Tuesday, June 7, 2011
With the stock market on a steady downtrend in the face of mounting evidence of a decelerating trend in the U.S. economy, investors have again started looking to the Fed for help.
This behavior is nothing new; it has been going on for years. The Bernanke Put, and the Greenspan Put before that, is just a fancy name for the expectation that the Central Bank would come to the market's rescue should the going get tough. The Fed's $600 billion bond-purchase program, better known as QE2, is just the latest in a long line of such helpful actions. But with QE2 coming to an end later this month and short-term interest rates at near-zero levels, the central bank may not be able to comply this time around.
The odds of another round of quantitative easing (QE3) are limited, if not altogether non-existent. Growing inflation concerns, both domestically as well as abroad, offset any positives that could accrue from another round of monetary stimulus. The Fed Chief himself pointed to this in his maiden press conference.
Also, the political backdrop is a lot less favorable to another round of quantitative easing than was the case last year when QE2 was unveiled. Equally important, the central bank appears to genuinely believe that the current growth slowdown is temporary that will reverse going forward.
Given these reasons, it is unlikely that the Fed will come out with another round of quantitative easing in response to the current bout of market weakness. We have the Fed Chief making a major speech later this afternoon where he will likely explain his thinking about current developments in the economy.
In corporate news, International Paper (IP - Free Report) announced a hostile bid for Temple-Inland , the cardboard-box maker, for $3.38 billion in cash. International Paper went public with its bid after it was rejected by the TIN in private discussions. Pep Boys , the auto parts retailer, came short of expectations in its quarterly results this morning. The homebuilder Hovnanian Enterprises , reports quarterly results after the close today.
With nothing major on the economic calendar today, the Fed Chief's speech later this afternoon will remain in the spotlight. Reassuring words from Bernanke will likely have a positive effect on stocks. And who knows? We may have even get a positive trading session after so many days of losses. But irrespective of what happens in the market today, the overall trend remains negative.
Director of Research