Making Money Alert: The Fed’s Still ‘Twist’-ing in the Wind

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It can be argued that the rally in the equity markets during the past couple of weeks was the direct result of traders anticipating the issuance of more monetary stimulus from the Federal Reserve. Today, traders basically got what they paid for, as the Fed chose to extend the so-called “Operation Twist” program through year’s end, a move designed to drive down long-term interest rates and spur borrowing and spending.

In a statement accompanying its decision on interest rates, the central bank said that hiring has weakened and the economy needs more support. The Fed reiterated its plan to keep short-term rates at record lows until at least late 2014. Mr. Bernanke and company also said they were prepared to take further action if the economy deteriorates.

Now, it’s questionable whether an extension of Operation Twist actually will have much effect on the economy or the markets. The Fed already has sold $400 billion in short-term Treasuries since September and is buying longer-term Treasuries. The extension means we will get another $267 billion worth of this same program through December.

But will this be enough easing to really make a substantive difference?

Long-term U.S. interest rates have already touched record lows. So far, businesses and consumers aren’t borrowing. So, will a slight reduction from current levels mean that all of a sudden more borrowing and investment are going to take place? I think not.

In fact, today I saw a story about a Business Roundtable survey of CEOs showing just the opposite. The survey of chief executives showed that fewer large U.S. companies plan to hire or boost spending in the next six months, a clear reflection of a weakening economy. The Business Roundtable survey showed that 36% of its CEO members plan to add workers over the next six months. That’s down from 42% when the survey last was taken three months ago.

The gloomy outlook here is on the heels of a pullback in hiring during the past two months, and that has raised concerns that the economy is slumping. Job growth averaged only 73,000 in April and May, after average gains of 226,000 per month in the first three months of the year. The unemployment rate also rose to 8.2% in May, another clear signal of trouble in the U.S. economy.

As for the equity markets, the preceding chart of the S&P 500 Index shows that stocks have made a nice comeback that has propelled the broad measure of the domestic market back above both its long-term, 200-day moving average, as well as its short-term, 50-day moving average.

Can this uptrend be sustained, especially given the Fed’s lack of any new quantitative easing? I suspect the answer is “no.” As such, I am advising a very cautious approach to the markets here.

If you have money in the market now and, especially, if you are sitting on some gains, I think the wise thing to do is lighten up your portfolio holdings. The coming weeks and months are going to put some serious selling pressure on equities, as traders will turn to what’s happening in Europe — particularly Spain and Italy — to see where the next potential roadblocks reside.

So, whatever you do, stay tuned!

Wisdom from the Pitcher’s Mound

“My only day off is the day I pitch.”

–Roger Clemens

The baseball great has been in the news a lot lately, but unfortunately, it’s not for his incredible achievements as an athlete. In this quote, Clemens reminds us why he is one of the greatest pitchers of all time. You see, it was well known that Clemens prepared extremely hard in the offseason, and on the days that he wasn’t on the mound. He did this so that when he pitched, he considered it the easiest of tasks. This shows the importance of preparation in life. If you want to perform well when you take the mound, you have to put in the hard work that allows you to win when it counts.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.

Sincerely,

Doug Fabian

P.S. Today’s challenging market conditions require even more knowledge than ever for investors and traders like you to keep pace with the latest market intelligence to safeguard your portfolio and to profit from opportunities that only may be available for short periods of time. Join me at this year’s MoneyShow San Francisco, August 24-26, at the San Francisco Marriott Marquis to hear recommendations and advice about how best to profit in 2012 and beyond! Register FREE today by clicking here, going to DougFabian.sanfranciscomoneyshow.com or by calling 1-800/970-4355 and mentioning priority code 027879.