Low Rates to Continue

I managed to catch part of Treasury Secretary Geithner’s testimony yesterday. I actually thought he represented himself pretty well. I can appreciate his stance that AIG really was to big to fail. But that notion that the New York Fed had to make sure all of AIG’s credit default swaps were paid still doesn’t make sense.

Geithner’s explanation was that if AIG did pay off debts like the $25 billion that went to Goldman, AIG would get downgraded and it would become more expensive to unwind the company. Maybe I’m wrong, and I haven’t checked to be sure, but I’m pretty sure AIG’s debt was downgraded. And do you even need a rating for a company that’s 80% owned by the government?

Bottom line: I still think former Treasury Secretary Paulson made sure Goldman Sachs got paid and it really stinks that tax payers get taken advantage of like that. Unfortunately, it’s unlikely anything will come of it.

*****The Fed reiterated its pledge to keep interest rates low for an extended period. No surprise there, but investors liked the news. Stocks finished the day with a nice rally.

Still, it’s not like the Fed is keeping the liquidity spigots wide open. The Fed plans to end its mortgage-backed securities purchases. With so many stimulative monetary policies in place, low interest rates will probably be the last thing to get changed.

*****China is also d oing its part to soothe investors. According to Bloomberg, China’s banking regulator has told lenders to "….step up scrutiny of property loans while pledging to satisfy "reasonable" financing needs…"

That’s a far cry from earlier reports that China had completely shut down lending.

China is making the right move by slowing lending. And I expect investors will respond by sending Chinese stocks higher. The recent sell-off for Chinese stocks has left Chinese bank price-to-book valuations the same as they were in early 2009. 

Asian markets finally put in a strong move to the upside, putting an end to several days of selling. I expect the bullishness will carry over to Chinese stocks listed in the U.S.

*****Small Cap Investor PRO members just discovered a $3 U.S. based company that makes amorphous alloy core transformers for the Chinese market. The Chinese government has mandated that old silicon steel core transformers be replaced by more efficient transformers, like the amorphous alloy core ones.

This isn’t earth-shaking news, but this little company is expanding capacity by 200% to meet the demand. I’ve got a $5.82 target for the stock, which is a 94% gain from yesterday’s close. You can get the details HERE.

*****Oil prices rebounded yesterday as the EIA reported a draw on crude supplies. That’s good news for stocks, as any reduction in supply suggests improving demand from increased economic activity.

*****Finally, I have to acknowledge a spot on trading call from TradeMaster Daily Stock Alerts’ Jason Cimpl. Yesterday morning, he told his readers:

"I am anticipating a rally to start soon …The [S&P 500] will find support soon, likely around 1084…"
The S&P 500 bottomed yesterday at 1083.11, and rebounded as high as 1099 before the close. I’d say calling the lows within a point is pretty good, especially in the volatility that always follows a Fed meeting. Jason’s traders get a pretty good game-plan for each days trading. Find out more HERE.
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