Fed Decides To Taper
It has been in the news for some time now that the Fed would be putting the brakes on Quantitative Easing aka QE. Today the news was put out that the Fed in fact will cut its purchases of Treasuries and Mortgage Backed Securities. The total that the Fed has been purchasing between the two has been 85 billion a month. They announced that they will cut 10 billion dollars off of what they are purchasing each month which will leave a total of 75 billion. Obviously this is just a slight adjustment; they are playing a game of how not to piss off the stock markets and bond rates.
What they did to soften any market knee jerk reaction was to announce a concrete decision to maintain a target federal funds rate near zero well past the time that the unemployment rate declines below 6.5%. This was the “good” news to counter the “bad” news that the Fed will start to cut QE.
Granted, cutting only 10 billion off of the top of the QE program is rather miniscule and still very immaterial when you consider the entire cost of the QE program, the markets simply laughed it off. Initially, everyone heard that the Fed was tapering and we saw stocks pullback and when the reality of the situation fully set in that it was hardly a cut, the stock market bounced back significantly. The Dow right now as I’m typing this article is up 300 points and sitting over 16,100. I think most people did not expect this result when it was finally announced that the Fed would taper QE.
The takeaway is that the economy is still on life support and that the Federal Reserve, in the words of Ben Bernanke, provides “accommodative monetary policy.“
Where to focus your money in the midst of uncertainty and chaos?
When doing the survey, a great deal of you wanted to get more stock ideas and I wanted to let everyone know that I heard you clear and I want to share a stock idea with all of you that I believe is a great buy right now. This is not a volatile momentum play with fast moving appreciation and great downside potential. This is something that I am purchasing for the long-term and something that will be around many years to come.
The company is IBM. The price of the stock has been unfairly attacked in my opinion and is trading in a range that makes this a great time to accumulate this stock. The company has tons of cash on hand and reinvesting into an enormous amount of intellectual capital that will pay out big time with growth and dividends over the years.
Why is it undervalued?
Take a look at this chart that compares IBM to the S&P 500. Considering that 4 out of 5 blue chip stocks track the general market, IBM has come up a little short. If the situation was that the company did not have their financial house in order and their outlook was poor, I’d have to agree with the trend. But instead, what we have here in my opinion, is a true under-valued opportunity that I along with our members are able to capitalize on.
I plan on this stock being able to pay for what will likely be ridiculously unrealistic healthcare costs in my elderly years. God only knows how bad the system will be by then, but regardless, owning a great company that is undervalued will pay major dividends no matter how a person plans on spending their money.
Chief Editor of CrushTheStreet.com