Here's an article by Roger Arnold from Realmoney.com about today's fed move. I'm by no means an expert in this kind of stuff but it's an interesting take as opposed to the consensus fed bashing that I see out there
"The Federal Reserve's announcement Thursday that it will purchase $40 billion of mortgage-backed securities on a monthly basis was a brilliant move. This is not just QE3; it's the beginning of QEX.
The Fed has essentially stepped into the breach in the banking and mortgage markets and promised to become the dominant buyer of mortgages. This move is not about mortgage rates; it's about liquidity for the banks. This has had immediate impact on Wells Fargo (WFC) and Bank of America (BAC) because they are the dominant mortgage originators.
Since the subprime crisis of 2008, the mortgage market has been in disarray. No matter how low mortgage rates have been pushed to stimulate bank lending, the effort has been thwarted by concerns about the potential liabilities of making and holding mortgages. The mortgage market is essentially a game of hot potato where banks originate loans and then repackage them into bonds to sell to investors. The key is not holding the loans and not having the loans put back after the sale for some underwriting mistake.
Since 2008, though, banks have been reticent to move back into the mortgage origination market for fear of opaque Dodd-Frank rules, Fannie and Freddie putbacks of previously originated mortgages, potential actions by the Consumer Financial Protection Bureau and the Federal Housing Finance Agency, as well as more legislation from Congress. These issues have spooked everyone involved down the chain of mortgage origination, including buyers of the bonds.
For the mortgage market to be healthy there has to be liquidity, and that is predicated by two primary events on either end of the mortgage market: demand for mortgages by homebuyers and investor demand for bonds backed by those mortgages. Everything else involves the mechanics of meeting those two demands at either end of the mortgage-industry spectrum. The relationship between these two kinds of demand and liquidity in the market is synergistic and symbiotic. Both are necessary for the mortgage market to function.
Up until today, the Fed's actions have been focused on the cost of capital and getting mortgage rates down to stimulate homebuyer activity. But these buyers have then run into obstacles in loan underwriting. Lenders have made qualifying for a mortgage difficult because of fear of regulators and because demand for mortgage-backed securities was low. The lenders did not want to originate loans they couldn't sell, and bond buyers didn't want to buy bonds in an illiquid market.
Today, the Fed has single-handedly alleviated both fears by stepping up to be the dominant buyer of mortgages. This is going to allow the banks to start becoming less restrictive with loan-underwriting criteria because they know they have a buyer for the mortgages. It will also pull the sidelined bond buyers in because they know they have the Fed to provide the liquidity. The increase in demand and liquidity of mortgage-backed securities will drive down mortgage spreads to treasuries, which will drag mortgage rates down by 0.25% to 0.50% from current levels, and maybe more.
A working mortgage market sets the stage for the beginning of a recovery in housing and the economy. Once under way, that will allow the banks to address residual issues with nonperforming loans and real estate owned (REO)."
Wow, this sounds like serious shit. We all know that housing in the US has been a drag on the economy and given the recent signs of life in housing, this plan by Bernanke to jump start the mortgage market is perfectly timed. Now, I'm by no means an expert in the housing or mortgage situation and like I said I'm sure you can find plenty of pundits who will dismiss this recent move by Bernanke. I'm not going to hang my hat on the potential benefits of QE3 like Arnold claims in the above article...I just thought it was an interesting and refreshing for once to see a bullish perspective on Bernanke's action.
Have you noticed how so many stock market "traders" hate Bernanke? I saw a post today on the message boards that said "I hope Ben get's hanged". Wow. One thing I commonly see are criticisms of Bernake for punishing savers and causing commodities inflation. All of this hate is not due to "moral hazzard" concerns it's due to one thing: sour grapes for losing money shorting the market or being on the sidelines missing out. Anyone who traders/invests in the market does so for one reason: making money and so why are so many traders on message boards griping about what interest rate savers are getting? It's just pathetic sour grapes for getting their asses handed to them. And far as commodity inflation goes, if you're so damn critical about Bernanke's policies why don't you load up on commodity stocks and make money instead of whining? STFU already. The bottom line is this...if most people were making money with this rising market (as what's normally supposed to happen but not anymore because we're in bizzaro world) you would not see such complaining and hatred towards the fed. The truth is, so many people, the majority it seems, have bought into the zerohedge doomsday propaganda both financially and intellectually and their wallets and egos have been wounded big time for this sheep-like behavior much like they were in the late 90's when they bought into the "new era" hype.
I'll be the first to admit that I haven't correctly called every up and down in this market but I have played the long side exclusively since the summer of 2009 because I refuse to be on the same side as these pathetic whiners who wake up everyday hoping for the end of the world just so they don't feel so bad about their miserable existence. I know that these losers can't be right and so that means doing the opposite of them is the correct play and it has been. But having said this, I'm still willing to play the short side now instead of just going to cash as a defensive measure. I will only do so however if conditions are ideal...when in doubt I will simply raise cash if I have concerns. I am also very aware that my great hostility toward these loser bears tonight could be a ST contrarian indicator! lol! Well, I have no problem fading myself....I've done so before!
As far as the market goes, when it makes a surge to a fresh multi-year high like this, you tend to see further ST upside even when it gets ST overbought. I will never short a market that makes a fresh 52 week high yet a multi-year one no matter how tempting. One of the things I wrote in my "trading bible" is this "a market that makes a fresh 52 week high/low is a powerful signal and will likely keep making new highs/lows." I realize that chasing the market after a move like this is difficult to do and if you refuse to that's fair enough, but don't short it either.
I found it interesting how coming into today's session sentiment showed NAAIM reducing their long exposure a bit while AAII still remained neutral. That to me indicated that there was still room for more upside and boy did we get it! As far as my decision towards hwo.to goes, I decided to pull the trigger and buy more and did so in the morning at 1.75. I'm confident enough in the company to be very overweight the stock and I figured given today's sentiment readings the market was at least another week or 2 away from making any kind of ST/IT peak. I may very well end up hedging my longs in the in the next 1-2 weeks though.
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