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QE 3 is Here as Fed Gets in Fast-Forward Mode

Investor’s first read - Brooksie’s edge before the openFriday, September 14, 2012 9:04 a.m.DJIA: 13,539.86S&P 500: 1459.97Nasdaq Comp.: 3155.83Russell 2000: 856.12Investors got what they

Investor’s first read – Brooksie’s edge before the open

Friday, September 14, 2012 9:04 a.m.
DJIA: 13,539.86
S&P 500: 1459.97
Nasdaq Comp.: 3155.83
Russell 2000: 856.12

Investors got what they wanted from the Fed. – open-ended purchases of $40 billion per month of mortgage-backed securities and Treasuries going forward until the Fed sees an improvement in the unemployment rate. The Fed “plans” to hold the federal funds rate near zero until mid-2015. (Good luck on that).

There is not much new here except the fact its open-ended policy is now official and Wall Street’s computers can now respond. Do we have a runaway train in stock prices?
That’s usually a sell signal when that question is asked.

I’d say, an amber light, not red light, primarily because the market advanced nicely before the Fed’s announcement but in-time, has room to run. There is so much institutional cash out there with no place to go, no place whatsoever, assuming the economy is not going into an ugly recession with the stock market going into a tailspin.

Stock prices are so dependent on the balance of buyers and sellers, and institutional cash, right or wrong, needs a place to go. The Fed has pretty much assured the Street, it is in fast-forward, reducing the odds of an economic calamity.

Add to that the odds of economic stimulus in Europe, China and Japan, and we have a global recovery in lock-step.

TODAY: Look for a little bit of a blow off today ahead of the weekend. The euro-area finance ministers and central bankers meet today in Cyprus to discuss banking issues for the 17-nation currency zone. Shortly, there will be questions about whether Fed policy will work. Since the Fed did not set a specific date or specific $$$ amount of its purchases, there is no easy answer.

What we may see more of here is “selective” strength is sectors/industry groups, as the institutional money feels more comfortable in committing funds sitting in safe places earning next to nothing.

FACEBOOK (FB) – $20.713: As expected, FB hit resistance at $21.48. It will attempt to break up through that area today, with the help of a strong market open. In a Monday interview, CEO Mark 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.

The Fed model compares the return profile of stocks and US government bonds.