The Fed's Medicine Is Not an Instant Remedy

I was asked last night if the moves by the Fed would allow us to inflate our way out of the current stock market morass. The answer is yes, they probably will -- but not right away.

The current enthusiasm for stock prices by traders ignores just how bad earnings are going to be. The stock market anticipates the future, but right now we are ignoring the near-term future. January is going to be the most brutal earnings season of my lifetime and the stock market is going to trade down on the news in my opinion. I am still cautious on stocks, but I'm building a list of good cheap companies I want to buy when the selloff resumes.

The smart markets, bonds and the dollar are indicating an economy on the verge of collapse. The dollar had the largest one-day collapse against the euro since that currency was formed in the 1990s. Treasury prices are now at yields that are almost beyond imagination. Thirty-year loans to the U.S. return less than 3%.

At least some of this is based on discussions by Fed officials on the possibility of buying massive amounts of bonds, bills and notes to flood the market with cash. A lot of it, however, is the market's indication that the economy is not getting better anytime soon. Indeed, in the historic press release earlier this week, the Fed said that it would keep the 0 to 25 basis point target for some time.

The stock market, however, tried to squeeze in as many drinks in as possible before closing time on Wednesday. We have seen some signs of the inevitable hangover, but still many stock investors think the Fed's moves are the panacea to market woes and a bottom is in place.

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At the time of publication, Melvin was long CHY and short TLT, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.