Fed Rate Hike And The Effects On The Stock Market
The Feds recently raised the rate on the discount window in an effort to get banks to rely more on the private sector. The Fed wrote this and published the speach on February 10th, but Bernanke is saying that the rate will not be as good of an indicator in monetary health as it was in the past.
This should be going up anyway with growth of 2-3% in GDP annually. The discount and Federal funds rate rising will effect the markets. What are the risks and returns? Well, cost of capital, inflation, interest rates, and equties. This is one of the first steps to gettting things back to normal. This is probably one of the first shocks heard around the world. The next shocker is probably going to be that the feds are going to stop buyihg mortgages. When this happens it will cause mortgage rates to go up which will bring capital down. Treasures and mortgage spreads wll widen. When the government stops buying bodns it will raise over all interest rates. Inflation could run up 1-2% in the near future and probably more in 10 years. This is going to increase the popularity of FAS and FAZ a ton. These are ETF’S that trade at 3x the normal move of the Russel 2000. They trend financials and have huge days when financials are on the move. The ATR of these ETF’s are 10%. This is perfect for day traders.
Mortgages are a bargain today, but we don’t think they are going to start selling mortgages on this year. If they ever got to selling mortagages. When the fed starts flattening the yeild curve it will effect financial earnings which currently accounts for 40% of all earnings.
The 5-10 year corporate bond market is attractive when the yield curve is steep as it is currently. This is a way to hedge against rising rates. This is going to cause many head winds and we expect volatility to rise in coming weeks. The recovery is going to be slow and any news that the markets are unsure about will cause the market to be unpredictable.
The thing we love about Penny Stocks is that they will not be effected by this. If you can find some good Penny Stock Picks then that could be your best bet with more stuff coming down the pipeline. Penny Stocks do not typically trend the broader market and they can offer much bigger returns if you know how to trade them right. We love trading penny stocks to get the 100% gains. It is sometimes hard to find them, but it is really hard to find them on regular stocks. In fact I doubt there has every been any stocks over $50 double in one day.
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