WALL STREET 15 Sept 2012 >>> U.S. stocks extend Fed-inspired rally

DJIA ends at multi-year high on Feds stimulus promise
U.S. stocks rose for a fourth straight session on Friday to close out the week at nearly five-year highs after the Federal Reserve took bold action to spur the economy, a move that could keep equities buoyed in the coming months. Equities are in a run-up that also pushed the S&P 500 to end higher for four consecutive months. The extended advance has come mainly from actions by Europe's and the United States' central banks to keep interest rates low and stimulate their struggling economies.

The Fed said Thursday that it would keep up its aggressive bond-buying until unemployment falls. Chairman Ben Bernanke said he wanted to see a convincing improvement in the economy that could deliver sustainable job creation.

Scaling back from a 113-point climb, the Dow Jones Industrial Average DJIA +0.40%  gained 53.51 points, or 0.4%, to 13,593.37, the highest close since Dec. 10, 2007. It gained 2.2% on the week, tallying gains for eight of the past 10 weeks. The sharp turn higher for equities came after the Fed unveiled an open-ended plan to buy mortgage-backed assets at a clip of $40 billion a month. The central bank also pledged to take more actions, if necessary, to give the stodgy economy and labor market a fresh jolt of power.

It was the best week for the Dow since early June. The broader markets had a strong week as well: the S&P 500 jumped 1.9% and the Nasdaq rallied 1.5%. 

ANALYSTS QUOTES

"Today is simply a continuation of the strength we saw yesterday." 

"Bernanke's comments are going to create an artificial floor on the market, meaning that we could see higher prices over time. Any correction that we get will be no more than a few percentage points."

"Right now we have this short-term euphoria. But then the question is where do we go from here? I think after a week or so, if the underlying economic data doesn't change, you're going to see the market drop a bit and we'll continue to plod along until the election."

“We had a fair amount of data out right on the heels of the Fed, but probably the biggest influence today is still the after-effects of the Fed’s announcement yesterday.”

"We are starting to get into that heady territory where you need to be on the defensive. Trying to squeak out the last 5 percent of a move when there is potentially a 15 to 20 percent downside in my opinion is pretty dangerous stuff."

"While everyone is trying to figure out what QE3 means to the economy, stocks have spoken, and they like it. At the same time, hedge funds have totally dropped the ball and missed most of this rally. There's a good chance these Johnny-come-latelies could be the fuel for the next surge higher."

 

 HAPPY TRADING

More Multi-Year Highs for the Dow, SPX as Summertime Rally Continues

08 Sept 2012 Wall Street end the shortened week on a bullish note
U.S. stocks clung to the flatline and stayed near multiyear highs Friday as disappointment over the August jobs report was countered by hopes the gloomy data could give the Federal Reserve further reason to unleash a third round of quantitative easing. The Dow Jones Industrial Average (DJI) drifted below breakeven before lunchtime, but battled its way back into the black in the last minutes of trading. With that, the blue-chip barometer secured a respectable return  of 1.65% for the week.

The markets will be laser focused on the Federal Reserve next week, anxiously awaiting word on whether the central bank will initiate another round of economic stimulus.

The Federal Open Markets Committee, which sets most Fed policy, is meeting Wednesday and Thursday and a statement is due at the end of the second day. Fed Chairman Ben Bernanke will hold a press conference Thursday afternoon.

Stock markets are all hoping for another round of quantitative easing, in which the Fed buys      U.S. securities in an effort to goose the stumbling U.S. economy. Friday’s dismal labor report which revealed that just 96,000 jobs were created in August only boosted hopes among investors for QE III.

The Dow Jones Industrial Average (DJI – 13,306.64) was rather flat all session long, but found itself up 14.6 points, or 0.1%, by the closing bell. The Dow posted its best daily settlement since December 2007. Half of the 30 components slipped into negative territory, with Kraft Foods Inc's (NASDAQ:KFT) 5.5% loss pacing the laggards. On the other hand, the 15 outperformers were led higher by Bank of America's (NYSE:BAC) 5.4% gain. During the holiday-shortened week, the Dow enjoyed a 1.65% rise.

