Business Magazine

ETF Periscope: The Bernanke Man Cometh

Posted on the 25 April 2011 by Phil's Stock World @philstockworld

“If it’s a penny for your thoughts and you put in your two cents worth, then someone, somewhere is making a penny.” – Steven Wright

ETF Periscope:  The Bernanke Man Cometh
During this past week, the market bounced off the 50-day moving average like a ten-year-old on a pogo stick. Will the bounce travel up to the 13,000 level this week? That might depend on what Ben Bernanke says to the press corps on Wednesday.

The Dow Jones Industrial Average (DJIA) ended the week at 12,505, its high point for the year. That is the highest level it’s been at since June of 2008. It bounced off its 50-day MA on Tuesday, and continued to rise for the duration of the holiday-shortened week.

So is the Bull going to continue its rampage this coming week?

Maybe not.  A number of economists polled by Bloomberg News are predicting that a Commerce Department report due out this week will reveal that Gross Domestic Product likely dropped over 1% compared to the previous quarter. That’s a pretty hefty number in terms of the GDP. Whether Wall Street shrugs off this negative news with the same imperious disdain it has largely demonstrated to just about anything of a sour nature as of late remains to be seen. It may depend on what Big Ben has to say, or, in the style of the Fed, doesn’t have to say, later this week.

That Bernanke is giving a news conference following the central bank’s policy-making meeting on Wednesday is astounding, in that it is unprecedented. It makes one wonder, “Why now?”  

In a sense, you might look at this event in the same way you might view an investment. There is a certain risk-to-reward ratio that comes into play for the Fed-Head, as he undoubtedly must feel that the news conference will bolster his position, whatever it may be. If that happens, then he has made a pretty good investment.

There is, of course, like all investments, an element of risk, a chance that the deal goes south. What happens if somehow, someway, he gets slipped up by a “gotcha” question? Ben slipping his foot into his mouth could end up costing the equity markets a large fortune. And it might not even take a full-fledged slip-up. It might just take a media-spin curveball that causes some damage.

Don’t forget, traders will have their fingers on the trigger, as they always do, following Fed announcements. It’s commonplace for the markets to shoot up or down within seconds upon the utterances of the Fed Chairman, in an effort to cash in on the first rush of response. However, this ups the ante, and the fingers might become a little fatter than usual.

It’s live television, after all. It’s what makes it exciting, a little dangerous. So you might wonder, why take the risk at all? The amount of potential volatility is huge, just because of the newness of the event. You have to assume that quite a lot went into the decision to hold the press conference. So what gives?

It’s unlikely that the Fed will announce a rate change at this point. It is more likely that there will be an announcement that spells out some details of what is to follow the current QE2, and that they’ll finish a $600-billion Treasury-purchase program by the end of June. Maybe there will just be some soothing words to allay everyone’s growing realization that, yes, there really is a serious degree of inflation going on, and that somehow that is being addressed is some splendid fashion or other.

It is also fun to consider that Ben might be doing some sort of “tit-for-tat” with Standard and Poor’s. After all, S&P’s recent lowering of its outlook on the U.S. credit rating probably was received as well by the central bank as it was by the equity markets. Maybe it was perceived as a bit of retaliation for the finger-wagging Washington gave them over that little matter of the mortgage-fiasco, when Standard and Poor’s was more than happy to stamp a whole lot of bad mortgages with an AAA rating. Perhaps Ben feels the need to assure all and everyone that all is well on the road to recovery, and that the U.S. credit rating deserves the stamp of good housekeeping, and that S&P knows not what they speak.

Or maybe Ben just wants to share with a wider audience. If that is so, the news conference is a brilliant idea.

Unless, of course, it turns out to be not such a great one. Stay tuned.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

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This entry was posted on Monday, April 25th, 2011 at 8:06 am and is filed under Immediately available to public. You canleave a response, or trackback from your own site.

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