The Fed chairman on financial markets condition

Tuesday, Dr. Ben Bernanke spoke to a group gathered by the Fed Bank of Atlanta. His words are, of course, watched very closely by traders seeking any possible message he might have for the markets. But, he said little about interest rate direction or the next FOMC meeting in June. What he did say was that while the markets are much more stable than the weekend of the Bear Stearns episode, they were still (in his words) "far from normal." The point he wanted to get across was that while steps taken have improved the situation, a great deal must yet be done.

The Fed has put lots of cash into the banking system to meet the demands put on it to be liquid. From special "auctions" for the banks to putting cash directly into the hands of large investment houses, Bernanke has put forth every tool he believes is needed to resurrect confidence in the financial system. He knows the single most corrosive power in any financial system is fear. All you have to do is read his book, "Essays on the Great Depression," to know that he will flood the markets with cash if needed to "grease the skids," as some say.

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My take on all of this is that so far it has all been "by the book," his book. Yes, things are calming down. Yes, there is some return of confidence. But, believe Dr. Ben when he says that the markets are far from normal. We likely still have six to 10 months to slowly unwind the toughest knots that "froze" the financial system last fall. But, I do expect that to us average investors the markets will neither race ahead nor fail precipitously while this is happening. We will maintain a trading range with the bias to the upside until it is clear that we are more "near normal."

This period, in my opinion, may prove to be a good time to have picked off some of those stocks you like for the longer term. Bottom line is I see the final outcome of all this healing to be the resumption of the major long-term bull market.

Fed chairman on housing

Then there is the attention Dr. Ben is giving the housing market. He spoke at a dinner at Columbia Business School in New York last week, and what he had to say boiled down to these two sentences from the speech: "High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy. Therefore, doing what we can to avoid preventable foreclosures is just not in the interest of the lenders and borrowers. It's in everybody's interest."

He suggested that Congress enact legislation that would address this problem, as soon as possible. And of course, Congress is doing just that. Both the Senate and House are working on bills that will give substantial financial aid to those caught in the web of foreclosure. Dr. Ben's thrust is that in the housing market, also, confidence is the key word. How does he expect to restore confidence? He wants potential buyers to start believing that the steps he and Congress have and will take have put a floor under housing prices. That is all he wants. It is a lot to ask, but I think that the current actions that are being taken will, in fact, relieve the potential of a foreclosure avalanche.

With Congress giving "tax credits" to potential buyers as incentive and Dr. Ben flooding the system with cash and telling banks to get busy and lend it NOW, I think that flooring will be in sooner than most expect. The charts are already indicating some confidence is returning, even as I write this column. Investors, be alert to this budding resurgence in the housing sector!

Libor interest rate funny business?

Still another driving power behind the current market action is a very quiet investigation being conducted by the British Bankers Association into the actions that drive the London Interbank Offered Rate, better known as Libor. A vast host of financial transactions around the world are linked to Libor, which is published daily. This rate is established by a group of banks selected by the Association. It is kept secret to forestall outside pressures being put on the selected banks to influence the daily setting of this all-important interest rate.

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Simply put, there is possible evidence that within the bank group some skullduggery may be going on to in some way profit someone in the group. Is it true? Too soon to tell. But, if there is any at all, it will surely not be good for the markets.

It is, in part, this kind of problem that Dr. Bernanke referred to when he said financial markets are still "far from normal." I expect that if any problems are found, they will be buried by the Association and the guilty party or parties will be dropped quietly from the "selected" group of banks that set Libor rates each day.

Right now, this kind of punch to the mid-section of the financial markets would not be good as the Association and central bankers all over the world know.

Politics and the markets

I rarely comment on politics in my column for a simple reason. I am a chartist, not a political commentator. But, now and then I weigh in when the potential outcome of a political event may seriously affect market actions.

With the elections bearing down on us, you need to be aware of three events that potentially could have broad impact on your portfolio.

First, taxes have profound impact on investors. Back in the 1940-50 era, it was a top tax rate of 90 percent — yes, you read right — that was finally addressed by Congress to break the dearth of investment money that our growing economy so badly needed. Today, while a 90 percent tax rate is not in sight, a substantial tax increase faces all of us, regardless of who is elected. Will it come to pass? Too soon to tell. But, when opportunity is narrowed, money takes flight to T-bills or other non-growth-stimulating types of investments. Watch how this one unfolds over the next six to 12 months. It is important.

The second impact comes from the fallout of the subprime problems. There are steps afoot to add massive new regulation to the financial industry. Now, while it is clear that some steps are needed, those that would like to gain big-time political control over Wall Street may see this as a time to act. The reach of these coming regulations will need to be watched closely. If the tides do result in over-regulation, the effect will be just as bad as a big tax hike. Be alert to this second potential problem.

