Wednesday, September 18, 2013

As Steve Winwood might say we are "Back in the High Life Again"

Well that was eventful.  There are a ton of things to discuss as it relates to today's record surge in stocks.

1) The taper is off - Okay, let's back up a little.  Remember that the Federal reserve has been engaged in a program for the past year buying $85 billion of mortgage backed securities and treasuries in the open market each month in an effort to hold interest rates in check.  Historically, the Federal Reserve would lower interest rates when it needed to spur economic activity.  However, with interest rates already at historic lows, Quantitative Easing has provided additional liquidity to the markets.  The hope is that this added liquidity will drive increased investment by companies, increased hiring and an economic recovery.

The consensus going into today was that the Fed would say something like "due to some pockets of improvement in the economy we will start reducing our purchases to $75 billion per month" or something to that effect.  Extremely low interest rates means that investments have to chase yield and return in other places like stocks.  So, the Taper (the Fed winding down their buying slowly) was expected to be a negative for stocks as interest rates started to rise.

However, over the summer something odd happened.  The economy basically stalled out.  We're not in recession but we're not growing like we should at this point of the recovery.  This slowed down in the economy was significant enough that it led the Fed to stick with QE3 for the foreseeable future.  That's all the computers needed to hear as stocks shot to all-time highs in 10 milliseconds (more on this in a minute).

So, to recap, the economy is weakening, so the Fed purchases will continue, so stocks are at all-time highs.

I'll go into what this means in the long run in another post but I'll say now that Mr. Bernanke has painted himself (and us) into a corner.

2) The trade - the market dissemination of this data was unreal.  The entire move in stocks happened in a bat of an eye.  In fact by the time you or I read the Fed's statement the computers had already deciphered the report and moved the market to all-time highs.  However, people that are much more informed on market news dissemination point out that both NY and Chicago exchanges traded up at exactly 2:00:00.000.  They point out that these exchanges are separated by 7 milliseconds (basically the speed of light which the amount of time it should take this news to reach Chicago).  So the implication is that someone preloaded this information and released it to the highest bidders at exactly 2:00.  This is effectively the new version of insider trading however, because it makes stocks go up no one cares.  However, there will come a day when these trades will go the other way (remember traders make money on moves regardless of direction) and when they start SELLING stocks on information received early you can be assured there will be Congressional investigation.

There are many, many other things to discuss but we'll save those for another day.

Cheers!

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