Fed and Interest rates.

The Fed

This is the HQ for the Federal Reserve System. The (Eccles) building speaks for itself, it is pretty austere and not particularly welcoming. There is absolutely no imagination here.  The Chair receives $199.700 per year, all other members about $20,000 less. The Fed is a private corporation, owned by a limited number of shareholders (like JP Morgan), who receive a statutory dividend of 6% of invested capital.

From the most recent meeting;

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate.

The dual mandate consists of maximum employment and stable prices. As you can see from the above “growth” is viewed as being synonymous with employment at least from a policy action point of view. We know that the stock market is also directly targeted.  The Fed is therefore basically responsible for prosperity and the continuation of the American dream. Essentially an impossible task, full of contradictions, which makes it all the more amazing that the general public actually believes that they will succeed while at the same time expressing their unwavering believe in the free-market capitalism. To add to this, there is no body of economic science that has been tried and found sufficiently true enough to be reliable to use as a guide. Decisions are accordingly made for the most part using the wet-finger method. Fed speak, if the truth be known, is not so much a deliberate attempt to obfuscate as it is simple the result of genuine groping in the dark. Read the entire minutes!

So QE3 is on it’s way, and just to help, China’s Central Bank also “injected” more liquidity. Will it work? Presumable “work” in this context would imply lower rates in the near future. Here is the US Gov. 10-year chart;

US 10year bond10-Year Treasury Constant Maturity Rate (DGS10) - FRED - St

For longer term reference we have added the St. Louis Fed’s 10 year constant maturity chart. The high was slightly above 15% and the low at 1.39%. Both , by the way , violate another mandate that the Fed. has, which is to keep interest rates at moderate levels, which can hardly be said for either Volcker or Greenspan/Bernanke rates. If you look at the 10 year chart you will see that interest rates actually rose by almost half a percent since July, which does not surprise us considering our expectation of a low back in June (June 7 under “interest rates”). BUT, because the chart has the unmistakeable signature of a diagonal,  we have to keep an open mind at least to the possibility of another, brief, low extreme. Wave 2 and 4 touch at 2.4% and for the past 10+ months interest rates haven’t done anything. A drop to the trend-line is still a possibility. Rates could reach about 1.1%. It is not something you want to trade on. After a new low, should it even occur, a fairly violent rise to 4% for starters should be expected thereafter.

AVL on T and QRM update

avl aug 21 2012qrm aug 2012

AVL is doing precisely as expected, it is now up about 30% since our last comments about a month or so ago. We expect at least a double but would add the following thought. Since QRM has not even started the process it has more potential upside and in all other respects the charts are pretty well similar. You can own both or sell one for the other. We do not know the fundamentals so do speak to your enlightened broker who will no doubt tell you what the best course of action is.

The counts shown are not precise, the main thing is the triangle that both stocks sport.

More DJIA

djia aug 21 2012

A few more thoughts concerning the DOW. The top in 1999 would have seem quite appropriate considering the run up during the 10 or so years preceding it. However if you take the DOW Transports, the top is better placed in 2007. That leg up from 7000 to 14000 can, in my opinion, be counted just as easily as 3 waves or 5 waves. The dive back down in 08,09 is best counted as  3 waves but again it could also be viewed as 5. Consequently the entire structure from 1999 to the start of 2009 could be viewed as a completed correction, an irregular a-b-c. In fact this possibility was rejected by the Prechter people not on grounds related to the structure per se, but on other metrics such as sentiment etc. If that were the case the next leg up could be a wave 5 and should unfold in 5 separate waves. Again the leg up from the 2009 lows can be counted either way, as a 3 or a 5.  At 13000 it is already well above the peak of what would then have to be wave 3 at about 12000. The higher top in 2009 is irregular, so it does not count (I think).

Some would argue that the whole structure over the past 13 or so years is one single pattern,  see for instance Robert D. McHugh, who has dubbed this pattern the “jaws of death”. There is a guest part on his website that is freely available under;  https://www.technicalindicatorindex.com/subscribers/guest-articles/McHugh%27s%20Article%20Jaws%20of%20Death%20February%2017th%2C%202012.pdf

This particular pattern does not, to my knowledge, exist in the standard EW repertoire  even though similar results may be obtained by combining two separate pattern, as I have done with a wave 4, irregular a-b-c and a 5th wave. In more detail it looks like this;

djia jul 2012 sdjia aug 21 s 2012

On the left we still show the rise from the 2009 low as a B-wave. Which fits rather nicely given that the C and A legs are just about vector equal AND we are about to hit the trend line. The pattern over the past two years or so is a rising wedge that is pretty well text-book, including alternation. This wedge could be either a C or a 5th wave. The target is around 13600, which, at the present pace of roughly 400 points a month could be reached any time now but certainly no later than the end of September. In the mean time the NYSE is behaving according to script. This could, of course change;

nya aug 2012