Face Off: Foolish Fed vs. Faithful Bull
The Federal Reserve, (Alcazar) will once again raise rates to curb inflationary fears spurred by high energy prices, unsustainable consumer spending, and un controllable government deficit spending. The Alcazar will give the stock market Bulls the “dirty dozen” rate hikes over the last 12 months, and they will probably continue to raise the prime rate as long as they see inflation on the horizon. In my article called “the Fed is not your friend”, (Jan 3, 2004) http://finance.groups.yahoo.com/group/docsstockclock/ message 504
I stated a fact about the Federal Reserve, they could care less what the faithful bulls want! Yet, I cannot understand the loyalty attributed to the Foolish Fed by the faithful bulls. Every money manager on Wall Street has the Fed’s play book, which says, you can’t expect new market highs when the Fed is raising interest rates. It has never happened, since higher interest rates cause long term capital withdrawal from the stock market. As interest rates move higher, stocks become less attractive to long term stock investors. Meanwhile bond interest rates increase, causing inflation and higher deficit spending by the government. Given a choice between a 6% return on the bond, or a 4% return on a stock, most will choose bonds. Bottom line, as the Foolish Fed raises interest rates, stocks will fall. No one knows at what point in time or what level of interest rate hikes will kill the desire to invest in stocks, but surely we are moving close to the breaking point than farther away. When the Foolish Fed was fighting inflation, (or was it deflation ,2001?), they killed the market faithful bull with rate hikes. Then after 9/11 attack, began a series of aggressive rate cuts, driving down the prime rate to a record low of .75%, making stocks attractive with their 3-4% earnings based on the S&P 500 index. The foolish Fed’s aggressive interest rate cuts caused a housing bubble, compounded with favorable tax treatment of long term capital gains treatment on the sale of a primary residence. If you were not aware of the change in long term capital gains treatment for homes, you have probably not sold a home over the last 5 years. If you had sold your home, you would have no taxes on your long term capital gains. The law was changed so that you can keep all the long term capital gains on a sale of a primary residence, as long as you lived in the home for 2 out of the last 5 years. There is no requirement to buy another home, nor any age restrictions, nor any one time exclusions, you were free to buy and sell 2 homes every 5 years as your primary residence. Upon the sale of these homes, all long term capital gains were excluded from taxes. Hence, the value of homes begin appreciating in double digits, just like the stock market double digit gains before the bubble collapsed. Some aggressive home buyers, have bought 2 homes within those 5 years, each time making substantial long term capital gains when selling the home, without paying any taxes. Recently, Greenspan warned of the creative financing of some of these homes with adjustable rate mortgages, piggy back mortgages, and interests only mortgages, which could back fire on the lenders. You see, the Foolish Fed is only concerned about banking, not about the faithful bulls, so if the mortgage lenders get into financial trouble with defaulting loans, guess who will be paying for collapse? That’s right, you the tax payer through FDIC insurance bailout. Some people may remember the savings and loan bailout, I hate to mention names, but at the center of that controversy wasn’t there a “Bush”.
The short term traders view of this market is great! The program trading gurus are keeping the market afloat using my harmonic stock clock signals lines, buying at just the right opportunity, and shorting the stocks at my resistance lines, doubling up on their profits. Meanwhile, the smaller short term swing trader are paying the costs with trading commisions and equity draw downs in their accounts. The wild swings in the indices were caused by the large money managers creating a opportunity by going long at key harmonic stock clock levels with the small investors and trader jumping on the bandwagon trying to catch the updraft one day, then taking the pain pill the next day. If you had been following the Harmonic Stock Clock signal lines, you could see the explosive buying activity as the indices crossed the green daily signal line, only to collapse when hitting the yellow executioner line. Since, 10-19-05, for the Dow index, the S&P500 index, there have been six major moves across the green signal line. There have been rejection of the yellow or red signal lines for shorting opportunities. As I am writing this on Monday morning, the faithful bulls playing their Trump cards, “Merger Monday”. I would challenge anyone to find me 1 stock who’s stock price is higher after the merger. I don’t know of any stock, so if you know of one, let me know in the comment section of this blog.
Why do mergers fail for shareholders? It is a simple tactic to hide the accounting trash that has accumulate with both company’s books, and after the merger, the company will site earning failure due to merging costs and one time earning exclusion charges. Yet, the faithful bulls believe in “cost savings”, “expanding markets“, “market share,” which is the same tired mantra perma bulls always use to create excitement for the un-informed investors.
Over the next few months, there will be a thanksgiving rally, and a Santa Clause rally, after all, the markets wouldn’t want to disappoint the faithful bulls. Although, these are called rallies, they will not set any new market highs, and the trading range will continue until next year. By the first of the year, the heating bills, the Christmas shopping season, and the higher interest rates will be weighing on the consumer, which could make for an explosive opportunity for those who are using the Harmonic Stock Clock indicators.
Good luck
God Bless
Doctrader
