Yesterday, the Dow was up 60-80 points all day, expecting to hear good news when Fed Head Ben Bernanke spoke at 3:45 PM.  As he started to speak, the stock market started to drop, finally losing 19 points for the day.  So, what happened?  What did he say?

First, he confirmed the U.S. economy has slowed down.  Did anybody not already know that?

Second, he confirmed that QE2 would end this month.  While everybody also knew that, the market was hoping for more, to maintain its current “sugar high”.  Analysts and pundits publicly agree that quantitative easing must end, but privately are afraid of what happens then.

Third, he confirmed interest rates would remain low.  That might be a little “newsy,” because the European Central Banks is expected to raise interest rates in Europe soon, perhaps as early as Thursday.  This should cause the dollar to lose value against the Euro.  This is good for the U.S. and bad for Europe, where the expensive Euro is hurting their exports badly.

So, why did the Dow lose almost 100 points during the day?  Because speculators were betting on QE3.  That’s all . . . just betting . . . not investing.  If Bernanke had said they were considering another round of quantitative easing, the stock market would have jumped, and the speculators would have profited.  They ignored the expected benefits from a falling dollar, focusing on the ‘sugar” of quantitative easing.

As much as I hate the confusion caused by speculators, they do provide additional liquidity to the market.    Unfortunately, Bernanke has no control over them.  He was doing his job, trying to keep the economy moving and the market informed.  The speculators were doing their job, making bets.  And, investors got whip-sawed . . . again.