The reflation trade is back. That is the Fed's message. And it has major implications for stocks.
With interest rates near zero, and the Fed making plenty of money available, it should be stimulating the economy, but it isnt. That's because those who matter--the banks and consumer--choose to hoard the money instead of lending or spending.
What to do? The classic way out is to reflate the economy. When there is moderate inflation, there is less inclination to stay in cash. That is what the Fed is trying to do.
The Fed has said they will do anything they need to do. Traders are taking this as open acknowledgement they will be printing money. So traders are buying commodity stocks on the reflation trade: gold, coal, metals, steel.
Insurance stocks like MetLife and Prudential were strong as well --as insurance companies own a ton of paper and physical real estate, which will be helped by the Fed's actions.
No more guidance! Start of a trend? Our parent company, General Electric, has reaffirmed its 2008 guidance, but perhaps more importantly they have announced they will no longer be providing quarterly guidance.
The GOOD NEWS is that it will free the company from the shackles of estimating earnings and revenue when it has become increasingly difficult to do so, and may make managers less obsessed with meeting quarterly targets.
The BAD NEWS is that analysts (and the media) will have a tougher time keeping a "scorecard" of a company's performance. After all, if a team doesn't play the game, how can we know exactly if they are winning or losing? Those in favor of eliminating guidance argue that GE will certainly continue to provide some kind of update on trends impacting their businesses.
This topic will be hotly debated on CNBC and in the financial media in the future, since it is likely GE's stance will make it easier for other companies to abandon guidance as well.
True, GE isn't the first: McDonald's famously abandoned guidance in 2003, as did Coca-Cola in 2004, and Dell has also abandoned guidance. But given the economic news, this may be the start of a trend.
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