Don't Fight the Fed
Stocks pushed higher again on Friday. The Dow Industrials broke above 11,000 and the S&P 500 moved closer to TradeMaster Jason Cimpl's target set five weeks ago of 1,172.
Still, these indices are below their 52-week highs of 11,309 and 1,219, respectively. That was back in April, after the European debt problems prompted a massive lending program form the EU and 1Q earnings came in very strong.
The situation is a little different now. Earnings have been decent, and will likely continue that way. But economic data, while not horrible, hasn't set the world on fire. So the Fed's promised some fuel for that fire in the form of more monetary easing.
Affectionately known as QE2, another round of quantitative easing is a thinly veiled threat to further weaken the dollar, with the hope of sparking an export- and cheap money led economic moonshot.
Or, if you remember Greenspan's response to the last recession, you could say that the current Fed, led by Ben Bernanke, is trying to blow the recovery bubble. After all, Greenspan's bubble sure created a lot of jobs in housing and sub-prime lending. Why not give it another shot?
Aside from the fact that re-flating this economy is like giving the breath of life to a CPR dummy, the U.S. isn't the only country that's trying to encourage growth by weakening its currency.
On September 15, Japan cut interest rates and intervened in the currency markets to sell yen and push the currency lower. And last week, Japan announced a $60 billion fund for monetary easing, which would likely include more direct intervention in the currency markets.
Too bad Japan is overmatched by the Fed. Despite Japan's intervention and threat of more to come, the yen has rallied 11% against the U.S. dollar since September 15.
Switzerland, South Korea and Brazil have also intervened in the currency markets this year, to no avail. The U.S. dollar is significantly weaker against every major currency except the Chinese yuan.
This might be a good time to remind readers of an important investment rule: Don't fight the Fed.
Quite simply, as the world's biggest economy, the Fed will get its way. Traders are making their money by probing the resolve of other central banks. Japanese officials might be surprised that their efforts to weaken the yen haven't worked. But they are fighting the Fed...
It reminds me of the story of when George Soros broke the Bank of England and made $1 billion in a day. I won't be surprised to hear similar stories about traders making wild profits from ineffective central bank actions.
At the G20 met over the weekend, Brazil's Finance Minster said a currency war was underway. The meeting, which was held to address currency disputes, failed to accomplish anything but a resolution that the IMF should monitor the situation.
But of course, the IMF has no authority. And a few reports on monetary policy won't accomplish anything.
So what should investors do?
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Don't fight the Fed.
Gold will continue to rally. So will stocks. And so will oil.
Right now, I like oil best.
On September 30, I informed readers about one oil stock from the Energy World Profits Portfolio, Brigham Exploration (Nasdaq:BEXP). The stock closed at $18.75 that day. As of Friday, it's up 13% to $21.24.
And that's not the only oil stock that's running in the portfolio. So long as the U.S. dollar is weak, oil prices, and oil stocks, are a great place to be.
For more on Energy World Profits, click HERE.
Of course, I'd like to hear your thoughts here: dailyprofit@wyattresearch.com
