The Fed Fires Back
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November 19, 2010

*****The Market Feels Heavy
*****Silver Eagle
*****The Fed Fires Back

Fellow Investor,

The good vibes from the GM IPO and the bailout potential for Ireland took the S&P 500 back above support/resistance at 1,192. We'll see how long the good vibes last.

Despite yesterday's strong move, the stock market still feels "heavy" to me. That's not to say I think a big decline is imminent. But the way higher is going to be a slow grind, unless we get some data to sway the mood.

We are on the verge of the holiday season. It's hard to believe Thanksgiving is next week! People tend to get a bit more cheerful during the holidays and that can seep into the stock market. That might sound simplistic, but never forget that while fundamentals may win out in the end, emotions rule the stock market in the short- and medium-term.

As an aside, all of the brick and mortar retailers I recommended on November 8 as holiday shopping trades are higher.

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*****Fed Chief Ben Bernanke spoke in Frankfurt, Germany this morning. In addition to blasting China for currency manipulation, Bernanke also dropped these two nuggets:

“On its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years...As a society, we should find that outcome unacceptable.”


"A fiscal program that combines near-term measures to enhance growth with strong confidence-inducing steps to reduce longer-term structural (budget) deficits would be an important complement to the policies of the Federal Reserve..."

On the topic of unemployment, Bernanke is right on target. Unemployment is not going to improve substantially. Many of the jobs created in the 2004-2006 timeframe were "bubble" jobs. They came as a result of unsustainable demand from the housing bubble.

I have to applaud Bernanke for stating that such high levels of unemployment are unacceptable.

Also, please do not overlook Bernanke's challenge to Congress. He is saying in no uncertain terms that Congress needs to get moving on creating conditions and policy consistent with job growth.

Good for him. Unemployment remains the economy's greatest challenge. Yet Congress has done little to address unemployment.

*****Banks are set to undergo another stress test to determine if they are fit enough to start paying dividends. This is a very important issue for banks, and we've already seen Bank of America (NYSE:BAC) sell assets, presumably to shore up its balance sheet ahead of these stress tests.

Banks may also start to sell some of their "toxic" assets.

Bond fund giant PIMCO is betting they will. It's currently raised $1 billion to but toxic bank assets. And with banks now looking to be dividend-worthy, they may have added incentive to sell.

You may recall the Treasury's TARP (Troubled Asset Relief Program) program, designed to remove these toxic assets from balance sheets was mostly a failure, because banks didn't want to sell at a loss. Banks believed then, and may still, that these assets would eventually regain much of their value as the economy improved.

And the fact that PIMCO may want to buy them will only encourage the banks to hold.

*****China is once again raising bank reserve requirements to get money out of circulation and combat inflation. Oil prices are always very sensitive to China's policy.

Too bad Chinese officials don't ask Ben Bernanke how they might slow inflation. I bet he'd have some ideas...

*****Cisco (Nasdaq:CISCO) is adding $10 billion to its share buyback program. That's the only source of growth the company has right now. How the mighty have fallen...

The weakness in Cisco's business has investors asking if tech stocks are broken. I can answer that question: No, tech stocks are far from broken. In fact, business is booming for many technology companies. And valuations are still attractive.

*****Please feel free to write me with your questions and comments. I'll probably print them in Daily Profit: [email protected]

Until Monday,

Ian Wyatt
Daily Profit

Posted 11-19-2010 1:40 PM by Ian Wyatt