On Thursday Fed Chief Ben Bernanke delivered his testimony to Congress. Everyone sat on pins and needles waiting for what he would say. The pundits on CNBC were chanting QE, QE, QE. And then it happened…”No change in policy unless conditions deteriorate further.” The wait was over. “Great Expectations” unmet. No “QE”. To the Market, a great disappointment as it fell quickly. But hold on. Let’s go back a couple of days and look at the activities right before his testimony. Could this have been just a setup?
The previous Friday, the unemployment news broke, revealing that just 69,000 jobs had been created. The Market plunged quickly and remained down the entire day. Monday morning, everyone worried that the Market would continue to plunge. After all, it had been down just about every day of May. Instead the Market was flat, holding around 12,100. On Tuesday, the Market was up slightly, certainly nothing to write home about, just drifting, a little up, a little down.
As is the custom before Bernanke delivers his testimony, the other Fed Governors also address Market conditions.
Dennis Lockhart, from Atlanta, began by saying that the current monetary policy was appropriate for the existing outlook he envisions. Only if modest growth becomes unrealistic would further monetary actions be necessary. Bottom line…no mention of QE. John Williams from San Francisco also spoke, but only said the Fed “must also stand ready to do even more if needed to best achieve our statutory goals of maximum employment and price stability.” No QE.
But then it happened. Bernanke’s right hand person, the number two Fed governor, Vice Chair Janet Yellen put QE on the table when she said, “I am convinced that scope remains for the FOMC to provide further policy accommodation”. The Market went wild and crazy, soaring nearly 300 points. There it was, on the table at last.
But here’s the anomaly — something always to be watched. While the stock market was flying high, the best rally day of the year, the Bond market was not sinking. Under normal conditions, traders either buy stocks and dump bonds, or buy bonds and dump stocks. To see both running up — that’s an anomaly.
And what made this anomaly even more evident was the fact that, yes the Market ran up nearly 300 points, but on very light trading. Given the heavy volume when selling in May, light trading was also unexplained. If the Market truly believed the low was reached, there would have been massive buying.
For those of you unfamiliar with the 2 magic letters, “QE”, it stands for “Quantitative Easing”. Here’s the Readers Digest intent. The Feds, at taxpayers expense, buy up toxic assets from the banks, (remember the sub-prime mortages that the same banks were packaging and re-packaging, until they were selling nothing but air) at face value that are all still sitting on their books. Of course, everyone knows that those sub-prime mortgage packages are no longer worth face value, or even half a face, but let’s not get technical. With this newly acquired money, the banks are more able to lend to business and industry, which, in turn, expand. More people are put back to work during the expansion.
But what is the reality? The banks changed their lending policies, making it more difficult for everyone to get loans. The housing / construction industry slowed, manufacturing slowed, just about anywhere money could have been used to expand business and hire more labor slowed.
Even the Fed knows that unemployment has not and will not materially drop. In his speech, John Williams said, “I don’t expect the unemployment rate to keep dropping that fast. It’s more likely to come down much more gradually over the next FEW YEARS.” So if the main purpose of QE is to reduce unemployment, and the Fed knows that unemployment can’t be reduced quickly, then what would be the purpose of additional QE? How could the Fed justify spending more taxpayer dollars on toxic assets? And didn’t the Market know this on Tuesday when Lockhart, Tarullo, Williams and Yellen all spoke? Didn’t all four say the same thing?
So why did the Market’s traders run up nearly 300 points before Bernanke testified? They knew what he was going to say ahead of time. They knew there would not be QE3. They knew Yellen was blowing smoke when she said QE was on the table. Hmmm….have you ever noticed that whenever a company or government has a problem, they always bring out a woman to take the heat, as if no one would beat up on a woman! Like when Walmart was caught with their pants down, bribing everyone and his brother in Mexico, it was a woman spokesperson to answer the questions first at the press conference. Was Yellen the token woman?
How about this for the more “under the table” scenario. The Market had been down the entire month of May. If someone didn’t do something, when Bernanke testified on Thursday, the Dow would have plunged even further, having already dropped over 1200 points from its high and about to break 12,000. So let’s buy the day before knowing that bad news was about to be delivered. The real question to ask is, who did the buying?
Remember this setup! Next time Bernanke is giving testimony, a few days before, get ready to see a Market rally. But watch the 10-year Note and 30-year bonds. If they don’t plunge, know the rally is on, but it will be short lived.
Barbara Cohen CIO, Shadowtraders, and professional day trader, specializes in teaching students how they can be trading futures with their own trading system and trading strategies. Ms. Cohen has helped hundreds of traders achieve their goals trading. Find out if trading futures is for you by attending one of Ms. Cohen’s Free Webinars. Check out my Futures Trading Articles. For more information, send an email to firstname.lastname@example.org or call 866-617-2037 today.