What QE2 Means for Stocks
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Well, you got to give Ben Bernanke credit. He delivered exactly what the market expected. And stocks neither ramped nor sold off.


Interestingly, no other country responded with any stimulus/currency debasing of its own. Instead, England kept its policy the same as inflation there continues to run around 3%.


The U.S. doesn’t have that problem. Yet...


But what will happen when the U.S. economy finally turns and starts showing some real growth and inflation? Will the Fed be able to hit the brakes when the time comes?


History would suggest that no, the Fed will not be able to move when the time is right. Former Fed Chief Alan Greenspan certainly left rates too low for too long. There's no reason to think Bernanke won't do the same thing...


And this is exactly why, a couple months ago, when economic growth took a nosedive in July and August, I was advocating bullish talk on the economy from the Fed instead of more quantitative easing.


But Mr. Bernanke still won't take my calls...


I received this letter form George A:


I disagree with your desire for weakened dollar in order to increase stock prices. While increasing stock prices may make you look like a hero to your subscribers, the reality is that lots of money printing that reduces the value of every dollar in your pocket does not make you richer, it makes you poorer (look at the value of each dollar you own over the last 2 months for proof of that). As for inflation, it is real and it is happening now – fedex and ups just announced 5% increases in rates starting in january, if you have bought a box of cereal in the last 6 months you will notice 1) it is more expensive by 10-25 cents and the boxes are thinner (they think they are tricking us by not making the box shorter, but a thinner box really does hold less cereal than a thicker one).


Bernanke’s tactics will only make us poorer in the end, regardless of what spin he, Washington, and the media want to put on it.


I have never once advocated dollar debasement as a way to improve the U.S. economy. I am a realist, not a hero. It's my job, as I see it, to advise individual investors on how they can make money in the stock market.


When I see stocks that I like, such as Brigham Exploration (Nasdaq:BEXP) or Citigroup (NYSE:C), I tell you.


When I see market conditions that can help investors make money, like I have been seeing since August 31, I tell you.


Again, I may not agree with Fed policy, but I'm damned sure not going to sit around and cry in my beer about it. Instead, I'm going to make money off it. It is our responsibility to have our profits outpace inflation.


As for the thinner cereal box, yeah, they sure don't make like they used to. But seriously, that seems like good business to me. Less packaging material means decrease costs.


And I think I noted yesterday that we are seeing price inflation for goods (like food) that must be shipped as companies pass on higher oil costs to consumers. That goes for UPS and FedEx as well.


My man Jason Cimpl provided his TradeMaster Daily Stock Alerts subscribers with a great explanation of the Fed's actions and intentions in his pre-market piece today titled It's a Bird, It's a Plane, No It's Helicopter Ben...


"Curiously, the bond purchases are mostly weighted to the front and middle of the yield curve. With 3-6 years being the "gravy" rate range. Quantitative easing is a way for the central bank to boost the economy by driving down long-term interest rates when short-term rates are already at zero. The Fed showed no interest in supporting long term rates in its second round of quantitative easing.


The steep yield curve created by this methodology may not help its intended target, which are those looking to acquire or adjust a mortgage. Instead, the approach supports risk taking behavior and encourages funds to be plowed into other assets besides bonds. Doing so pumps up asset prices and builds a wealth effect for the public in order to increase employment and consumer spending.


Far be it for me to "play" the economist, but this program could be more meaningful if combined with another stimulus strategy created to boost capital demand."


Pay particular attention to Jason's observation that the Fed is not targeting mortgage rates, but rather, asset and equity prices.


Also notice that the long-bond, as measured by the iShares Barclays 20+ Year Treasury Bond ETF (TLT) was absolutely hammered yesterday after the Fed's announcement.


Finally, gold is roaring higher this morning, up around 3% or $40 an ounce.


I also mentioned bank stocks as my "canaries in the coalmine." By attacking short term interest rates, the Fed is clearly helping the banks. They should rally nicely.


It is appropriate to start asking "where do we go from here." Clearly the Fed is trying to make the investment pool as inviting as possible. And that should lead to more gains in the medium-term.


But we also need to be aware that the stakes are higher now. The potential for inflation, policy failure or some other shock to the financial system is now magnified.


It's tempting to throw some price targets for the indices out there. And it would be prudent to keep an eye on 1,220 on the S&P 500. But the Nasdaq is already at a post-recession high and the Dow Industrials is within 100 points of one.


So instead of targeting a specific index level as a turning point, let's be aware of the potential threats. A surprise jump in inflation would be a big one. I'll start digging into others for tomorrow...


As always, I want to hear your thoughts. I'll even print them. Write me here: [email protected]

Posted 11-04-2010 3:50 PM by Ian Wyatt
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