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inthemoneystock (< 20)

The Bernank Walks Into Selling Pressure



October 04, 2011 – Comments (1) | RELATED TICKERS: BAC , MS , GS

This morning, the major stock indexes are trading sharply lower to begin the day. Many traders and investors are eagerly awaiting the comments from the Federal Reserve Bank Chairman Ben Bernanke as he testifies on Capitol Hill. Since the last FOMC meeting when the central bank announced its Operation Twist program the Dow Jones Industrial Average has declined by more than 900.0 points. Recently, the Federal Reserve has hinted at another quantitative easing program. While this talk will usually cause the markets to have short term rallies or bounces it is highly unlikely that the central bank would implement another quantitative easing program so soon. The last $600 billion quantitative easing program that the Federal Reserve issued just ended on June 30, 2011. That QE-2 program caused massive inflation around the world. Countries such as Brazil, China, India, and Russia have been very outspoken against it. Many investors believe that QE-2 caused food riots in the Middle East and Northern Africa.

What will Chairman Bernanke say or do to help lift the stock markets? Is there anything that the Federal Reserve can do at this time besides implementing another quantitative easing program? These are the questions that investors and traders are asking themselves.

The problems in the European Union are an absolute mess. There really does not seem to be any clear cut fix to the problems in the Euro-zone except default. By know we should all know that defaults rarely occur as bailouts will usually take place first. What is the Federal Reserve going to do about Morgan Stanley (NYSE:MS)? The credit default swaps on MS stock are surging. This means that investors are buying insurance on Morgan Stanley in case they go bankrupt. Now we are sure that Morgan Stanley is going to be able to borrow from the Federal Reserve, however, this is not a good sign for the markets to have this happening. Bank of America Corp (NYSE:BAC) is another leading financial stock that is approaching the $5.00 level. This is another very unhealthy sign for the markets.

As a trader it is important to note that the markets are becoming oversold and somewhat extended to the downside. This tells us that an oversold bounce can occur at any time now, however, it is likely to simply be just a quick oversold bounce and nothing more if one should occur. We can only wonder what the Bernak will say today to try and prop up these markets.

Nicholas Santiago

1 Comments – Post Your Own

#1) On October 04, 2011 at 12:05 PM, davejh23 (< 20) wrote:

"What will Chairman Bernanke say or do to help lift the stock markets? Is there anything that the Federal Reserve can do at this time besides implementing another quantitative easing program?"

There's nothing he can say or do at this point.  Previous QE campaigns did little to actually strengthen the economy...they boosted confidence for a time, which helped lift the stock market, but that confidence is now gone.  We just watched the economy weaken substatially right in the middle of QE2...a QE3 announcement is not likely to boost stocks in the way that QE2 did. 

What did Bernanke say?  Not much.  He urged Congress not to tighten too rapidly, and added "The Committee will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in the context of price stability."  Further Fed actions will be aimed at promoting price stability...avoiding deflation, not boosting employment, etc...  How willing do you think Bernanke actually is to act here?  A massive QE3 campaign enacted just as the world economy plunges into recession, unemployment jumps, stocks tank, housing tanks, etc...?  If he's not 100% confident that QE will help, he's risking his own credibility and that of the Fed.  In that scenario, it would be politically popular to wind down every "too big to fail" bank and to end the Fed. 

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