Stocktiming.com Tuesday, December 16th. - Stock Trends, Charts, and Commentary
"Is a Bernanke "gift" coming your way?
Yesterday, Bernanke said the Fed could directly intervene in markets to stimulate the economy, saying it could purchase U.S. government bonds to drive down yields or private sector debt to narrow spreads and lower borrowing costs.
More market intervention ... and less free market balancing forces is a bad idea. While we understand what Bernanke is trying to do, there is no free ride in the end.
As 30 year yields are driven down by the Fed, bond prices will be forced into an unsustainable bubble. Fix the immediate problems now and deal with the repercussions later seems to be the only strategy that the Fed and Government can think of.
Bernanke wants to drive down mortgage costs to 4.25% to 4.5%. That would help the housing sector and start to whittle down the huge unsold inventories. Banks aren't exactly playing the same game yet. While 30 year yields have dropped sharply, banks held the 30 year rate at 5.12% for days without budging.
Yes, they did give in on the points, reducing new loans from 2 points to 1 point. And then yesterday, many banks moved the mortgage rates down to 5% with a 1 point charge.
This whole scenario reminds me of an old Corvair I had as a kid back up in the cold New England winters. I would crank the engine and it would sputter for 3 seconds and die. The next try would sputter for 6 seconds and die. Ten tries later, the battery died.
I hope this doesn't turn out to be the scenario on forcing low yields into play ... lower yields and the economy shows noises of trying to crank up, but it fails. The Fed intervenes and buy bonds ... and we crank things up for a little longer. After a while, the battery runs out of its charge as too many Bernanke cranks on the engine leaves him with a dead battery and a bond bubble that can't be sustained.
In the meantime, enjoy the ride. If yields drop to 4.25% with 1 point, or 4.5% with no points, reduce your monthly mortgage payments and take the deal if your home is not paid off. Of course, that presumes that you will have a good enough credit rating and a job. ( I now am hearing of employed friends being told that they will not be laid off ... BUT, they will be given pay cuts.)
Let's now look at the 30 year yield (TYX) chart and see what's going on. A quick look and you can see how 30 year yields have plummeted since the end of November. The Fed still wants the 30 year mortgages to drop a half to three-quarters of a percent, so they have more work to do. Pushing the current drop further will put 30 year bonds in a bubble that will not unwind pleasantly.
Yesterday, the TYX movement had our Accelerator drop while being in negative territory (see the bottom chart). So, for now, Bernanke has the upper hand as he turns his key and cranks the engine, hopping it will catch and start up the economy.
Is a Bernanke "gift" coming your way? It sure looks like it. In the meantime Bernanke's strategy is also saying: "Let's create a bond bubble ... won't that be fun?"
George.
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