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Spanish Banks, Miami Heat, Lindsay Lohan and Greek Elections


The Greek elections were so exciting this weekend that I didn’t even notice that the Miami Heat won Game 3 or that Ms. Lohan fell unconscious after “working 85 hours over 4 days and being up all night.” (Note to the starlet – go cry to the Marine Sergeant leading patrols in Afghanistan for $35k a year).

While I have more on the elections below, it was a good week in the equity markets.  No, it wasn’t the bailout of the Spanish banks last Monday that set off an equity market rally, but rather speculation that the Fed will announce some new measures aimed at improving the economy when they meet this week. The news that global policy makers reassured that they would step in with liquidity, should the Greek vote end up poorly, was welcomed as well.  It turns out that the Greek vote went well and the U.S. is set to open to the downside this morning.

Go figure.

But this is why we say over and over that individual investors shouldn’t trade on daily news and speculation.  Think about it – was anyone in the main stream media predicting we would see a 2 week winning streak in the equity markets 14 days ago?

Here’s how the market ended up for the week.

6-18-12 v2

As mentioned above, the conservative, pro-austerity, New Democracy party appeared to win a small victory against the radical leftist SYRIZA bloc increasing the likelihood that a Greek exit from the 17-nation euro currency has been averted.

For now.

But it’s not all about Europe right now.  Here in the US, the Fed will conclude its two-day meeting on Wednesday after which Fed Chief Ben Bernanke will hold a press conference.

So while the Fed is closely examining events in Europe, it also needs to address the market’s concern over a third slowdown in the U.S. recovery in as many years.

Contrary to what a lot of people seem to think, the Fed is not out of options. It’s just debatable whether or not the options will provide the required ‘oomph’.

To set the stage, let’s review a little history.  First, the Fed conducted $2.3 trillion in bond purchases (popularly called QE1 and QE2).  From there, the Fed purchased another $400 billion of longer-term Treasury bonds.  The purchases were made with money they got from selling the same amount of short-term bonds.  This is commonly referred to as “Operation Twist”.

Options available include:

1. Extending its low rate pledge beyond late 2014. This won’t really do anything.

2. Cutting the 25 basis point rate on excess reserves that the Fed pays to banks in order to encourage lending. Given that part of our problem is that banks are not really lending much these days, a tiny cut might not stimulate anything.

3. Extending Operation Twist, which concludes at the end of the month.  This would push rates even lower.  However, rates are already at record lows.

4. A full-blown QE3. The Fed could announce a third round of bond purchases. Equity markets would probably do well, but commodity prices would soar again too.

5. I read over the weekend that the Fed could also buy European bonds, including those of Spain and Italy.  That would probably send stocks soaring for the short term but it’s politically impossible – elected officials would go NUTS!

Number 5 could be more entertaining than a good summer book, but don’t count on it.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index. The Russell 2000 is an unmanaged index generally comprised of companies with lower price-to-book ratios and lower forecasted growth values.  The 2, 10 and 30 year Treasury is simply the yield at the close of the day.

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David B. Armstrong, CFA

President & Co-Founder

Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....

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