Federal Reserve restarts the money pump
Posted
Oct 05 2009, 02:04 PM
by
Anthony Mirhaydari
Rating:
Stocks should soon start enjoying the benefits of a renewed surge in liquidity courtesy of the Federal Reserve.
Although the Fed pulled the punch bowl away in one area, by announcing the discontinuation of its direct debt purchases back on September 23, it has quietly been gunning the money supply. Clearly something has Ben Bernanke & Co. worried. Maybe it was Friday's terrible jobs report.
As you can see in the chart below, the effective Federal Funds rate -- which is the short-term inter-bank lending rate that the Fed targets -- has plummeted over the past few weeks. It reached 0.07% last Thursday, well below the Fed's target rate of 0.125% and beneath the levels that prevailed late last year in the wake of the credit crisis. Effective interest rates haven't been that low since 1961. The measure has since rebounded slightly.
Research by Tom McClellan of the McClellan Market Report shows that stocks react to changes in the effective Fed Funds rate with a lag of about 13 trading days. My guess is that over the next few weeks, as Q3 earnings are reported, this flood of money will help power a very fast, very powerful rally that will take the S&P 500 near the 1,200 level and the Dow over the 10,000 threshold.
My Positions
My portfolio at Wall Street Survivor is off to a good start in October: As I write this, I'm up 9.8% for the month versus a 3% decline on the S&P 500.
I've exited my long Treasury position, the Direxion 30 Year Treasury Bull 3x (TMF), for a 3.7% gain over a four-day holding period. I've also exited my precious metal shorts.
With some renewed dollar weakness brought on by the Fed's money pumping, an oversold condition, and Q3 earnings season about to begin, the risk trade looks to be back on. I've added a number of leveraged, high-beta positions to take advantage of this including the Direxion Daily Financial Bull 3x ETF (FAS). Be sure to check my future posts for trade updates.
Disclosure: The author does not own or control a position in any of the funds or companies mentioned.
Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
Related reading:
Why stocks look oversold
Is there hope for the labor market?
A new bull market -- in Treasury bonds?
Did the Fed just kill the bull market?
