future cash flows of a given company and then discount them using the weighted average cost of capital (WACC) which is just a fancy way of saying what the borrowing costs of a company is.

So why do bond yields matter? Well, the 10 year treasury is most often used as the "risk free rate". Basically it means that as an investor whatever I am investing in needs to give me a better return than the 10 year yield on a treasury because it is considered "risk free". For example, if the 10 year treasury yield is 4% and the underlying asset has a yield of 2%, an investor would choose to invest in the 10 year treasury and not the underlying asset.

For a long time the 10 year treasury was running under 2% which many feel is responsible for greater than 50% of the stock markets climb. The yield is now approaching 3% and many believe that if it gets to 3.5-4% that it means a steep decline in the stock market.

That is the way it is supposed to work, but we are in unchartered territory. Usual technical analysis is not going to be able to 100% guide the way. But, can the Fed completely control rates? Maybe, but not forever. Markets can't stay manipulated forever.

One thing is for certain (to me anyway). The fed is not going to raise interest rates any time soon.

 

[Truth Detector]

The market is currently acting irrational thanks to irrational Fed policies. The reaction of Wallstreet was a collective sigh that the Fed only reduced their QE binge by a tiny amount.

The bubble builds; the question is how to time the bust. If you're nearing the end of your years, you might want to get out soon. If you're young, you can cling to your stocks and hope they recover. In the long term, stocks always advance. But the wild eyed claims of speculators never materialize for the average investor. I'd be happy with anything that consistently increases by 10 to 13% annually. People must understand that part of the 401K retirement model hinges on annual contributions and conservative investment strategies.

Always keep in mind the fees and commissions to buy and sell and this reality about Wallstreet; the brokers ALWAYS make their money whether you win or lose.

 

[canceled.2021.1]

The market is currently acting irrational thanks to irrational Fed policies. The reaction of Wallstreet was a collective sigh that the Fed only reduced their QE binge by a tiny amount.

The bubble builds; the question is how to time the bust. If you're nearing the end of your years, you might want to get out soon. If you're young, you can cling to your stocks and hope they recover. In the long term, stocks always advance. But the wild eyed claims of speculators never materialize for the average investor. I'd be happy with anything that consistently increases by 10 to 13% annually. People must understand that part of the 401K retirement model hinges on annual contributions and conservative investment strategies.

Always keep in mind the fees and commissions to buy and sell and this reality about Wallstreet; the brokers ALWAYS make their money whether you win or lose.

I am going to disagree with you here. I believe that the reason the stock market surged the other day was that BernanQE pretty much said "Hey, you have zero percent interest for as far as the eye can see". I think he backed himself into a corner with regards to slowing bond purchases and here is why. He has said all along that he only plans to buy the bonds until the economy improves. Well, there have been modest improvements, nothing sustainable in my opinion, but the top line numbers look better. BernanQE knows that when you dig into the numbers it is all bullshit, but he has to hold true to what he has said in the past to some extent. So he is straddling the fence. He has obviously left the door open to continue buying bonds.

There was a time when the market would be shitting its pants over the prospect of the Fed having $4 trillion of debt on its books. People like Deshy Dearest don't understand those implications as long as her Dear Leader can gain some glory.

The other thing I would disagree with is about young people staying in if this thing collapses. You are right trying to predict when it will fall is tricky because when you get to new highs, every day is new resistance. 1814 on the S&P is a number I am looking at today. If the S&P closes above that today, I am going long again with a stop at 1800. With regards to the youth, or any investor for that matter is capital preservation. I never understand accepting 20% losses. Yes, you can't time the market, but you can follow trends. I have been pretty successful at it. Do I catch every bottom and every top? Nope. Do I miss out on every run? Sometimes, but one thing I have been able to do is minimize my losses which has more than made up for it.

In the end the bond market will have the final say. They can push around a lot more money than BernanQE and if they decide they want the 10 year yield to be at 4% then I am not sure how much control any Fed chairman will have. But you are right we are in unchartered and irrational times.

I don't think it is going to end well.