The Fed stated it would buy the bonds of “fallen angel” - companies that got downgraded from investment grade to junk.
Why does it matter? In short, by buying junk bonds, the Fed is allowing companies to issue debt thereby adding fresh cash to their balance sheet in order to stave off losses. One more step farther down the capital structure, and the Fed will buy buying stocks outright.
The Fed adds municiple bonds to assets it can purchase.
Why does it matter? In one word - Taxes. State and local governments cannot issue more currency. This requires them to somewhat run fiscally balanced budgets. To make up for shortfalls, they can either raises taxes on its citizens (further impairing the economy), or issue debt. Just like the junk bond corporates, purchases by the Fed are giving states and local government an easy out. Issue more debt.
Both of these are positives for the stock market at least in the short term. At some point, the mountain of debt that is building up in the Fed's balance sheet will have to be reckoned with. When, however, is anyone's guess.
On a relatively "minor" note, a mere $250B of additional funding for small businesses are being held up once again. Small-Business Aid Stalls in Senate as Democrats Demand More Funds. No doubt this is the current political football of the day.
The market itself is still sitting right in the technical resistance zone, where I advocate being more defensive. If the market indeed is going to rally farther (and who knows what the multi trillions of dollars of liquidity can do), it's going to at least have to base for a period. (a correction of time, not price)
To add to this, I want to go back to the forgotten 6.6M jobless claims. While jobs are often viewed as a laggin market indicator, I can't stress enough how important jobs actually are for the stock market. Below is a chart of the unemployment rate overlayed with the market, clearly showing the importance of jobs to the stock market. While we have known for weeks now, that this number was going to spike hard, its worth comparing to the 2001 and 2008 recessions.
What is indeed different this time (vs 01 and 08), is that the Fed is not only acting quickly, it appears to actually be ahead of the curve - almost as if its actively on the hunt for any liquidity problems in any part of the financial system. Will that make things different this time? Actually yes, but its the degree to which it does, that cant be foreseen. With respect to trading and investing, I have to assume we are in a bear market as delinated by the fresh new highs in unemployment - with no end in sight as of yet.
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RiskManager Jeff
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