Wednesday, March 17, 2010

Full Speed Ahead

Nine out of ten FED OFFICIALS say the economy is still very fragile and chose to maintain interest rates at very low levels. The stock market took this queue as an indication that the markets will continue to rise for, as analysts say, another six months.

We can see that already, small cap stocks are up 10% for the year before even the first quarter ends. As long as the Fed is going to keep rates at zero, it's likely to expect that the stock market will continue to rise with little fear of setback. Thus far, any setback has been mild and immediately challenged by the Fed or other government officials.

As I have often said in this blog, the markets can continue to be irrational for a much longer time than I can remain solvent. It's so sad from my perspective that the Federal Reserve has tried its best to manage the business cycles for far too many years now. Today's news speaks of how the Fed is lobbying to retain its current level of power and it's continued desire to be the master RISK REGULATOR. Yet, they are creating another bubble. We are not so far from the last highs and even then, the markets were over-inflated. Where were we at when Senor Greenspan claimed that there was irrational exuberance? With our economy continuing to crumble, we are in excess of those irrational levels and the Fed wants more!

For those of us who watch things closely, there is little doubt that we are still in a very fragile state but it's because the rules continue to allow banks and other "too big to fail" entities to hide risk in offshore entities. When the FASB pushed to move these assets back on bank balance sheets, the Federal Reserve complained that virtually no bank would be solvent if this rule came to pass.

We are still in a world of hurt. The interest rate market proves that. Rates are not rising despite all the hype that the economy is improving. DONT BELIEVE IT. Watch interest rates and not the stocks. The stocks are merely a respository for those who can't take the low interest rate pain any longer. Many are forced into the market by the Fed's continued policy of low rates. Those on fixed incomes are especially hurt as prices continue to rise yet fixed income sources fall.

We continue to liquidate long positions at each level higher. Our long term picture shows a massive head-and-shoulders formation developing. It could take several years to form the right shoulder. But this being said, we expect a trade range of 10,000 to 12,000 over the next two years. Then look out below. It's going to take a while for today's policies to ripple through and eventually destroy the American life as we know it today. But it will probably happen. Yes, we can go higher on the market and it's inevitable, with the Federal Reserve's intentions, we will push this market higher. It will keep going up until it pulls in every last penny. Then look out below. Welfare state for today's rich and poor alike.

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