Stocks continued recovering some of the ground lost this year, boosted by the Federal Reserve’s Open Market Committee’s decision to purchase up to $300 billion in long-term government debt, and up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year.

  

The iShares Barclays TIPS ETF, an index of Treasury securities that offer inflation protection, has also gone up nearly 4 percent after the FOMC decision was made public, portending the sharply changed market expectation towards inflation. Gold had also jumped.

  

More details on the long-awaited plan to deal with the illiquid assets were revealed this week. The public-private partnership the plan relies on private sector participation to be successful, with the Treasury providing 50 percent of the equity funding on a 6-to-1 leveraged basis and the fund manager having full secretion in making investment decisions. While we remain somewhat skeptical that current business environment is susceptible for private enterprises to become actively involved. Time will tell. The government itself does take on most of the downside risk in the transaction; however, it may end up needing much more money for this than the currently allocated $100 billion.

 

On a truly positive side, it seems that the economy has slowly begun to recover. Home sales in February unexpectedly climbed, although the 5.1 percent increase was partially due to sales of foreclosed homes. New home sales have also risen more than forecast, remaining, however, at an extremely depressed level. Nevertheless, the lowest mortgage rates and the highest housing affordability in at least 40 years, as well as significantly lower prices, are all working toward bringing new buyers to the housing market.

 

Orders for durable goods, another economic health indicator, unexpectedly rose last month, reflecting demand for machinery, computer and defense equipment. The gain of 3.4 percent was the first such increase in seven month, and the biggest in more than a year.

 

If the money from the new plan will actually flow to the banks, and if they become more willing to lend, businesses and consumers would finally have easier credit access, leading to job creation and better consumer confidence, which would effectively lead to more job creation and increased consumer spending.

 

Until Next Time,

Your ETF Trader Team