February 8, 2010, 08:00 EST Dr. Joe Duarte's Market I.Q.
The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
Federal Reserve Plots How It Will Raise Interest Rates
What's Hot Today: U.S. stock index futures were pointing to a flat open on Monday.
Today's Economic Calendar:
- 4-Week Bill Announcement 11:00 AM ET
- 3-Month Bill Auction 11:30 AM ET
- 6-Month Bill Auction 11:30 AM ET
Afghanistan: Government supporters of militants arrrested. According to Stratfor.com: "A district administrator in northwestern Afghanistan was accused of militant links and corruption charges and is the second senior Afghan official to be arrested in the past week, AP reported Feb. 8. The chief administrator in Bala Murghab, a heavily Taliban influenced area, was detained but officials did not disclose the news until after his interrogation. He is accused of passing sensitive military and intelligence information to militants and faces corruption charges. The officials brother was the leader of a militant cell that attacked Afghan and foreign forces in Bala Murghab."
Tea party movement gets organized. The Tea Party movement is trying to find its direction. According to The Wall Street Journal: "Building a coherent movement won't be easy. The Tea Party activism that sprang up last year remains a loosely organized concept, held together by the broad beliefs that politicians in both parties are out of touch, that fiscal responsibility has run amok and that the public view of America has dimmed." The key is whether the movement can make the transition. As The Journal points out: "the movementguided by thousands of independent and conservative activists who organize mainly through online social-networking sitesis prone to infighting over its leadership and ties to the Republican Party. There are also tensions between those who think the Tea Partiers should remain a grassroots organization, and those willing to partner with more-established groups who can offer guidance on how to organize and run campaigns."
Federal Reserve Plots How It Will Raise Interest Rates 
Central Bank Sends Out Warning To Investors: Surprises Will Come
The Federal Reserve want to raise interest rates at some point in the future. And although there is no hurry, the central bank is putting together its strategy despite some significant differences of opinion inside the institution.
Fed Chairman Ben Bernanke, fresh from a controversial, but still valid confirmation is about to set on a difficult campaign, that of taking away the proverbial punch bowl of low interest rates from the markets and the economy. According to The Wall Street Journal, Mr. Bernanke will be using a new tool, "an interest rate the Fed pays banks on money they leave on reserve at the central bank. Known as "interest on excess reserves," this rate is now 0.25%." The way this new device, which Congress gave Mr. Bernanke in 2008 works, is this: "When the Fed is ready to tap the brakes, it plans to raise the rate paid on excess reserves, according to Fed officials in interviews and recent speeches. The higher rate would entice banks to tie up money they otherwise might lend to customers or other banks. The Fed expects such a maneuver to pull up other key short-term rates, including the federal-funds rate at which banks lend to each other overnightlong the main tool for steering the economy."
But the use of this new tool does not guarantee an easy road for the central bank, the markets, or the economy. As the Journal points out, when the Fed finally tightens it will be start the reversal of a significant amount of monetary easing, thus, "Extricating itself from these actions will require both skill and luck: If the Fed moves too fast, it could provoke a new economic downturn; if it waits too long, it could unleash inflation, and if it moves clumsily it could unsettle markets in ways that disrupt the nascent economic recovery. Mr. Bernanke and his colleagues are attempting to explainboth to markets and the publicthat the Fed has an exit strategy in the works in order to bolster confidence in its ability to steer the economy."
What it means is that Bernanke and Fed officials are about to hit the road and start making speeches about what its plans and policies for the future will entail and how things may turn out. In the past these speeches, especially those made by Alan Greenspan were usually market movers. Remember the famous "irrational exuberance" speech by Greenspan and its negative effects of the markets. So the question is whether Bernanke and his crew can communicate their goals to the markets and the economy without causing volatility even before they start to tighten. This is clearly a new experiment and one that is not without risk in and of itself.
The first test of this new potential Bernanke Effect will come on Wednesday as the Fed chief goes before Congress. It's expected that he will begin his campaign there.
And if you're wondering why the Fed needs a new interest rate tool, here's the answer. According to The Journal: "Because it has put so much money in the banking system, the Fed expects to find it hard to control the fed-funds rate with traditional approaches. Hence the search for alternatives." In other words, the Fed doesn't think that it can control the money supply and market interest rates in the ways that it used to. In and of itself that's something to consider, given the fact that the central bank has been able to do its job fairly well during past cycles.
What's more interesting is that the Fed now wants to add a certain amount of uncertainty to when and how it will raise rates once it starts down that path. According to The Journal, Fed officials and economists don't want to be locked into a predictable pattern of interest rate increases, as they want to have flexibility depending on the economic data available and how the economy is performing at any one time. Thus: "Officials are reluctant to be so predictable this time. Uncertain about the outlook for the economy and markets, they want to avoid committing to a course they might later find inappropriate. They want to keep open their options: raising rates quickly; keeping them low for a long time; boosting them and then pausing, or some other tack, depending on the economy." And here's the clincher: According to The Journal: "Officials are warning investors and banks to prepare for surprises."
And here are some examples of other tools that the Fed might use: "One is to encourage banks to tie up money at the Fed for a set periodpreventing them from lending itin what are called "term deposits." Another is to lock up funds, and thus constrain the supply of credit in short-term lending markets, by borrowing against the Fed's large portfolio of securities holdings, in trades known as "reverse repos." When the Fed borrows from the markets, it effectively takes money out of circulation and replaces it with securities from its holdings."
Conclusion
Last week we noted that higher taxes were certain to come. This week, we're starting with a story and analysis of how the Fed plans to raise interest rates.
It's not hard to figure out that harder times are ahead for investors. And that's without even knowing what nasty little surprises may lie ahead.
So what's the bottom line? At some point in the future, taxes are going up significantly. And if history is any guide, that's probably just around the time that the Fed figures that it will be time to start to tighten monetary policy.
It's going to be hard to win an election at that time if you're an incumbent with a controversial approach to governing.
Market Moves U.S. Natural Gas ETF (NYSE: UNG) Tries For Ground Hog Boost The U.S. Natural Gas ETF (NYSE: UNG) is getting a cold weather boost.
Chart Courtesy of StockCharts.com
The cold weather blitz, and ground hog aside, the potential for at least one or two more weeks of it seems to be boosting natural gas. That means that those with a short term orientation can consider using UNG.
The ETF had some trouble in keeping up with the general trend of natural gas last year due to some issues related to the number of shares outstanding. That seems to have been ironed out, which means that owning UNG is likely to give holders a more faithful adherence to the overall trend of natural gas.
The U.S. has enough natural gas reserves, by some fairly reliable estimates, to power its own energy needs for at least the next 50-100 years, based on what's likely available from shale rock deposits.
That's the reason for the fairly low price of the commodity for some time. Yet, a short term spike is always possible due to the weather.
The bottom line is that winter is still here and natural gas prices are perking up. It's worth a look.
