The FED Gets Creative

Today was an historic day for the financial markets as the DOW was up over 400 points marking the biggest one day percentage gain in almost five years. The catalyst for the market was a new plan introduced by the FED and some foreign central banks where they agreed to loan $200 billion of treasury bills, which are insured by the government, in exchange for mortgage backed securities. If you go back to my stock market re-cap for 2007, I mentioned there were two terms we heard more often than any others; "sub-prime mortgage crisis" and "credit crunch". While the sub-prime mortgage crisis got the majority of the headlines. The silent killer was the credit crunch because it effected the ability of businesses and individuals to get loans. The reason that today's announcement is important is because it addresses the credit crunch. Up till now, the FED had tried to address both of these problems by slashing interest rates. The theory was that these interest rate cuts would widen the spread between the rates banks could borrow for and what they could loan the money for, so they would be more willing to loan and consequently they would make more money. However, the banks were scared to make loans because they had a lot of bad loans on their books. The takeaway for us on this is that the FED is no longer going to aggressively cut rates. That means the dollar is going to stabilize against other curencies and the worries over inflation should start to subside a little. In my last update, I recommended both the US Oil ETF (USO) and the Gold ETF (GLD) based on the thought that the Fed would keep cutting interest rates and the dollar would keep sinking and inflation would keep accelerating. I now think the upside for both of these ETF's is more limited. The USO should be supported by strong worldwide demand for oil, but I could certainly see it pulling back a little from today's close of $86.34. If you have profits in USO, it's time to take a little off the table. GLD is a little harder to call. Since gold is supposed to be an inflation hedge, you would think this would be very bearish news for gold. However, gold has been moving higher for several years and the move started a long time before inflation stated to creep up. I'm not sure how investors will trade it, but I would recommend selling some if you have profits or if you have an oversized position. If you're like me and have just a small position, you should probably wait to see how gold reacts to this news over a few days before deciding if you want to take action. As for stocks, I want to own companies that have growing earnings, pay a good dividend and have overseas exposure. One stock that has caught my eye lately is GE (closed today at $33.40) It had been making new 52 week lows almost every day until the huge rally today. Almost everyone should be familiar with GE. They have so many businesses it's too hard to name them all. But, the stock meets my three criteria and I would definitely be a buyer at today's closing price and would look to add to my position if it makes new lows.