Yesterday, Wall Street was waiting. The massive stimulus plans enacted by the Fed, QE1 and QE2, had not succeeded in growing the economy, but they had done a marvelous job of stimulating the stock markets. The market had already anticipated that Chairman Ben Bernanke would enact Operation Twist and wondered if QE3 was in the offing. Like a child spoiled by too much candy, the market waited breathlessly to see what other treats awaited.
But instead of sweet treats, Ben Bernanke told the markets, "No more candy for you!" The market responded predictably with a temper tantrum. After getting slammed yesterday, the screaming and crying continued at today's open.
But there is a positive sign. The selloff has brought us into an area of support on the S&P 500 that I've mentioned many times before: 1123.53. We may very well trade below that number today, but my eyes are on the close.
Note that the SPX traded close to it 50-day moving average and into an area of resistance that we have mentioned many times (1219) before pulling back sharply. Yesterday I said the SPX needed to break that resistance if it was to form a higher high, but it failed to do so. Now, less than 24 hours after testing resistance, we are testing support. I'm long the S&P 500 E-minis, and I'll add to that position in the 1123 area. If we close below 1100, I'll take the loss.
If market stimulus is comparable to candy, then Operation Twist is merely the exchange of one candy for another; in this case, adding to purchase of long-term Treasuries with the proceeds of previously purchased short-term Treasuries, in an effort to drive down rates on the longer end of the curve. This is already occurring: As of this writing, a 30-year Treasury bond yields less than 2.9%.
What will lower long-term rates really achieve? If unsold houses remain on the market despite the availability of 4% 30-year mortgages, would a 3% 30-year mortgage do the trick? The sad truth is, even if somehow a zero-percent, 30-year fixed-rate mortgage became available, you'd still need to be employed in order to afford the payments. The market sees that Operation Twist isn't a panacea.
Mortgage rates are not the problem; we need jobs. We need to let go of this fantasy that the Fed can fix the economy, or that the government can create jobs. Bernanke isn't Superman. The Fed can't fix the economy, just like the government can't create jobs. You can't repeal the economic cycle, and our attempts to do so have only prolonged the misery.
Perhaps today is a new day. Perhaps the Fed has finally said, "That's enough candy. Eat your vegetables." Perhaps if we begin to live in the real world instead of a market distorted by the funhouse mirrors of stimulus, we can see things as they really are. That reality might not be pretty, but seeing the world as it really is could be the first step toward dealing with our problems in a realistic manner.