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Tomorrow could be a game changer in the markets.  A few events that are worth taking a look at:

  • Housing starts at 8:30 AM (grab a cocktail- things could get ugly)
  • FOMC (aka Ben-a-Palooza 2010) meeting 2:15 PM

As I am writing this, the Nikkei is up .37% on the back of a huge Wall Street rally with the S&P 500 up 1.52%.  All in the clear?  Before the bears raise their white flags, let’s take a step back-namely to this past June when economists surveyed, prior to when the existing and new home sales reports were released, expected positive numbers all but finding themselves (surprise!) underestimating the decline of housing demand following the tax credit expiration.  These same courageous souls have once again declared recovery as shown in the recent Bloomberg survey of 73 economists.  I would venture that the majority of the economists in the survey are Ivy League graduates and have based their estimates of 7.1% growth in existing home sales on their same backward looking models.  These people are often paid large sums of money to provide advice to financial institutions and places of higher education and they will probably be way wrong on this call again like they did on their last two guesses this summer.  Maybe breakeven (not trusting any official statistics these days), but likely this number will be in the red as well.  Enough to catalyze broad a correction in equities in through November- perhaps 10 even 20 percent?  Maybe.  Thats if the Fed doesn’t beat that Thursday number to the punch.  The FOMC is bound to disappoint fed watchers on analyst desks that expected another round of quantitative easing this Tuesday (QE2).  While Quantitative Easing, or rather the nuclear option, is likely sooner vs. later, this will not happen until the Fed is convinced that the public markets can stomach 3-5 trillion being pumped into the financial system again.  So, the most likely scenario taking place tomorrow? Scenario 1: Since the massive rally over the past couple of weeks have hinged on rumors of fed liquidity and have been bullish for equities, gold, and some commodtities and bearish for the Dollar, a major FOMC disappointment would most likely mean stocks, gold selloff and major Dollar strength.  Scenario 2: If there is some aggressiveness in the statement, expect at least choppy trading and possibly more gold buying on account of more “unusually uncertain” conditions.   Scenario 3:  Massive quantitative easing is finally unleashed by the Fed.  This scenario has become casually referred to as the “endgame.”  Expect inflationary conditions from massive selling of greenbacks.

Most likely, there will be disappointment and the Fed will wait until the S&P 500 heads below 1000 and the financial superstructure can no longer stomach the massive plunges in home sales that will continue.

Have a fun rest of the week.

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2 Comments

  1. Are they not already unleashing liquidity through Permanent Open Market Operations? Please give your expert opinion! I agree that people will be watching what the Fed says, but won’t that be a short term blip since they are already pumping liquidtiy?

  2. Thank you, Papa, for your post. Yes, they have been pumping liquidity ever since the purchasing of Treasuries in August with the proceeds of MBS unwinds. There has been, however, no expansion of the Fed’s balance sheet. It has merely been an asset swap and maintaining status quo as the Fed shows its appetite for “easing.” It appears that after today, all that is left for them to do is massive purchases of treasuries most likely in November at the next FOMC meeting. In the meantime take a look at the Adjusted Reserves chart at the Fed to get a better glimpse of how much the balance sheet has grown….

    http://research.stlouisfed.org/fred2/graph/?chart_type=line&s%5B1%5D%5Bid%5D=ADJRES&s%5B1%5D%5Brange%5D=5yrs


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