allow its members to accumulate and distribute stock for tax purposes.
Interest Rates
It might interest you to know that it is the New York Federal Reserve System that determines the monetary policy of the Fed. They have their meetings and then the Fed takes its action. Interest rates are one of the specialist’s most important tools. When specialists are rallying stocks to their all time highs interest rates are kept at their lows.
The best possible news for investors would be for the Fed to raise rates. The public has been lead to believe high rates diminish borrowing and investment, which impacts output. A case in point is yesterday’s, (08/17/07), market activity caused by the Fed’s actions. The market opened flat and when the Fed announced it’s actions specialists rallied the market up 314 points in the first hour of trading. The Fed’s action of lowering the Discount rate by ½ point to 5.75% has absolutely no effect on investors. It is money that the Fed loans to the Banking industry, not the public.
The reason for this is simple. It causes investors to leave the safety of their money market instruments, which are at their lows, and forces investors into the market to buy stocks at or near their highs. Conversely, when stock prices are being dropped to there low, rates will be high. When investors see this they leave the risk of the stock market for the guaranteed safety of the Cash instrument market. As rates rise the market tends to rally.
The reason the market was rallied sharply was very simple. It was done so that specialists could unload massive amounts of stock back to the public and institutions, which they have accumulated over the last five weeks of declining stock prices before again moving stock prices dramatically, lower for their final accumulation purposes. It would make absolutely no sense for them to continue lower with the entire inventory that they picked up at higher stock prices. They would be loosing money on every point that their collective stocks decline. They only want to accumulate stock for their personal investing accounts at the markets/stocks lows.
The nations most highly regarded economists have failed to note the link between interest rates and the movement of stock prices. Yet of all the restraints upon investor’s ability to think intelligently about whether they want to buy or sell stock, the most remarkable testimonial to the tenacity of traditional thinking is that investors have unthinkingly accepted the proposition that the movement of rates determines the movement of stock prices.
To prove my point I will give you two examples to drawn your own conclusions from:
Because rising rates are always accompanied by suddenly declining prices, it seems self-evident to investors that when they see rising rates that they should sell stock. Since declining rates invariably accompany advancing prices and therefore appear to be constructive, when investors see declining rates, they move out of cash instruments and into the markets. No one has ever drawn out the connections between the exchanges use of rates to
1)
In 1982 when Ronald Regan was President and Paul Volker was head of the Federal Reserve interest rates were nearing 17 percent. The economy was in shreds, but the stock market was at an all time high. Conversely, in 1994 when interest rates had been lowered to 3 ½ percent to stimulate the economy the stock market was mired in the middle of an 18 month “ Bear Market ”. 44
2)
Alan Greenspan began raising rates from that 3 ½ percent low to a 9 percent high in February 1995. This effectively moved investors out of the market and back into cash instruments as stock prices were beginning to be advanced. This was the start of a seven-year “ Bull Market” This article was written by: Richard W. Wendling Any comments and questions should be sent to:
[email protected]
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