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The Fed is buying. Should you?

Today's Financial News - Posted October 15, 2008

The markets remain highly volatile. JPMorgan (NYSE:JPM) and others announced surprise third-quarter earnings, yet the future is bleak. The more data we get the more I believe you should buy gold and short oil.

By Andrew Snyder

Baltimore – (TFN): America is a changed beast. What once was a country willing to go to war over democracy and free markets is now a country forcing its way into banking-industry ownership.

Picture the scene: Banking executives from across the country are gathered up, forced in a small room, and lined up in alphabetical order. Government officials, already in the room, slide a piece of paper in front of each banker.

The representatives from the government pressure the bankers into signing the contract, insisting it is for the good of the society. Even with questions and protests, everyone signs. Against their better conscience, they sell a large share of their companies to the federal government.

Sounds like a scene out of Russia, huh?

Sounds like something Putin, Chavez, or Castro might be behind.

It’s not. It happened right here in the United States over the weekend and the government officials doing the pressuring were the folks we gave $700 billion to just a couple of weeks ago. All that money and power must have went straight to their heads.

Nevertheless, the federal government swooped in and bought huge stakes in the nation’s largest nine banks. Wall Street and American economics will never be the same again.

Will its $250 billion infusion work? It hasn’t yet.

After a day or so of positive action on the Street, companies from all sectors are pumping out earnings report after earnings report. While many third-quarter statements are meeting and even exceeding expectations, fourth-quarter forecasts are looking dismal at best.

Where’d it all go?

Banking bellwether, JPMorgan (NYSE:JPM) managed to beat Street estimates this morning, but its earnings report was painful to read. The company’s profits plunged by over 80%. The banker earned just $527 million over the past three months. This time last year, that figure was $3.4 billion.

Analysts were expecting a per share loss of $0.21. A lot of folks were surprised when JPMorgan announced the figure was actually a positive $0.11. Even with the higher-than-expected figure, analysts warn of significant losses to come in the next few quarters.

It is the same story across the board. Analysts are downgrading equities at an increasingly fast pace.

Even worse, the credit markets continue to show signs of constriction. Libor rates dropped a bit over night, but treasury yields are on the rise once again. Even with the markets virtually drowning in liquidity, few lenders are willing to loan out their cash. Even mortgage interest rates are on the rise.

Shopping at a discount

And finally, some economic data, the stuff that usually moves the markets. The latest reading of the Producer Price Index was released before this morning’s bell. The gauge of everything wholesale pointed towards a deflationary tendency. That’s good news for folks expecting another Fed rate cut this month.

The index showed a decline of 0.4% in wholesale prices, which was in line with estimates. Excluding goods with volatile prices like energy and commodities, prices actually rose by 0.4%.

While the headline figures are nothing special, if we dig a bit further into the report, we can gain some good insight. Retail sales were down 1.2%. Auto sales were down 3.8%. And clothing sales were down 2.3%.

On a positive note, spending at gas stations and in the healthcare sector were up. That solidifies the topic I wrote about yesterday.

So what does all of this mean for investors? It means fasten your seat belt and tighten your helmet. We are in for more turbulent times.

My advice right now; buy gold and short oil. I will tell you more about that in just a bit.


Next Article: Obama’s economic program: Wealth redistribution

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Posted by Andrew Snyder · Filed Under US Stocks and Markets 

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