The last problem is related to the "atmosphere" in the business community. I do believe that, to a degree, there are currently some speculative excesses in the commodities markets that are out of control. That said, because of this quite visible excess activity, I also see a move afoot to blame all the problems of the world on the financial marketplace.

This results in the demonizing of the oil, food, and venture capital markets, with some commentators calling for harsh steps to control these markets. Clearly, I don't object to some tamping down of the over speculation. What I fear is that the "Enron - Martha Stewart" type syndrome may rear its ugly head and we will again see show trials and hear political comments that will hobble the normal business activities of the markets. Believe me when I say that if this occurs, it will directly affect your pocketbook. So, keep an eye on this potential, too.

Oil price panic

The huge pot of speculative dollars that is driving this market to its current extremes (evident also in other commodities) will end in a major price collapse if it is not reined in.

I know charts, as I said last week. The charts do not ever support an unending climb in prices. The well-known investor Jim Rogers has been quoted recently as saying that this is just the beginning of a great bull market in commodities. I believe he is wrong, at least in the near term, say over the next two years or so.

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Yes, over the next 20 years we may see higher prices in the commodity markets, and one may call that a bull market in commodities, but in the near term the current rate of price growth will break down, not continue. When? I wish I knew. But, I do know the charts tell me we are near some sort of break in the next four to 12 months — that is about as close as I can get it at this point. And even that may be wrong. An example you might look at is the NASDAQ market in 2000-2003. That is the kind of collapse over-speculation brings.

The grandfather of all newsletter writers, Richard Russell, puts it best. "I can tell you what is going to happen from the charts. I just can't tell you when." So be very, very careful about getting into the commodity price panic anytime soon. There are lots of much better places to be investing just now. Might I suggest you look into my monthly newsletter, High-Yield Income Investing, for some very good ones.

The inflation ‘bogeyman'?

You are already hearing the I-word being used by commentators everywhere. They are all "warning" the Fed that inflation is coming big-time and that, like the 1970s, it will be overwhelming us very soon. The ink that will be wasted on this bogeyman will be incredible.

Yes, inflation is always to be watched. After all, we have a paper currency, some call it "fiat" currency, and part of the package of this type of currency is inflation, regardless of what county you live in. It is the fallout of the pricing of one fiat currency to another that is constantly going on. I won't get into the details here, but, simply put, it will always be there. The key is to keep it to a tolerable level.

I would again send you to the book Fed Chairman Ben Bernanke wrote and had published in 2000. He is one of the most, if not the most renowned experts on inflation that lives today. He is deeply aware that inflation can destroy an economy. He is also a true expert when it comes to treating the symptoms of inflation to keep them under control.

My words to you on this subject are brief. You have the most effective man in the world handling this problem. Forget it as a major impact on the economy. And forget the so-called "experts" that scold him for being so "blind" to the inflation problem. If they were as wise as Dr. Ben, they would be the Fed chairman, not writers.

Consumers: The thundering herd!

And finally, it all comes down to the consumer, doesn't it? If they don't spend, the economy will falter and fail. And yes, there has been a deafening drumbeat in the media about how they are failing big time just now. Yet, every measure I know of true importance says just the opposite. One of my favorite measures, and a potent one I believe, is the regular report of sales issued by Wal-Mart. This giant now supplies over 12 percent of all U.S. consumer expenditures. That means something. I think it is one of the most sensitive and early warning measures out there.

This week, Wal-Mart reported that while its stock has risen over 19 percent since the first of this year, its profits increased by nearly 7 percent with total sales climbing by over 10 percent. That does not sound to me like the consumer is disappearing at all. Yet, all we hear in the media is doom and gloom. To listen to them, we are in the midst of a "recession" even if the numbers don't say so.

It is as if we should forget the facts, forget the real numbers and just believe the media dirge. Well, I for one will ignore that stream of gloomy news and believe the facts. While the stock market has not broken out to new highs yet, and I still believe that we will remain in a trading range for a period, there is nothing to tell me that we are about to go into a recession, make new lows on the stock market, or any other dire condition. Of course, that must always be prefaced by the caution that if some totally unforeseen calamity worldwide were to occur, all bets are off.

For now, be an accumulator of stocks you like for the long run. As I said above, this period, in my estimation, will be looked back on as a great time to have done just that.

Well, that's my say for today. I felt you should know that much of my chart commentary is also backed by a look at the news behind the charts. It does help round out my visit with you each week and just felt you should know that. Hope you liked what you read.

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And so, I do hope your investment week is a good one. In the meantime, you keep in touch. I do! See you next week.

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