Stock Market Analysis

Wednesday, February 27, 2008

The Big Promise...

Today's market action is really more technical than anything fundamental. Investors just need to take some profit after 3 good days in this crazy, volatile market condition. This is especially so in the face of a resistance level, which in this case is the 12750 level for the Dow and tomorrow's GDP numbers (see Economic Calendar). On the bright side, we are seeing short term treasury yields tanking like a rock, creating an extremely steep yield curve. Such a curve indicates that the flight to quality has really gone a little too far and soon, investing in bonds would be unattractive. Those money would have to find a more attractive investment vehicle, which in this case, would be equities. In fact, such a curve pattern usually spell that the bottom is near for equities.

On the down side, January durable goods order came in disappointing, further enforcing the notion of a weakening economy. Fed chairman Ben Bernanke seemed to get it at last with his promise of further rate cuts to shore up the economy. That's the Big Promise. I know he has a very difficult job there in the Fed but I cannot help but criticize his being behind the curve all the time. While the stock market seems to be a leading indicator of what is going to happen, Uncle Ben seems to be a lagging indicator instead. He failed to see a weakening economy late last year when the markets are already talking about it and failed to cut rates aggressively in order to prevent this episode that we are seeing today. Today, with the weakening of the dollar, rising commodity prices and rising inflation, which adds up to an extremely fragile condition where fed fund rate should be held steady for a while, he is promising more rate cuts. Really wonder what is going on. Well, that makes him the Fed chairman and me, a mere fund manager.

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