Fed Enters Center Stage, But Could the Fiscal Cliff Be Next?

George Brooks  |

Investor’s first read - Brooksie’s edge before the open
Thursday, September 13, 2012 7:34 a.m.
NOTE: I am going to press before the Jobless Claims report at 8:30 today.
DJIA: 13,333.35
S&P 500: 1436.56
Nasdaq Comp.: 3114.31
Russell 2000: 845.12
All of Wall Street has been waiting for this day for months.
It has worried about the economy, and for good reason, it is struggling. It has worried that the Fed won’t announce a stimulus program today.

And it will worry afterwards if the Fed announces one today, worry that it won’t help. So, fair to say, it is a good thing bull markets “climb a wall of worry.”
At some point, global economies will finish climbing out of the abyss dealt them by the Great Recession, and near fiscal/monetary meltdown. They will gain momentum.

I believe Efforts by the Fed to stimulate the economy have helped avert a more prolonged recession. However, the biggest healer is “time.” The Great Recession did a lot of damage, That will take time to heal. Fortunately, we have already logged in more than three years of recovery; the only question I have now is one of the valuation of stocks. Have they gotten ahead of the economy’s recovery?

I think the answer to that is, how far out do we have to go to see an acceleration in the economy ? The BIG money will be buying several months before the rest of the investment community is aware of an acceleration. The bubble for long-term bonds will burst and bond portfolios will get hammered.

The stock market has done a great job of climbing the wall of worries and defying a lot of serious adversity.
But the S&P 500 is up 116% from its March 6, bear market low. That’s a hefty rebound that deserves respect.
Fed news release times today:

12:30p.m. – FOMC policy statement
2:00p.m. – FOMC forecast for unemployment, inflation and projections for the
federal funds rate in coming years.
2:15p.m. – Chairman Bernanke press conference
Expectations for a Fed bond buying program vary but are for slightly more mortgage-backed securities than Treasuries generally about $30 billion monthly for the former and $35 billion monthly for the latter.

If the Fed opts for a stimulus involving the purchase of Treasuries and mortgage-backed securities, it is expected to be open-ended, i.e. no time and quantity limits.

WHAT IF the Fed delays a stimulus? In that case, I expect the market to take a hit down to the DJIA 13,000 area (S&P 500: 1400).

CONCLUSION: Big picture: We are moving closer to an effort to boost economies here and in Europe. Toss in China and Japan and you have a real springboard for global recovery. That would be huge ! This is a global problem, and the solution is global, unless there is to be a fragmented economic recovery. It will take time, and may not happen.

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TODAY: Traders often use “news” following a sharp move up in stock prices to sell. Unless the Fed proposes something new here, I expect traders to sell. I am not sure what the Street’s computers are programmed to do. Odds favor – BUY.
FACEBOOK (FB) at $20.93:

Buying “gap” opens is risky. FB opened yesterday the morning after at $20.76, up $1.50 from Tuesday’s close. It closed at $20.93. That’s why I urged caution about “buying the open.”

Resistance starts at $21.38, support now rises to $19.88. In anticipation of FB CEO Mark Zuckenberg’s interview after the close Monday, the stock broke up through resistance at $19.25, tuning from negative to positive on Monday in anticipation of CEO Mark Zuckenberg’s Monday afternoon interview, the first since the company went public in May this year.

Zuckerberg explained that FB is going “mobile,” that it erred in its decision to code in HTML5, that it cost the company two years in progress. We couldn’t get the quality we wanted, he said, adding they had to start over and rewrite its applications code in “native,” which is capable of greater things.

He sees FB’s “search” feature as becoming big, noting it already gets a billion queries a day. While he was not specific about how FB will get to a strong revenue base, there was little question about the direction it was headed. “Going forward, it’s all about mobile”… that’s where users are spending more time, he notes.

Was that enough to turn the stock around? I think it stops the bleeding. As for a sustained upturn, more specifics will be needed and there will be sellers on the way up and possibly today. Its Sept. 4 low of $17.55 is looking pretty good right now, though a move down to a smidge below $19 as a “test” is possible.

I think I have achieved the goal that I set in May, that is to offer daily guidance for followers of FB starting at $34 on May 21 with my warning about a drop to the $24 - $26 area, which it did shortly thereafter. Following a rally back into the 30s FB dropped into the low-20s where on August 2, I forecast a low for the stock at $16.88.

On September 4, it hit $17.73 before rebounding into the 20s over the last six days. I plan to cut back on coverage, commenting on occasion when I think it would be helpful. I don’t own, nor have I ever owned FB. Generally, I don’t recommend or comment on individual stocks. I started covering FB technically after its IPO because I felt at $34 it was very vulnerable in face of all the misunderstanding and hype. At some point, I will drop coverage. I would like to see readers through the full cycle, from the $34 where I picked it up as “going lower” down to a bottom.

George Brooks
The writer of Investor’s first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

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