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Feds 'Twist' draws skeptics

06/21/2012 @ 6:50am

Overnight action: Lawmakers push for IPO revamp; J&J nears settlement with DOJ; China manufacturing slows.

Watch for: Weekly jobless claims (8:30 a.m. Eastern Time): Seen down 1,000 to 385,000. Flash PMI reports for Germany and the euro zone. May existing home sales (10:00): Seen down 1.1% from April. Philadelphia Fed manufacturing survey (10:00): Seen at zero, up from -5.8. EIA weekly natural gas report. ConAgra, Rite Aid and CarMax are among companies reporting quarterly results.

The Breakfast Briefing

Investors have been waiting three long weeks for Big Ben to ride to the rescue.

The Dow has risen 3.5% this month despite the tumult in Europe, the slowing domestic economy and the worrying economic signs out of China. This month's rally has largely hinged on Fed Chairman Ben Bernanke taking action to boost economic growth.

As Bernanke's big day came and went, investors are left with the same questions they had leading up to the Fed's two-day meeting. Does the central bank have enough ammo left in its arsenal to juice the economy?

The Fed's extension of "Operation Twist" was greeted with a mixed reaction on Wall Street. The Dow crossed zero 48 times during yesterday's session before finishing down 13 points, not exactly a ringing endorsement for the central bank's latest move.

"Extending Twist is likely to be fraught with operational issues," says Tom Porcelli, chief U.S. economist at RBC Capital Markets. "But it does buy the Fed some time in terms of having to deploy the nuclear option of unsterilized asset purchases."

Over at the High Frequency Economics, the economists had an even dimmer view. Twist, in their opinion, "will do very little to boost growth, but the Fed clearly wants to be seen doing something."

If Twisting through the remainder of 2012 won't solve those issues, stocks could be in for a rough summer. The Fed slashed its economic forecasts. It now expects weaker growth, higher unemployment and softer inflation than previously anticipated.

"The markets are beginning to doubt the remaining impact the Fed can have," said Michael Farr, president of portfolio-management firm Farr, Miller & Washington. "The dependence on the Fed has become way too severe."

The Fed's efforts to spur the recovery throughout the last three years have been reflected in rising asset prices, but whether the impacts of QE1, QE2 and Twist have trickled down into the economy are debatable.

And if investors truly start doubting the Fed's ability to keep the economy growing, stocks could get slammed.

To be sure, the Fed still has yet to unleash its big QE3 bazooka, which could be its last-ditch effort at spurring growth.

But with interest rates already at rock-bottom levels, the impact of another massive bond-buying program is debatable.

"It's time for this market to stand on its own two feet," says Uri Landesman, president of Platinum Partners, a New York hedge fund.

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