Fed to scale back bond buying

[valueinvestor]

NEW YORK: US stocks on Wednesday surged to new records after the US Federal Reserve modestly scaled back its bond-buying programme, while signalling it would continue to keep interest rates low.

The Dow Jones Industrial Average soared 292.71 points (1.84 percent) to 16,167.97, while the broad-based S&P 500 jumped 29.65 points (1.66 percent) to 1,810.65. Both were records.

The tech-rich Nasdaq Composite index rose 46.38 points (1.15 percent) to 4,070.06.

The Fed said it would scale back its bond-buying programme from US$85 billion to US$75 billion starting in January due to conditions "consistent with growing underlying strength in the broader economy," according to a statement by the Federal Open Market Committee.

But the move to taper the purchases was accompanied by a decision to extend the period of very-low interest rates.

The move means the current near-zero rate will be in place "well past the time" that the unemployment rate declines below 6.5 percent," said the FOMC communique.

The overall thrust of the statement was "a bit dovish," said Dan Greenhaus, chief global strategist at BTIG. The move to extend the period of low interest rates "compensated" for the taper decision, he said.

"The market is taking the statement as somewhat dovish, somewhat supportive of growth and the economy, and by extension, somewhat supportive of asset prices."

Large banks advanced, including JPMorgan Chase (+2.7 percent), Wells Fargo (+3.1 percent) and Bank of America (+3.4 percent).

Home builders also scored large gains, including DR Horton (+6.4 percent), PulteGroup (+2.2 percent) and Lennar (+6.3 percent), which reported a 32 percent rise in quarterly earnings to $164.1 million.

Ford Motor sank 6.3 percent after forecasting 2014 pre-tax profits at $7-8 billion, below the $8.5 billion it expects in 2013, and well below analyst expectations. The company also said its medium-term profit margin target was at risk.

Dow component Boeing fell 0.3 percent after announcing a series of executive promotions, including the promotion of Dennis Muilenburg to president. Analysts said the moves suggested Muilenburg was in line to become the next chief executive.

Tech giant Apple fell 0.8 percent after a leading supplier to the iPhone, Jabil Circuit, gave a weak outlook, raising speculation of low iPhone orders. Analysts also pointed to the lack of a deal with China Mobile, despite news reports indicating an agreement had been reached.

Bond prices fell. The yield on the 10-year US Treasury rose to 2.89 percent from 2.84 percent, while the 30-year jumped to 3.91 percent from 3.87 percent. Bond prices and yields move inversely.

[valuebuddies]

Before taper, everyone are happily shopping, once taper, everyone shop even more, one day when everyone realise that they have shopped too much, that is when the bubbles burst.

[opmi]

"markets can stay irrational longer than you can stay solvent"

[freedom]

low short term interest rate and higher long term interest rate?

Who borrows short and lends long? Yes, the banks.

A great era for the banking industry has come.

QE is the enemy of the banking industry, finally, the Fed starts to taper it.

[specuvestor]

As discussed in other threads, tapering is different from rising short term rates, though we see the bond market is reacting. And bond market since May been saying interest rate will rise sometime in 2H14 as they are usually 12-18months ahead.

They have shifted their goal post from 7% unemployment to 6.5%. This is positive and shows they think the economic recovery is stronger than they thought.

From a fundy point of view, tapering is for sure. Problem is everyone wants to be a market timer now. The fundy perspective is to examine stocks that are interest rate sensitive. Rising rates due to strong growth, rather than inflation, is positive equities.

[opmi]

low short term interest rate and higher long term interest rate?

Who borrows short and lends long? Yes, the banks.

A great era for the banking industry has come.

QE is the enemy of the banking industry, finally, the Fed starts to taper it.

yes, banks lends long to who? property owners..

[AlphaQuant]

well it's certainly good to get the damn taper started and hopefully out of the way soon.

Hopefully Bernanke goes down in history well as the bloke who prevented another depression but only time will tell.

[freedom]

Mr. Bernanke is one of the greatest economists of this era. His deep understanding of the economy of United States and way of handling the financial crisis is second to none.

Normal people on the street who are challenging his intelligence are just showing pure ignorance.

[Antifragility]

As discussed in other threads, tapering is different from rising short term rates, though we see the bond market is reacting. And bond market since May been saying interest rate will rise sometime in 2H14 as they are usually 12-18months ahead.

They have shifted their goal post from 7% unemployment to 6.5%. This is positive and shows they think the economic recovery is stronger than they thought.

From a fundy point of view, tapering is for sure. Problem is everyone wants to be a market timer now. The fundy perspective is to examine stocks that are interest rate sensitive. Rising rates due to strong growth, rather than inflation, is positive equities.

Unfortunately flow matters, not stock. The market demonstrated this in May this year. Tapering IS tightening, albeit indirectly.

The Fed tapered because:

1. The deficit shrunk
2. They are causing massive dislocations in the bond market given that they own 33% of all 10 year issuances. Every week the amount owned increases by another 0.25%.
3. The market was coming to the realisation that they were monetising government debt.
4. International community is unhappy.

So expect to see the goal post being shifted to 6.0% once 6.5% is reached. Unemployment came down because less people looked for jobs, not mainly because the economy is recovering.

[Antifragility]

Mr. Bernanke is one of the greatest economists of this era. His deep understanding of the economy of United States and way of handling of financial crisis is second to none.

Normal people on the street who are challenging his intelligence are just showing pure ignorance.

Oh yes, because borrowing from the future has absolutely no consequences. And so what about putting future generations on the hook? They deserve it yes?