"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey
Yesterday, in an unprecedented move, the Fed announced it would provide its primary dealers with $200 billion to lend to financial firms by using their high-grade mortgage securities as collateral.
Since no one really knows what a high-grade mortgage security is nowadays, lets just call it what it is, a good old fashion bailout.
In addition, the Fed also increased swaps with the European Central Bank, and the Swiss National Bank, to make more U.S. dollars available to European banks.
What all of this is telling us is a remedy for the current credit crisis is appearing. Sure, there will be more scary moments down the road, but the Feds main focus continues to be bailing out major banks, and Wall Street brokers.
Of course, while this plan is unfolding, inflation pressures are increasing for commodities, raw materials, natural resources, food and energy.
Investors are very aware that once a solution to the credit crunch is achieved, the Fed will begin to target inflation. They will come to the rescue of the dollar by raising interest rates once the all-clear signal is sounded.
Here is the double-edged sword to the inflation problem. The dollar may rally, energy prices and raw material prices may decline, but the costs of goods and services will remain high. Simply put, once your plumber, electrician, or favorite restaurant raises their prices, when inflation subsides, their price increases will not.
I have spoken with many business owners who told me they had to raise prices because of increased energy and raw material costs. I asked, "when the price of energy and raw materials declines, are you going to lower your prices?” Some said, "No"; the others said "Are you kidding me?"
Inflation, once it subsides is actually good for business and stocks. Publicly traded companies that raise prices because of increased costs are more profitable if they can maintain their price increases once costs subside.
Inflationary periods can add to a company’s growth and margin expansion once costs come back down to historical levels.
Downgrade Them at the Bottom
In classic Wall Street fashion, analysts are famous for downgrading stocks when they become obvious bargains.
Today, Credit Suisse lowered its price target on Wachovia Bank (WB) to $23 from $30.
I have always looked at analysts as the ultimate contrarian indicator. Here's how these clowns think. When a stock is performing poorly, they get more negative.
Many of the analysts today were not even born prior to the 1973-74 recessions. They wouldn't know a recession if it jumped up and bit them in the butt.
Most analysts have very high IQ's, and graduated from a top business school, which usually translates into a severe lack of common sense. They love glamour stocks that are severely overvalued, and trade with high momentum, high growth, and high volume.
Investors who hang on every word that comes out of an analysts mouth, and is spread through the airwaves on the financial channels need to remember that "real investors" like Warren Buffett do not listen to analysts opinions. I take that back, they may listen, and then do the opposite of what they say.
Value investors like Buffett know that it is difficult to know when a value stock has bottomed. Instead, he focuses on buying stocks in dominant companies when its long term growth-rate has been mis-priced by a short term event.
When quality stocks overreact to bad news, analysts portray that bad news as permanent when in reality the news is only temporary. Analysts are notorious for downgrading a stock after the bad news is already priced in.
In my many years in this business, the analysts rating methodology hasn't changed;
Buy means Sell
Sell means Buy
Downgrade means Accumulate
Upgrade means Hold
Hold or Neutral means they don't have a clue
