The Federal Reserve didn’t make any dramatic announcements yesterday. In fact, they pretty much did what everyone expected them to do… leave overnight lending rates alone.
The “talking heads” analyzed the Fed statement with a microscope for clues about the state of the U.S. economy. Of course, everyone uncovered exactly what they expected to find; that is, this recession’s toast, though the prospects for an expansion are somewhat tenuous.
How tenuous? The Fed is still purchasing U.S. Treasuries through the end of October, a month later than the central bank initially projected. The purpose in doing so is to artificially keep mortgage rates as well as other consumer rates at historic lows.
Of course, as soon as the Fed stops buying, do we really think the Chinese and Japanese will buy 10-year Treasuries at 3.7% yields? 10-year treasuries will be heading to 4.25%-4.5% once the Fed runs out of the $50 billion it has left for the purchase program.
So which ETFs benefit the most from the Fed’s decisions to maintain super low target rates, as well as to continue buying U.S. treasuries and Fannie/Freddie mortgage-backed securities? Here’s the rundown:
|Fed-Friendly ETF Performers On 8/12/09|
|iShares FTSE NAREIT North America (IFNA)||5.35%|
|streetTracks KBW Insurance (KIE)||3.45%|
|SPDR Homebuilders (XHB)||3.02%|
|SPDR DJ International Real Estate (RWX)||2.89%|
|Rydex Equal Weight Financials (RYF)||2.83%|
Home construction, REITS and financial services like banking and insurance all received a Fed-friendly jolt. Yet the question remains… how can consumers ratchet up their spending when neither jobs nor incomes are growing?
While the Fed expressed confidence in its aggressive actions a la “quantitative easing,” one has to wonder if they could dare say otherwise. Uhhhhh, listen folks… the stuff that we’ve been doing, it’s kinda, sorta, maybe working?
Several things seem reasonably clear from my vantage point: (1) Established businesses may be able to get the money they need, but individuals do not have a great deal of access to credit, (2) Home sales and even prices may have picked up due to foreclosure purchases, yet financial institutions are a long way from lending in the manner that the government had hoped, and (3) Most banks will not be making money since cost-cutting can’t replace lending for long-term profits.
Financial stocks will continue to be far more volatile then the market at large; and, they’ll continue their reign as a top target for short-selling enthusiasts.
Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.