50–50 Is a Big HelpTed Olshansky
Publish Date: October 1, 2007
In our last newsletter, we stated that without some help from the Federal Reserve to ease concerns over the sub prime housing debacle, the market would trend lower. Why? The possibility of the country entering into a recession. The 50 basis point cuts in the discount and Fed Funds rates were designed to prevent this from happening.
It showed that the Fed was more interested in seeing the economy grow than worried about the threat of inflation. The immediate effect was a vote of confidence by the market, but also a fall in the dollar and rise in the price of gold. Investors correctly saw this Fed move as inflationary. Money markets have improved, albeit slowly and liquidity has returned to a more reasonable level.
One word about gold. The Fed in its announcement left room for more rate decreases. This of course would be beneficial to the price of gold. The Chinese government could think of substituting gold for their reserves. Right now only 1% of their assets are in gold. If they ever decided to increase this percentage to say 10%, the gold market would naturally skyrocket. This scenario, in this writer’s opinion has about a 30% chance. Remember, the 750 billion China has in US treasuries (not to mention other countries) has appreciated very nicely offsetting the losses in the dollar conversion.
What does this mean for the market? This writer always tries to see the forest from the trees. With oil prices over $80 a barrel, gold at $740 per ounce, the worst housing market since the great depression and an almost certain slowdown in the economy the averages as of the end of September were very close to an all time high. The market, which is rarely wrong, is telling us that our economy is strong enough to withstand these problems and that at least for now; the threat of recession is not in the immediate horizon. Therefore, the market should trend higher for the rest of the year. Remember, as you have read this market saying here before, “The Trend is Your Friend”.
Bullish Bearish Sentiment: 75
Thought for the Month: When you look to the heights, hold on to your hat. (Author unknown)
Q: My broker says that when I do a covered call strategy, I always want to lose money on the call. Please explain. Gloria Helena Ramirez
A: Your broker is correct. If you lose money on the call, the stock will have risen and you will have made the most money you can by employing this strategy. And after all, that is why you are using this technique.