Optimism Runs High This Fed Day

 | Dec 12, 2012 | 8:05 AM EST  | Comments
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It's better to be an optimist who is sometimes wrong than a pessimist who is always right. --James Koford

It is Fed day -- when the Federal Open Market Committee is slated to deliver its interest-rate decision -- and optimism is running high that Fed chief Ben Bernanke will keep the printing presses rolling. The latest round of quantitative easing didn't produce the same sort of euphoric response that the first two rounds did, but the market still loves that cheap money, and it isn't very worried this will ultimately produce inflationary pressures.

With the focus almost entirely on the "fiscal cliff" issue of late, the Fed has been on the back burner recently. Europe concerns have poked their head out a few times -- but, again, the only real issue of consequence lately has been resolution of the fiscal cliff.

Of late, the particularly interesting aspect of the market lately is that the way it's been acting suggests it is very confident that a deal will be done. On Tuesday it registered a response to some negative comments from Senate Majority Leader Harry Reid (D-Nev.) -- but, soon after the close, those losses had been recouped and sentiment regarding a deal was quite positive once again. This morning there is talk that the Democrats have put corporate taxes on the table, and that Republicans are slowly dropping opposition to tax increases. Everyone seems to want a deal, and the market is feeling pretty good about the prospects for one.

The big question Thursday is whether the Fed announcement will spark some further buying. Up until the last round of quantitative easing, everything that the Fed did generated a euphoric response, but there are now concerns that Ben Bernanke really doesn't have any ammunition left, and that only incremental positives are possible. However, fighting the Fed simply doesn't pay too often -- and if Dr. Bernanke continues to say he is willing and able to do all he can, the market will be happy even, if there are some questions about what tools are left.

The bears' big argument at this point is that the market has run up quite a bit, even amid much uncertainty and plenty of negatives. Even assuming the fiscal-cliff issue is resolved and the Fed issues a market-friendly decision, we still face a poor economy, sovereign-debt issues in Europe, high unemployment and poor corporate earnings. While removal of the fiscal-cliff issue will be nice, it will also mean we'll end up with higher taxes and less spending -- which are not going to be positive economic drivers.

I can understand some skepticism about this market and our politicians, but the potential for a sharp upside spike is very high if progress is made on a fiscal-cliff deal. There is just too much risk of a positive headline to feel comfortable with aggressive short positions.

I suspect that one of the big drivers right now is that market players are once again under-invested and struggling to produce relative performance. One of the main themes this year, especially back last January, comprised straight-up moves that never let anyone in. Funds underperformed back then and have never been able to catch up, and now they are now struggling again as they attempt to put some gains in the bank.

Fed days always make for choppy trading -- and on Wednesday the market will have to navigate the rate decision, due at 12:30 p.m. EST, and then Ben Bernanke's press conference at 2:15 p.m. It is generally expected that the Fed will keep on buying mortgage debt, but there should be some comments about the fiscal cliff and other matters to shake us up.

I'm maintaining a generally bullish bias, but my exposure is pretty limited right now, and I'll continue to hunt for new inventory.

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