Wednesday, May 18, 2011

Some Thought on QE3, Fed Funds Rate and European Crisis

I don't care about chatter in CNBC and Bloomberg on doomsday scenarios. Fed is not going to announce QE3 anytime soon. Bernanke is going to play safe and announce that they are going to hold to their treasury purchases for foreseeable future. As I explained in my article on Option ARMs, the U.S. housing market can't stand any outside pressure. Unfortunately it is going to experience the second waive of foreclosures by August 2011. Any increase in interest rates would be suicidal for fragile housing market. therefore Bernanke is going to keep the Fed Funds Rate at 0.25% until late spring of 2012.

If last year someone would tell me an European country is going to pay +25% interest to borrow money for the next 2 years. I would fall of chair, but if you live long enough you would see that anything is possible. Greece 2 year government bonds yield hit +25% a couple days ago; yes! it yields more than junk bonds. European union members have to get their act together and do something about Greece, Portugal and Ireland. What makes me worry the most is Spain situation. Spain 10 year government bond yield hit 5.596% recently. If it breaks above 5.90% it would be very problematic.

As you should know by now, I'm a bear but I'm going to put on my bull mask ! I think big institutions are going to squeeze the shorts. I think the most we could go lower would be 1313 level in S&P500. obviously in past 3 weeks there are some damage done to the rally but I'm going to stick to my gun, "S&P500 is going to hit 1430 this year" we shall see what is going to play out.