September 18, 2011
Weekly Market Outlook
By Keith Schneider
After a two week hiatus (summer road trip) from writing this column, so much has occurred in the markets it was hard to pick a theme. However, it was nice to come back to a 5 day rally. It's fairly rare, happening only about 3% of the time since the early 50's. It brought the market up about 5% for the week. Gains the following week are usually meek following such fireworks. One thing for sure, when it seems like a sure thing, it's not. With the debt downgrade, Gold almost at $2000 OZ, and Eurozone imploding, etc., the US equity market is only down a little for the year. Sentiment versus market action is out of whack.
So, in terms of themes for this week's column, choosing from the "rogue" trader at UBS , the upcoming Fed meeting or NFLX's hosting its very own horror show, I chose to cover what is most critical to the markets and that is what might be the secret "tools" used by the Fed to bolster the sagging recovery. The idea that has been bantered about is a something called "twist" where the fed raises short term rates and sells short term rates in order to buy longer term rates. They did this in the early 60's with moderate success. By driving up short term rates and reducing long term rates the Fed keeps its balance sheet neutral and that should be perceived as non-inflationary by the markets while supporting growth. This strategic step in theory should force banks to stop hoarding cash and actually lend money to consumers and business. However, banks are still in big trouble and need help in getting solvent. Raising short term rates and taking away the free ride that the banks desperately need seem unlikely. However much the FED might like to twist, the banks will shout and it seems more likely that some form of cranking the printing presses will occur. If the Fed can convince the markets that a twist is viable, then getting the economy moving without printing money could ignite a powerful rally. Of course anything can happen!
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