Now Wall Street is Starting to Question Operation Twist

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Some have said that
Operation Twist is already a failure,
based on the initial reaction since Federal Reserve Chairman Ben Bernanke and the rest of the FOMC announced the program. Now even those on Wall Street is questioning it. Brian Sozzi of Wall Street Strategies was out with a
note
discussing Operation Twist this morning and whether it actually was worth it. In his note, Sozzi writes, "...the Fed's uber hyped Operation Twist, in addition to the accompanying language, was very poorly received by the market. While the language was a clear downgrade of the economy following a downgrade on the August 9 meeting, the actual Twist itself will hamper the returns of pensions (among other domino effects) at the same time little incentive exists to save compliments of rock bottom interest rates." Sozzi goes on his note to talk about how the Federal Reserve downgraded the potential of the U.S. economy at the August 9 FOMC meeting. In response to the economic weakness, the Fed announced it would be keeping its federal funds rate at current levels at least through mid-2013. This is the first time the Federal Reserve ever explicitly told the markets how long it would keep the rates at current levels for. He also talks about how the markets are now readjusting to slower economic growth, as the Federal Reserve said economic growth "remains slow". This was the first negative from the FOMC. The second negative was the fact that the Federal Reserve acknowledged "significant" downside risks to the economic outlook. Sozzi implies that despite all the Fed has done, it has not been able to save the U.S. economy from potentially weakening further, and that the Fed might be out of bullets. We all know that the Federal Reserve can not save the U.S. economy alone, it needs the help of Congress. There does not appear to be any appetite however from the right to increase spending. They went so far as to even try to
put some pressure
on Bernanke and the rest of the FOMC prior to the Operation Twist announcement, saying that it only hurt confidence. After two rounds of quantitative easing totaling almost $2.5 trillion, the U.S. economy does not appear to be any better off then it was back in March 2009. We will never know how the U.S. economy would have ended up without QE1 and QE2, but many suspect it would not look much different. The Federal Reserve has two mandates: price stability by keeping inflation in check, and maximizing employment. The Federal Reserve is doing all it can to maximize employment, but this is a fiscal policy issue, not monetary policy. With the $400 billion in purchases that Operation Twist is enacting, it will actually hurt more than it help, according to Sozzi. He writes, "...the actual Twist itself will hamper the returns of pensions (among other domino effects) at the same time little incentive exists to save compliments of rock bottom interest rates." Even though Bernanke gave Wall Street what it wanted in the form of Operation Twist, it may have been the wrong action to take this time. The old adage "Do as I say, not as I do" may have never been more appropriate at the corner of Wall Street.
ACTION ITEMS:

Bullish:
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Traders who believe that Operation Twist will actually work might want to consider the following trades:

  • This could be beneficial for technology firms, like Apple AAPL and Baidu BIDU.
Bearish:
Traders who believe that Operation Twist will fail may consider alternate positions:

  • Operation twist will invert the yield curve, making it even harder for banks to generate loans, and could cut into their profitability. Consider shorting names like Bank of America BAC, J.P. Morgan JPM and Wells Fargo WFC.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.
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Posted In: Long IdeasShort IdeasTrading IdeasBrian SozziWall Street Strategies
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