Wednesday, October 13, 2010

Bob Lang: Markets, the Fed, and Metals

From Bob Lang at Big Trends ETF Tradr.......

Market Noise is Deafening
When we don't know what to do or where to go, we ask someone. The obvious path is not so any longer and we need direction. Well, in the markets we're now at that critical juncture. Much like the 'advice' that was given in fall 2008, bargains of a lifetime, 'you have to be in this market', long term it makes sense, etc, only to have markets fall another 50% into the spring of 2009. Was that advice we needed to follow? Today, the word on the 'street is 'how far this rally can go, and should I stay or get on the sidelines'. Naturally, market sages will tell you to stay the course if you're invested, they want you all in at all times. Yet with all the noise and distractions around can we afford to make the one decision that could lead to a setback? The LESS we listen to media accounts, hurray the Dow hit 11,000 again, let's have a party, the better off we'll be. It'll be all over the place now and louder than ever! This type of 'workplace noise' can be hazardous, a news story the other evening stated that those prone to noise at work are more likely to have a stroke, heart attack or high blood pressure. Let the market tell you WHEN to should exit, remain or re-enter.

What's All this Fed Talk About?
We've heard quite a bit lately about this Fed game called QE2. To be sure, they are playing upon our positive expectations at the end of the game. The hope is that this program will help spur some economic activity, inflation and move people back to work. But, what is QE2, and did what did QE1 accomplish? Simply put, QE is quantitative easing, implemented when the Fed has no more additional room to cut short-term rates to stimulate the economy. Basically, cutting borrowing rates has failed to control the money supply. By definition, QE is upping the supply of money by increasing excess reserves of the banking system, expanding their balance sheet. By purchasing government assets and other bonds in the open market they give banks excess reserves required to create new money. Hopefully the banks will use this extra money to lend out to borrowers, thereby stimulating activity. Many argue this is the wrong approach, creating dollars. To be certain, QE measures have had mixed results and there is not a direct correlation to creating new jobs, which seems to be the big issue of today. Back in early 2009 the Fed implemented the first round of QE and while it improved growth a bit, the desired effect and length lagged badly. In fact, the economy recently fell into a 'soft patch', enough warning for the Fed to jump to the fore with their new easing plan. Is that a pattern we'll see develop over time?

Metals are sure Precious!
New highs again for gold, new multiyear highs for silver. Haven't seen such a blistering move on a commodity since crude oil went parabolic in 2008. Do we know the reasons for this parabolic rise, or do we 'think' we know the reasons. By all accounts it seems everyone is talking about the metals these days. Heck, there are four new gold shops that popped up in my town over the last several months, and on every other street corner is a guy holding a sign that says 'will buy your gold'. The fever pitch is reaching that of the miner 49ers over 160 yrs ago! Can it last? Sure, any bubble move can keep going until every last one gets in and then POP! I'm not calling for this, but certainly the reasons for buying gold are consistent with past bubbles, oil, housing, tech, and biotech. Oh, I've participated, silver has been my choice, but if you fail to acknowledge what is happening around you then you'll get taken in by the hype. We choose to listen to what and whom we want that makes us feel good (read up top again about the noise factor). Being in a bubble and profiting is ok, in fact it's great as an options player, but knowing your exit is most important. Enjoy the ride while it lasts!

Check out Bob Lang's calls and articles at Big Trends.Com


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