 

Adding 5.8 points, or 0.4%, the S&P 500 Index (SPX – 1,437.92) prolonged its stay in the black today and closed at a fresh four-year high. Plus, the SPX marked its best daily close since January 2008. For the week, the broad-market index climbed 2.2%.

 

The Nasdaq Composite (COMP – 3,136.42) enjoyed another multi-year high run, touching 3,139.61 in intraday action -- its loftiest price since mid-November 2000. And after the dust cleared, the tech-rich barometer eked out a fractional win. The COMP turned in the best weekly performance of its peers, rallying 2.3%.

For every stock sliding in New York Friday, more than two gained on the New York StockExchange, where nearly 680 million shares had traded. Composite volume reached 3.7 billion.

 

HAPPY WEEKEND

What Is Quantitative Easing?

Put simply, it is the injection of liquidity into the financial system by central banks to jump start growth. While quantitative easing alludes to printing money, central banks have other means to do it, such as by buying assets like government bonds from the banks.

This way, the reserves of banks are raised which enables them to continue their lending activities.

With quantitative easing becoming more widely used to ease global credit crunch, the worry is that if continued for too long, it could hurt the currency and cause a bubble build in the assets that the implementing central bank is buying from the financial institutions.

Inflation can also be a by-product although in the current crisis, the threat of inflation has waned as prices have come down rapidly in the face of weakening demand.

The good news for us is that it is unlikely that there is a need for Malaysia to resort to quantitative easing as a policy option to mitigate the current economic downturn.

It is lucky in this regard because with the OPR at 2.5%, there is still room for the central bank to manoeuvre insofar as monetary policy is concerned. Additionally, the banking system is till flush with liquidity and the country’s fundamentals still strong.

Thus, of greater importance at this point in time is that monetary easing must be accompanied by fiscal measures that should be implemented as quickly as possible amid the deteriorating economic environment.

The US & Japan Entered The Territory Of Quantitative Easing …

The US .....

The Federal Reserve vowed to pump an additional US$1 trillion into the US economy in an aggressive bid to battle a deep recession, partly by buying government bonds for the first time since the 1960s.

The central bank said it would buy up to US$300 billion in longer-term Treasuries to bring down borrowing costs, harkening back to a program called "Operation Twist" that ran from 1961 to 1965.

In addition to purchasing Treasury debt, the Fed would expand an existing program to buy debt and securities issued by mortgage finance agencies by US$850 billion to US$1.45 trillion, an effort to lower mortgage rates.

Critics said that buying longer-term government debt was not the most efficient way to ease credit market strains.

The price of U.S. government bonds surged after the announcement, with yields taking their biggest one-day tumble since 1987. Stock prices also shot higher, while the dollar plunged. It's an attempt to keep rates low, particularly on the mortgage side, which is seen as critical to a big revival of the housing market.

The Fed would begin buying the Treasury debt late March 2009 and planned to focus on securities with maturities ranging from two years to ten years. It would make purchases about two to three times a week.

In addition to ramping up its efforts to pump money into the recession-struck economy, the Fed unanimously decided to hold its target for overnight interest rates in a zero to 0.25 percent range -- the level reached in December 2008.

The Fed said rates would stay low for "an extended period," a more explicit vow to stay on hold with rates for a prolonged time than it had offered in recent months.

JAPAN ......

The BOJ has effectively entered the territory of quantitative easing, and it may eventually shift its policy target towards that and cut interest rates to zero if it tries to further ease financial conditions to cope with worsening of the economy.

The BOJ would buy 12 trillion yen of the JGBs with maturities of one to 10 years, more than half the total of the 21.6 trillion allocated for purchases each year. The BOJ has has no intention of monetising government debt and it is not aiming directly at pushing down bond yields. JGB buying is just one of its many market operation tools to provide funds to money markets

Falls in Tokyo share prices have put a strain on banks’ capital adequacy ratios. The BoJ was concerned that banks’ declining capital ratios, if left unchecked, could lead to a fall in lending to businesses and deal a further blow to Japan’s recession-hit economy.

In a nutshell ......

In economics, quantitative easing is a monetary policy tool that allows central banks to boost money supply in the financial system by buying up assets such as government bonds and mortgage backed assets.

In plain speak, it means central banks are using the printing press to create new money to buy up these assets!!!