Shock and awe

With the help of some financial shock and awe from the Federal Reserve Wednesday, the markets moved from down about 2% mid-day to close higher across the board.

The Dow Jones finished the day up 90 points and over 1% higher to 7486. The NASDAQ continued its strong run, adding 2% to close at 1491. The SAP 500 also added 2%, ending trading at 794.

Oil was unchanged at $49/bbl. Gold was down $23/oz earlier but rose the stock market up to add $21/oz and end at $938.

In addition to keeping the Federal Funds rate in the historically low range of 0% to 0.25%, the Federal Reserve announced it would be buying a total of $1.2 trillion in securities. Over the next 6 months, it will buy up $300 billion of long-term US Treasury bonds and $700 billion of Fannie Mae and Freddie Mac backed assets. The goals are to stabilize the credit markets and to put more downward pressure on mortgage rates.

The last one seems to already be working. The return on the 10 year US Treasury note dropped to its lowest level since 1962. This is significant because this is the issue that most mortgages are priced against.

Despite the long-run problems with inflation, the US stock market has had a great dose of good news in the past week. Not only are their serious signs of a turnaround in monetary velocity underway, it also seems that some mark-to-market accounting reform is on the way. And today, the Fed jumped in with both feet. These three developments should be causing serious indigestion for the short-sellers of US stocks.

Despite some problems developing down the road because of policies today, as we had in 1975-1976, a significant rally in stocks over the next year has potentially become very real.