The Fed’s New Policy Changes. What are they Telling Investors?

Could the Fed’s new policy changes signal the end of the bull market? There is a often quoted saying: “Don’t fight the Fed.” If that is the case, perhaps it’s time to step back and analyze exacting what took place this week. The Fed uses two ways to communicate with the public. It holds eight meetings each year. The Chairperson, in this case Janet Yellen, issues a consensus statement on overall Fed policy and issues some guidance going forward. The second and equally powerful communication comes from the minutes of the Federal Open Market Committee (FOMC) whose job it is to oversea the Fed’s market operations and steer interest rates in line with committee consensus.

How the Fed Controls Interest Rates

The Fed controls the all powerful Fed Funds Rate. Banks must deposit funds with the Fed to meet their reserve requirements. If they have excess funds they can lend them out to other banks and large institutions.
However, it is the Fed that has the powerful silent hand in controlling the Fed Funds rate. The FOMC can add money to the system by buying treasuries from the banks and crediting their bank balances. Banks then have more money to spend and interest rates remain low. On the flip side the Fed can limit the money in circulation by selling securities to the banks, thereby draining funds from the system. This has the effect of raising interest rates and a slowing of the overall economy. At present the Fed Funds rate is set at 0 to .25%. To add to mix we have futures contracts on the Fed Funds rate. These are three month contracts that project the funds rate into the future. Bankers and investors watch the contracts carefully to garner any hint of a rate increase. At present the nearest contract is at .25%, the August 2015 contract is at .50% and the December contract is at .75%.

Fed Policy Changes

On March 19, 2014, Chairperson, Janet Yellen, held her first news conference. She stated that the Fed was removing the 6.5% unemployment from the Fed’s guidelines. She prefers not to have a specific number to determine interest rates. Then, when a reporter asked when the Fed planned to raise rates, she made an “off the cuff” startling remark. She said that the Fed could raise rates perhaps “six months” after the end of Fed tapering. Within minutes the stock market tumbled. Fed watchers estimated that Fed tapering would end this fall. Projecting out six months brought the rate hike to April 2015.

The FOMC minutes also revealed a startling change in their rate projections going forward. They see the Funds rate at 1% by the end of 2015 and 1.75% by the end of 2016. This was quite shocking since the consensus was for .75% and 1.75% respectively. Now add to this another piece of disturbing news. 13 of the 16 policy making members favored a rate hike sometime next year. One member wanted it this year, and two others preferred to wait until 2016.

Make no mistake, these policy changes will affect the markets. No one knows for sure the exact outcome but it is time for investors to be vigilant and keep a watchful eye on the Fed.

Markets React to Crimea Vote

The seeming sense of world cooperation we witnessed during the Russian Olympics was shattered on the closing day when President Vladimir Putin began mobilizing troops along the border between Russia and Ukraine. Within days he moved some 60,000 Russian soldiers to the border. In rapid fire, he then announced a referendum to be held in the Crimea to determine if it was to remain Ukrainian or join Russia. The referendum was held on March 16, 2014 with 82% of the vote affirming their choice for annexation to Russia by an overwhelming 95%. The next step will be for the Russian legislators to draw up the annexation documents on March 21st.Continue Reading

Investing in the Financial Services Sector

Since the start of the new year the stock market has been on a bumpy ride with sharp ups and downs. There is an old adage that says: “It doesn’t make any difference who wins and loses, your brokerage firm will always make their commission. The same is true for retail transactions. Whenever you use your credit card, the card company makes money. With that in mind, let’s look at the key stocks in the Financial Transaction Services Sector. These are companies that service large banks, brokerage houses and retail purchases. Here are some stocks that have been moving higher. (Barchart.com)Continue Reading

What is the Buffett Indicator Telling Us About the Stock Market?

After a wild January and February 2014 that saw the averages plunge then recover quickly, we wonder what’s in store for the rest of the year. The pundits and soothsayers have started to polish their crystal balls and peer into the future. Unlike the goldie locks scenario of 2013, this year is froth with challenges and uncertainty. At the end of last year we saw the US Federal Reserve start to taper their bond buying program. Then, Janet Yellen, the incoming Chairperson of the Federal Reserve, noted that she intends to continue tapering again this year. Of the $85 billion in purchases we now have it down to $65 billion per month. The stock market has been fueled to record highs in large part through the steady flow of funds from the Fed’s quantitative easing. Now with this source of revenue slowing drying up, the question on investor’s minds is will the market continue its push into new highs this year or will it stall out?Continue Reading

Growth Stocks for 2014

We are in March now, with a bumpy ride in the past couple of months. The indices were hit hard and now have bounced back to their old highs. The bulls are looking for more buying here to punch the averages into new high ground. Whether a move into new highs is the real thing or just a bull trap remains to be seen. Meanwhile, we’ve had time to do some searching for growth opportunities in 2014.Continue Reading

Investing in Solar Stocks

This week the Ivanpah Solar Electric Generating System started up in the Mojave Desert, 45 miles southwest of Las Vegas, Nevada, making it the largest in the world. It stretches for five square miles and has 350,000 mirrors, each the size of a garage door sitting atop 459 foot towers. The mirrors reflect sunlight to boilers that create steam that runs turbines, which in turn, produces electricity.Continue Reading

Investing in Agriculture Stocks

This week President Obama signed a $956 Billion dollar farm bill. As you can see just by the number, agriculture is a huge business in the United States. Now only do we have the raw commodity producers, but also we have the slew of businesses that bring the food to our supermarkets.Continue Reading

The Financial “Butterfly Effect.”

The “Butterfly Effect” is a theory that postulates that a small change in the initial condition of a system causes a chain effect that can change the outcome of an event. The example often used is that a butterfly flapping its wings in South America can affect the trajectory of a hurricane headed for Texas. In other words a small event can change the outcome and lead to large scale alterations of events.Continue Reading

Refinance Your Mortgage Under the Federal HARP Program

Many Americans are not aware that they can refinance their existing mortgage even if they are “under water” (owe more than their home is worth.) Only 10% of eligible mortgage holders have taken advantage of the program. When the housing bubble burst, Congress passed two laws to help home owners avoid foreclosure. One program termed the Home Affordable Modification Program (HAMP) is specifically designed for owners who are on the verge of foreclosure. It helps to restructure the mortgage so the homeowner can continue to make payments. The second program called Home Affordable Refinance Program (HARP) is designed to help homeowners refinance their mortgages at low rates.Continue Reading

Investing in Cloud Storage Stocks

Cloud storage technology is a relatively simple concept. We can compare it to physical storage units. An entrepreneur usually buys a space and constructs a group of storage units. Persons who have excess “stuff” will rent a unit away from their premises. The same concept is used in Cloud Storage. IT companies have purchased a series of servers capable of storing huge amounts of data. Companies are finding that their own local servers are not adequate to store all their files and documents. They either rent or buy storage space from Cloud Storage companies. Cloud storage has increased 57% from 21% in 2010. Global data center IP traffic is expected to increase 33% by 2015. The industry has spawned a variety of support companies that provide the hardware and software for Cloud Storage. Intel (INTC) provides the chips for Cisco servers. Cisco then provides the servers to cloud storage companies.. Seagate Technology (STX) has a 42% global share of the disk drive market for cloud storage. Palo Alto Networks (PANN) produces a suite of products for the security of cloud storage centers.Continue Reading