The Fed's Free Money: Time to Go Long

I am sure you all have heard by now that the Fed cut the Fed funds target to the nifty range of 0%-0.25%. Free money! That's awesome.

In effect, all the Fed was doing was taking the target down to where Fed funds have been trading anyways. I have been watching Fed funds the past while and I cannot remember the last time it traded at 1%. It has been several weeks at least. Fed fund were trading as low as 0.0625% within the past few days.

I am not going to go through the entire Fed statement. What I did find most interesting was this.

In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time [emphasis added].

This is both a good and bad thing.

It is good because it demonstrates that the Fed will do whatever it takes to avoid another Great Depression. And they will ultimately succeed.

It is bad because it lays the possible foundations for the next insane bubble. I am hoping, nay praying, that the Fed does not repeat the mistakes of earlier in the decade by keeping interest rates too low for too long. I am highly skeptical, however, that the lessons of the immediate past have been learned.

In the meantime, this is great for me personally! I am as long as I have ever been. I have been buying the past month, albeit too early. I expect this rally to last until January or February, then we will see. I expect the first level of serious resistance at the 1020-1040 level for the S&P 500. This is also fair value, given that I am using $70 as a normalized earnings number and applying a 15 price/earnings multiple.

At that level, I expect to start taking profits.

Unless I change my mind and start taking profits sooner. Or later.

Comments

[jepittman:]

Beware Toro, this is the kind of opinion that gets derisive hoots and laughter from the vast majority on these forums. Bullish, huh?

2008 Dec 17 12:11 AM

[dawase@gmai...:]

Maybe "normalized" means something new, but how are you getting to $70 and why are you figuring a 15x multiple?

I'm thinking $60 at 12x... means we're already over-valued.

Unless you're looking out to 2010? Then it should be more like 8-10x, no?

2008 Dec 17 12:14 AM

[Alan Brochs...:]

Toro, Toro, Toro...

This is unlike anything we have faced. Don't get bullish until there are signs that banks are lending again, except for a short-term trade. It doesn't matter if rates are zero for savers - it's the rates for borrowers that count. Ability to repay principal is going down due to asset impairments (for businesses and homeowners), higher unemployment that is baked in (for consumers) and lower revenues (for businesses) as consumers "save". Do you want to lend in this environment? I don't blame the banks...

2008 Dec 17 08:31 AM

[Joe Red:]

A panel on CNBC said $55 this morning.

2008 Dec 17 10:16 AM

[carey_jim:]

I said, humorously, that the Fed will soon be charging us a fee to keep our money safe for us but now I'm beginning to take myself seriously.

I can see the headlines now,

"More chaos in the streets. Fed cuts prime interest rate from -1% to -2% but mob calls for further cuts to raise money from the rich. President Obama is considering -3%. Mob outside White House threatens, BURN BABY, BURN"

2008 Dec 17 12:00 PM

[Incae:]

This is not good, What is the exit strategy??? I wrote a paper on "there is not enough data on zero bound", meaning we dont have enough that to run a model. The Fed is flying blind here. Have you heard of a fork strategy? you try several things, the consequences vary for each measure taken until all come together into one big mess that the market quits.

2008 Dec 18 01:23 AM