Markets decide Fed’s discount rate increase is no big thing
The financial markets have bought it.
The Federal Reserve’s move to increase the discount rate, the interest rate it charges banks to borrow money overnight, by 0.25 percentage points to 0.75% is part of “normalization” after the financial crisis and not a sign that the U.S. central bank is about to start raising its benchmark interest rate.
That’s how Fed chairman Ben Bernanke pitched the change. The U.S. financial system has recovered enough, he said, so that the Fed can begin with withdraw some of the support it offered during the crisis. In normal times the Fed sets its discount rate about 1 percentage point higher than its benchmark short-term rate now at 0% to 0.25%. The increase announced on Thursday, February 18, after the stock market had closed is merely part of a return to normal. So too is the end of an extension of overnight loans from the Fed to banks to as much as 30 days. Overnight loans will go back to being just overnight.
The financial markets, of course, didn’t have to buy into this interpretation.
Wal-Mart’s U.S. sales drop another sign that the economy is turning–and a signal to put Wal-Mart on my watch list
Sun fails to come up. Water no longer wet.
Wal-Mart (WMT) sales dropped at its U.S. stores for the quarter ended on January 31 2010.
Wal-Mart comparable sales dropped? That’s the first time ever. Ever.
Time to add this company to my watch list for a buy sometime within the next three months.
If you’re looking for thin reeds (See my post http://jubakpicks.com/2010/02/18/my-thin-reeds-say-the-first-half-of-2010-will-be-surprisingly-strong-in-the-u-s/ ), here’s another one that says U.S. consumers are feeling better about themselves. Some portion of the consumers who found shopping at Wal-Mart so attractive during the worst of the recession has apparently decided that it’s okay to spend a little more.
Why even after a 70% gain this is still a secular bear market
This is still a bear market
Even though stocks, measured by the Standard & Poor’s 500 Stock Index, were up 70% from their March 9, 2009 low to their recent high on January 19, 2010.
Yep. Yes indeed. Absolutely.
If by bear market you’re talking about what’s called a secular bear market.
Strong market rallies—even three to four year cyclical bull markets—can take place inside a longer bear market trend. And despite the bull rally the long-term trend can remain pointing very strongly downward.
I think that’s exactly where we are now: in the midst of a strong cyclical bull rally that’s taking place in a long-term bear market down trend that began in March 2000 and could have another five to 10 years to run.
I raise this question and answer it this way not to scare you out of the market. Remember that even if this is just a cyclical bull market rally inside a larger downtrend such a rally can go on for as long as three or four years. (Although a cyclical bull is by no means guaranteed to go on for that long.) I don’t want you to jump ship just yet.
But I think understanding that we’re in a cyclical bull market rally inside a longer-term secular bear market is the best way to explain why this stock market feels the way it does, why so many investors still doubt this rally even after a 70% gain, and why it has been so hard to go along for the ride.
The Fed expects strong economic growth too
I guess that counts as a fat reed.
Yesterday at 4:30 p.m. ET—just a minute after I posted my piece on thin reeds that argued that the U.S. economy was growing more strongly than many investors expected http://jubakpicks.com/2010/02/18/my-thin-reeds-say-the-first-half-of-2010-will-be-surprisingly-strong-in-the-u-s/ —the U.S. Federal Reserve raised its discount rate by 0.25 percentage points to 0.75%.
The discount rate is the interest rate the Fed charges banks to borrow funds. The Federal Reserve also went back to its normal policy of limiting such borrowing to a maximum term of overnight. During the financial crisis the Fed had increased the term of such loans to a maximum of 30 days.
The move indicates that the Fed believes that the U.S. economy is growing strongly enough for it to take this small step back towards business as usual. In that the move adds to the evidence that I cited yesterday for stronger-than-expected economic growth over the next quarter or two.
My thin reeds say the first half of 2010 will be surprisingly strong in the U.S.
Thin reeds. You wouldn’t want to count on a single one to support much weight but bind enough of them together and you can sail across the Atlantic—or find a profitable investing trend before it’s visible in the official numbers.
Sometimes the reeds all point in different directions and you can’t build an investing tactic out of them.
Sometimes, though, day by day they seem to fall into bundles that promise to be strong enough to support a buy or two or three.
I think that’s happening right now. In recent days I’ve seen a number of thin reeds that bundled together add up to a stronger U.S. economy—for the next quarter or two—than most investors are now expecting. And certainly these thin reeds are pointing to a trend that you won’t see in the official economic measures such as today’s (February 18) disappointingly high numbers of workers filing initial claims for unemployment. Many of the official numbers—such as the 31,000 rise in initial claims to 473,000 when economists had been projecting a drop to 438,000– still say the economy stinks.
The thin reeds I’m collecting, however, say that through the middle of the year at least U.S. growth will be stronger than expected. (They’re still not telling me anything good about the second half of the year. To the degree there is a pattern it’s not pointing up.)
So what’s all this talk about “thin reeds”? Have I been up late watching YouTube video of the Ra II expedition again? Channeling my inner Thor Heyerdahl?
