Tuesday, October 05, 2010

Japan throws in the towel and it's rally on!

The Bank of Japan cut interest rates to zero and pledged to keep them there as long as it takes to fix things -- which might take a long, long time.

"the central bank also decided to set up, as a temporary measure, a 35 trillion yen ($419 billion) pool of funds to buy or accept as collateral assets such as government bonds, commercial paper and asset-backed securities."

I think this is going to kick off another round of global quantitative easing with the Fed Reserve joining the party soon. Remember here is the equation, quantitative easing weakens your currency and pushes prices of EVERYTHING priced in those currencies - stocks, bonds, commodities - up. At the end of the day if you have $100 invested in a stock and easing pushes it up to $125 you might think you're ahead 25% until you go to spend that $125 and realize that it now only buys $85 of goods. Good times.

So, much like April/May 2009 when the war on currencies began we may experience another round melt up in stocks while the dollar marches lower.

However, I'm very concerned by the fact that EVERYONE is on the same page with this theory. Typically, when that happens we get surprised by something that no one sees coming.

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The service ISM was better than expectations and seems to have given the market another leg up. This is another result of weaker US dollars, our services become cheaper to foreign buyers when the greenback is crushed by currency traders. A big component of the jump was in the employment index and that just doesn't pass the sniff test. There is very little growth in services employment at the moment but facts tend to be considered disposable when it comes to government data.

Oh, and factory orders fell for the third time in the last 4 months, but let's ignore that today because it doesn't fit with the script for today.

Cheers!

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