Fomc Shocker...Unprecedented Campaign...Massive Quantitative Easing...

FOMC SHOCKER… UNPRECEDENTED CAMPAIGN… MASSIVE QUANTITATIVE EASING…
1

FOMC SHOCKER…

UNPRECEDENTED CAMPAIGN…

MASSIVE QUANTITATIVE EASING…

Equities Equities COPPER OIL BOND PRICES

USD
FALLING YIELDS

BUT…

March 19, 2009

Vinit Tulsyan http://vinittulsyan.wordpress.com

2

THE RALLY CONTINUES…
The rally continues with US markets posting their best 7 day performance since
1930s. With one big event of details on FOMC meet out, I continue my belief that
Dark clouds to fade further on the back of other six events. These events as and
when unfolded will provide direction to global equity markets including Indian
Markets. (Refer my earlier article titled “fading dark clouds” dated 16th Mar’09).

Today’s FOMC decision at-least provided clarity on the state of economy and as
this one big event unfolded, with market participants just expecting a statement
from FED on the state of economy on the back of expectation that FED on the
back of already 0% interest rates and widening deficits have exhausted all its
ammunition…BUT unprecedented times calls for unprecedented action,
unprecedented campaigning. Its realization that credit market or main-stream
market stability is the key to put a stop on economy contraction and brining back
stability to economy; which in turn will guide the equity markets.

The other events which going forward will unfold and provide
direction to equity markets include:

1. Details on Geithner’s BANK TOXIC ASSET PLAN (though part of it
became clearer today that the existing TALF program will be extended to
include other financial assets in order to spur consumer lending to help
remove distressed assets from banks’ balance sheets),
2. G20 summit in London,
3. Continuation of good news on banking front,
4. Details on Stress Test conducted on 19 largest banks in US and
March 19, 2009

subsequently clarity on the bad word called “NATIONALIZATION” and
whether banks would be needed to recapitalized further or not,
5. Decision over UP-TICK and MTM rule,
6. News flow unfolding in China


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Note: Please refer my earlier article dated 16th Mar’09, titled FADING DARK
CLOUD

FED FIREPOWER IGNITES REBOUND AND THE RALLY ON THE
WALL STREET CONTINUES… Mr. Bernanke reiterated that to stabilize the
economy, one needs to stabilize the financial system and the main stream market
and that is exactly what FED has done.

Very few market participants expected FED to take any drastic action and the
expectations gained confidence due to already 0% interest rate, a large deficit.
But Fed showed that unprecedented times calls for unprecedented actions to be
taken, unprecedented campaigning to be done. Fed showed that Interest rates are
not the only tool it has, rather it will do anything or it is ready to take
unprecedented decision at any cost to avoid repetition of 1930s. But at the same
time, it also shows that how much cautious fed is about the economy, and it
believes that the health of the economy is not good, nor its’ expecting the
economy to come back on track any time soon. In other words, the more dramatic
the move, the more it says about the depths of the economic problems.

How do the policy makers view/observe this economy?
quot;The economy continues to contract,quot; the policymakers observed.
quot;Job losses, declining equity and housing wealth and tight credit conditions
have weighed on consumer sentiment and spending,”
Businesses are facing weaker sales prospects and Credit troubles have them
cutting inventories.
Problems overseas have crimped demand for U.S. exports, providing
domestic companies another blow,
March 19, 2009

Unemployment rate up to a quarter-century high of 8.1 percent and
expected to breach 10% over sooner rather than later.


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Decision taken by FOMC: The last time the Fed set out to influence
long-term interest rates was during the 1960s.
To buy up to US$300 billion in longer-term Treasuries over the next six
months—which will encourage lending by lowering interest rates;
It will buy up to an additional US$750 billion of agency mortgage-backed
securities (MBS), bringing the total this year to US$1.25 trillion.
It will also double its purchases of agency up to US$200 billion.
It had decided to hold its target for overnight interest rates in a zero to 0.25
% range; a level reached in December (and expected to be in this range at-
least this year) and repeated that borrowing costs would likely stay
unusually low for some time.
In addition to all these above steps, the Fed said a US$1 trillion program to
jump-start consumer and small business lending could be expanded to
include other financial assets.
Range of eligible collateral for the TALF “is likely to be expanded to include
other financial assets in order to spur consumer lending to help remove
distressed assets from banks’ balance sheets.
o The TALF would provide loans to investors and agree to take illiquid
debt as collateral. TALF may lend as much as US$1 trillion to
investors from hedge funds to pension funds and insurance
companies.

FED action in sync with the central banks actions around the globe
Central banks around the world are grappling with how to formulate policy with
target interest rates near zero. The current monetary policy move of US FED is
March 19, 2009

similar to MPC (Monetary Policy Committee) of Bank of England. The Bank of
England is buying government bonds and corporate debt, the Bank of Japan is
snapping up government notes and making subordinated loans to banks, and the
Swiss National Bank is intervening to weaken the franc.


5

A CAUTION… APART FROM EQUITIES, OTHER ASSETS CLASSES
ALSO RALLYING…MEANING THAT INVESTORS LOOKOUT FOR
SAFE HAVEN IS NOT YET OVER…RISK APPETITE STILL NOT
IMPROVING

Treasuries rallying: FOMC action spurs the biggest rally in bond
prices in decades, BUY WHAT GOVT. IS BUYING; focus again
shifted on safe haven, as bond market turned bullish with FOMC
announcement of buying treasuries securities and MBS to help ease credit
market; with bond prices soared at a roaring pace.

Yields on long term 10 year treasury paper fell by as much as 50 basis point
during the days trade, finally closing at 2.54% against 3.01% at the start of
the day’s trade, the biggest decline since records dating from 1962.

Gold Rallied: “INFLATION HEDGE AND SAFE HAVEN STATUS
CONTINUES”, U.S. gold futures rose above US$940 an ounce (up 3%)on
inflation fears and a tumbling dollar after the FOMC released their
statement, which included buying up to US$300 billion of long-term
Treasury securities over the next six months. GOLD is there for
diversification, and is expected to continue its rally in the long term.

Another reason why his rally has more steam left?
Dollar Plummets: Dollar plummeted after FED decision as fed action
balloon fed balance sheet and will add additional 1 trillion USUS$ to the
FED Balance Sheet. US$ plummeted against major currencies with US$
March 19, 2009

index falling by more than 3%.


6

BUT???
Are we again moving to a situation where too many dollars or too much of money
due to “EASY MONEY” availability again starts chasing too few assets which is
the root cause of the current problem.

The goal is to kick start the US economy, and if that will be done by increasing the
appetite of borrowing money by an already over-debted people and it will further
put pressure on an already troubled economy. The easing of interest rates,
mortgage rates, as per FED expectation will facilitate the extension of credit to
households and small businesses, but what about INFLATION?

Will the decreasing mortgage rates artificially put increase the home price, which
have been the plummeting the worse, and is the first and the major reason for the
situation the economy is into now?

Thanking You,

Warm Personal Regards,

Vinit Tulsyan,

http://vinittulsyan.wordpress.com
March 19, 2009


Fomc Shocker...Unprecedented Campaign...Massive Quantitative Easing...

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