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home : opinion : opinion

10/10/2012 2:16:00 PM Email this articlePrint this article 
Market update - September 2012

Brad Blackburn

As you probably know, Wall Street was closed for most of September due to the soul-crushing smoke that enveloped the whole world. However, that doesn't mean there wasn't exciting news to report. The incredibly big news of the month was the long-awaited release of the Apple IPhone version 5! I haven't been so excited since the finale of The Bachelorette. In fact, I was one of the losers that waited in line for days for my new IPhone. The best part was when I elbowed that little girl that cut in front of me. She had it coming.

Yes, everything I just wrote is completely untrue. Let's just move on to the two very big pieces of recent markets news.

After months of endless chattering, the European Central Bank (ECB) finally brought out the big guns. Throughout this entire crisis, the European leaders have made a habit of disappointing the markets. However, this was not one of those times. The ECB announced that they will use "unlimited" amounts of money to purchase the bonds of the troubled European countries (primarily Italy and Spain). The important word here is unlimited. This is truly a game-changer. The ultimate goal is to help Italy and Spain keep their borrowing costs low, which will allow them to continue to limp along into the future. While this solves exactly none of the underlying problems, it should buy plenty of time for Europe to try to grow its way out of this crisis.

This is huge news and a very positive omen for the stock market. The S&P 500 reacted by reaching its highest point since January of 2008.

But of course, it can never be that easy... As it turns out, the ECB isn't just going to start throwing around buckets of cash. Those troubled countries are going to have to beg. As distasteful as begging is, it gets worse. They'll also be forced to accept very strict spending rules (also known as austerity). Do you know what happens to politicians who beg for a bailout while drastically cutting government expenditures? They get fired.

As a result, not one European country has asked the ECB for help since the announcement. Does that mean this is much ado about nothing? I don't think so. The simple fact that the ECB is ready and willing to throw unlimited amounts of money to help any struggling European country makes an enormous statement. What investor in their right mind is going to bet against Italian or Spanish bonds when the ECB, with their unlimited cash, stands on the other side of the bet?

None of this means that Europe is headed for strong economic growth anytime soon. Robust growth is exactly what Europe needs, but it's hard to see where that growth will come from. However, the odds of a European meltdown have dropped dramatically. In my opinion, the European crisis has been the single biggest hurdle the markets and economy have had to overcome over the last two years. That hurdle just got much smaller.

Back here in America, the Fed may have just one-upped the ECB. Not only did the Fed commit to "QE3", their third round of Quantitative Easing (Quantitative Easing is the process of buying government bonds to keep interest rates low), but they said it's "open-ended," meaning they'll keep going as long as they darn well please. That sounds a lot like the ECB committing to "unlimited" bond buying. However, here in the USA, we like to go big. So, the Fed took it one step further, and committed to keeping interest rates low until mid-2015.

I've ranted against Fed action like this many times in the past, so this time I'm going to give you the other side. Remember that all that cash that American corporations are sitting on (most estimates say it's at least $2 trillion)? One reason they are still sitting on all that cash is that business decision-makers worry that as soon as the economy picks up real steam, the Fed will immediately start to raise rates. That would have the effect of slowing the economy, which isn't good for business. When the Fed says they'll keep rates low for another three years, they are telling businesses to turn off the TV, get off the couch and start putting that money to work.

While I have mixed feelings on the issue, the markets celebrated. The S&P 500 reached its highest level of the year while rising more than 2.5 percent over the four days after the announcement.

If you are a consistent reader of mine, you know that I've been expecting a drop in the markets sometime in the coming months. While I still think that is the most likely scenario, I have a little less conviction in that idea. While our economic news continues to be merely decent, the recent developments in Europe, along with QE3, are positive developments. It will be very interesting to see what the coming months bring.

Brad Blackburn, CFP®, is the owner of Blackburn Financial, Registered Investment Advisor. Blackburn Financial is located at 121 Cottage Ave, Cashmere. He can be reached at 509-782-2600 or email him at brad@blackburnfinancial.net



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