When the Fed Floods, MoMo Runs

When the Fed floods the system with liquidity, or executes some other transaction to reduce risk in the financial system, the primary beneficiary is not the industry targeted by the Fed.  Rather, the biggest winners are the hottest sectors, both prior and after the Fed's actions.

For example, when Easy Al took interest rates down to 1% and held them there for a very long time, it did not stop the Nasdaq from falling 77%.  Instead, the liquidity flowed into housing, bonds, commodities and various other asset classes.

This financial truism reasserted itself in the Fed's actions from September to March, culminating in the bail-out of Bear Stearns, all done to reduce systematic risk in the financial system. 

For certain, spreads have come in for credit products, though the cash market is still broken and borrowing from the Fed's various facilities have accelerated for the commercial banks.  However, consider the performance of the stocks for the following companies since the end of March

AIG -17%
Citigroup (ticker C) 1%
Bank of America (BAC) -11%
Lehman (LEH) -10%
Wachovia Bank (WB) -12%

In fact, the KBW Bank Index (BKX) is down 5% during that time.  Remember, the Fed was acting to avert a crisis in the financial system.

Now take a look at the performance of a few momentum favourites during those same two months.

Apple (AAPL) 30%
Google (GOOG) 31%
Potash Corporation of Saskatchewan (POT) 31%

The genesis of this post was the performance of the coal industry, of which there are a couple hundred years of known supply of coal in the United States.  This is the performance of various coal stocks over those same two months.

Arch Coal (ACI) 56%
Consol Energy (CNX) 49%
Massey Energy (MEE) 94%
Patriot Coal (PCX)  155%
Peabody Energy (BTU) 52%
Walter Industries (54%)

The biggest beneficiaries of the Fed's actions have been the hottest sectors. 

I own shares in Patriot Coal.

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