Is BIG Money Selling Into Q1 Earnings Reports?

George Brooks  |

Brooksie’s Daily Stock Market blog: An edge before the market opens.

Thursday, April 28, 2011 9:23 am EDT

DJIA: 12,690.76
S&P 500: 1355.66
Nasdaq Comp.: 2869.88
Russell 2000: 858.42

Ok, the U.S. Federal Reserve just gave the stock market bulls a pass, is it safe to go all-in ?

I don’t think so ! In fact, it would be wise to raise some cash, lock in some profits, just in case the BIG money has been using good Q1 earnings to sell.

I believe the bull market is alive and well, but unless memories are short, an 8% - 12% correction can “hurt” and just to get back to where positions started to tank, can take months.

This market has gotten a big boost from Q1 earnings, what will juice it in coming months ?

Fed Chairman Ben Bernanke informed Wall Street that upon completion of its $600 billion bond-purchase program in June, it would continue to reinvest maturing securities, Treasuries and mortgage-backed securities (MBS), so the amount of securities held would remain constant.

“Monetary policy easing should remain constant going forward from June,” he said in his news conference yesterday.

He added that the Fed would, however, take action if inflation persists.

Let’s step back from the mincing of meanings and consider where we have been and what we may face in coming months.

This bull market was launched amid unprecedented uncertainties, as savvy money decided stock prices had adequately discounted the worst and stepped in with a bushel basket* to catch everything for sale and do some serious buying to boot.

The result was a relentless climb of a wall of worry that kept most investors on the sidelines for a good part of the ensuing bull market.

The savvy money, also referred to here as the BIG money, knows the drill well – “buy low –sell high” and the time to get the best price is when no one else wants anything to do with common stocks, and in fact is indiscriminately dumping what’s left of a decimated portfolio.

So, here we are, a little more than two years later with the DJIA up 96%, S&P 500 + 104%, Nasdaq +125%, and Russell 2000 + 149%. For such a steep wall of worry, that’s some serious climbing.

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Throughout this journey, the Treasury, two administrations, and Federal Reserve implemented measures to prevent a total meltdown and foster a sustainable economic recovery. There were many occasions when it looked like these efforts would fail, that too much damage had occurred.

Interest rates were effectively dropped to zero by the Fed in an effort to facilitate borrowing , ergo an economic recovery. In response to its actions, bonds soared to all time highs. Money became cheap, if banks chose to lend. Unfortunately, anyone holding cash was deprived of a reasonable return on their safe assets – money markets and T-Bills yielded zilch, still do. I wonder how much this factor alone sapped strength from the economy.

The Fed’s most recent effort to stimulate was launched late last August with its second quantitative easing (QE2). In the interim, commodity prices soared, raising the specter of runaway inflation.

The dilemma now facing the Fed is, when and how can it backtrack smoothly away from a policy of stimulation to one of enough restraint to head off a serious inflationary spiral.

Unless the economy and pressures on commodity prices self-correct, the Fed must raise interest rates at some point. Obviously, starting at “zero”, it can bump rates up considerably without doing too much damage, we have had economic expansion and bull markets in face of rising interest rates.


I expected more info from the Fed yesterday, reasoning that its change in procedure with the FOMC making its monthly statement earlier than usual and chairman Ben Bernanke following up with a press conference.

What we got in my opinion here is the beginning of a process for facilitating a soft landing WHEN it switches to a more restrictive policy. Higher interest rates will mean lower bond prices, and initially lower stock prices as the market seeks a comfort level in line with the Fed’s new policy.

It CAN spell the end of a bull market if inflation and the economy run rampant and the Fed must undertake a highly restrictive policy. We’re not there yet.

The surprise yesterday is the Fed still doesn’t think inflation is a risk, instead it appears concerned that the economy is not chugging along with enough vim to risk taking its foot off the gas. It still sees inflationary pressures as “transitory.”

Q1 GDP was reported at 8:30 today at a plus 1.8% vs a plus 3.1% for Q4. Reduced government spending at all levels and weather impacted Q1’s economy.

Jobless claims through April 23 were up 25,000.

George Brooks

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