The Economy Guy

Everything moved sideways today.  Stocks were up and down and ended up 48 points.

Bonds were the only market which ended significantly higher (lower interest rates) as people worried about the economy (see articles below.)  Remember that the bond market is much more sober and realistic as a market compared to the stock market, or commodities.

In the news today…..

The Treasury has decided it should give our TARP money to Insurance Companies too.  I guess the insurance companies must be in trouble.  Remember the psychology of TARP – it was forced on the banks, and they couldn’t say “no.”  I wonder if the insurance companies will be in for the same treatment?  The rationale is that if the “market” doesn’t know which insurance companies are “bad” and which ones are “good”, the market won’t be able to drive down the value of the bad companies and cause them to become “bankrupt” because their share value is so low – as happened with the banks.

But, that was the reason the Treasury has never told us which banks took the TARP, and how much they took.  But, someone (insider knowledge??) found out and drove the value of these crummy banks down.  I guess the Treasury isn’t as smart as it thinks it is.

Some insurance companies are also BANKS today.  The ones that are banks, and therefore automatically qualified to receive TARP money, are Prudential, Met Life, Hartford and Lincoln.  That’s all.  Maybe more insurance companies are planning to become banks – just like the financial companies ALL become banks at the end of last year.  By the way, I smell a conspiracy about that change in status as all those “new banks” got billions of our tax dollars after they swapped over.

FEDs March Meeting Minutes…..

The FED minutes from March’s FOMC meeting were released today, and the FED decision to “stimulate” the economy with $1.2TRILLION was based on the following:

1. deteriorating economic outlook – falling production, higher layoffs than previously anticipated
2. poor export orders – the US economy can’t count on exports helping keep production up
3. thwart the continued deflationary pressures
4. not worried about inflation, but was worried about depression.
5. put long term bond prices up (decrease long term interest rates) by purchasing long term treasuries

The FED reduced its GDP predictions for 2009 and 2010.  They previously stated the 3rd and 4th Q would have recovery growth.  They now say both these quarters will be ZERO growth.  That’s an amazing turnaround.  They previously stated that 2010 will have growth between 2.5% and 3.3%, but now predict 2010 will have very weak growth – and that means less than 1%.  The FED is finally getting its arms around the seriousness of the current economy.  The lesson here is that the FED (with its infinite wisdom) DIDN’T have its hands around the the economy as late as January.  Okay, they’re human too.

Here is my personal opinion:  The FED acted one week after the Chinese threatened to “pull the plug” on buying more US Treasuries.  The Chinese understand that higher interest rates means lower values of their bonds.  They also understand the future inflation produces higher interest rates, and they publicly stated that the Obama Administration’s spending plans would produce inflation.  The FED (coincidentally???) announced its US Treasury Bond purchase plans to keep interest rates low.  This mollified the Chinese to purchase more Treasuries in the near term as they are being “protected” by the FEDs use of taxpayer money.  (Please remember that when the FED buys Treasuries, they can lose money on those purchases just like any investor.)  The FED and the Treasury can’t fund the Obama spending without foreign nations purchasing dollar denominated US Treasuries, and if the Chinese stopped buying, everyone else would probably stop too.

Stock Market Psychology…..

Here is something for you to think about.  The subject being debated, hot and heavy, today is whether or not stocks are in a new bull market, or is this just a bear market rally?

Market psychology says that a major turn in the market upward occurs when EVERYONE thinks the market will continue to go down FOREVER.  Also, when the first person says it is at a bottom, that person is publicly stoned to death (verbally speaking) with cynicism and criticism.  

That never happened when we hit the bottom last month and the market rallied over 20%.  In fact, there were lots of pundits saying we were “at the bottom” as the market dropped like a stone.

Just using “market psychology” this says that the bottom was NOT reached last month, but a lower bottom will be hit sometime in the future.  You can’t predict timing (i.e. when the bottom will be reached) using market psychology, but you can (usually) predict the trend – up or down.

Stock market psychology says that the recent rise in stocks is a Sucker’s Rally.

Herein ends today’s lesson.

Here are the last numbers for today:
Dow Jones 30 Industrial – 7838 (up 48 points)
10 Year Treasury Bond – 2.85% (down 0.08%)
Euro – $1.3260
Gold – $886 (up $3)
Oil – $49.38 (up $0.23)
Gasoline – $1.44 (down $0.02)