Tags: Horwitz | Fed | Easing | Companies

Todd Horwitz: Fed Easing Isn’t Helping Smaller Companies

Thursday, 26 Jul 2012 01:32 PM

By Forrest Jones and John Bachman

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Market talk that the Federal Reserve is preparing to stimulate the economy with credit easing tools has been growing, but more such tactics won't do much for the struggling economic recovery, one financial expert says.

The Fed has twice intervened to jolt the economy with a monetary policy tool know as quantitative easing, under which the Fed buys assets like Treasurys or mortgage-backed securities held by banks, injecting the economy full of liquidity in the process that weakens the dollar, pumps up stock prices and pushes down interest rates to spur recovery.

A third round won't work in that the liquidity fails to reach smaller companies, the ones that need it most, Todd Horwitz, chief strategist at Adam Mesh Trading Group, told Newsmax.TV in an exclusive interview.

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"The mid-cap companies, the smaller-caps are having trouble borrowing money, which makes it hard for them to succeed, which makes it hard for them to add on new jobs, because the truth of it is, the Russell 2000, the 2,000 small-cap companies, those are the companies that run this country," Horwitz said.

"Those are the ones that do the most amount of employing , those are the ones that borrow the money, those are the ones that do everything , and because of the lack of liquidity that we have because banks are not willing to loan to them right now for payroll, for inventory for all those other reasons, those companies are struggling."

The Russell 2000 is the only index that failed to hit a new high this year during recent rallies, and has also led the direction on our way down, Horwitz pointed out.

Stock prices have risen in recent years, often buoyed by Fed tools.

A first round of quantitative easing saw the Fed buy $1.7 trillion mortgage-backed securities from banks just after the downturn a few years ago, while a second round involved purchases of $600 billion in Treasuries, which wrapped up in June of 2011.

Fed officials have repeatedly said they would be willing to support more stimulus provided the economy deteriorates.

As a side effect, stock prices rise and so do inflationary pressures.

Monthly jobs reports have repeatedly failed to meet expectations recently while sales and confidence indices have disappointed as well, prompting calls for action.

Still, Fed intervention isn't what the country really needs, especially when interest rates eventually do rise in an economy brimming with dollars.

"What we’re doing now is with the Fed intervening, we’re getting too much artificial information and we’re getting artificial rallies in our market and I think we’re in a very dangerous spot right now because really what I think the Fed is doing is they’re borrowing tomorrow’s dollars today," Horwitz said.

"It’s kind of like Wimpy in the old Popeye cartoons: 'I’ll gladly pay for a hamburger tomorrow if you give me one today' and I think that’s what we’re trying to do. If something happens here, if the markets are demanding higher interest rates, there’s going to be a problem because all this debt has to be paid back and it will have to paid back at a higher rate."

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Turning to commodities, Horwitz warned that soaring corn and other grains may be due for a correction.

Corn has risen 46 percent since June thanks to a crippling drought, which has decimated crop yields and sent prices climbing on supply concerns.

Prices tend to spike under such scenarios but they often taper off once markets have time to digest pricing.

"We need a little more information here technically but I would look for an opportunity to get short the commodity markets here. I think they are overdone. They have what we call a short-squeeze, they had a parabolic rise and if weather goes back to normal, I believe that we are going to have a major sell-off," Horwitz said.

"I think we can go up another 6-7 percent, and I think we can go down 30 percent."

Gold, meanwhile, has soared under Fed intervention, since the precious metal often trades inversely from the dollar, which weakens when monetary authorities loosen policy.

Future Fed action won't necessarily mean gold is due for more gains, as the metal is taking on a life of its own as opposed to its historical role as a hedge to a weaker dollar.

"I think gold is in a dramatic down trend. As we’ve seen the last couple times the Fed has got themselves involved and talked about doing something, gold has gotten hammered subsequently afterwards," Horwitz said.

Gold prices hit a record high $1,923.70 an ounce last year but today are trading around $1,600 an ounce today.

"Gold itself I believe to be in a major down trend and looking to go probably at least down in the $1400s before we might start to see some rally again and I think it goes there no matter what the Fed does here."

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