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To QE3 or Not to QE3
To QE3 or Not to QE3
Excerpt from the Week Ahead Section of Stock World Weekly
After four weeks of declines in equity prices, it’s natural to wonder which way stocks are headed. There is great uncertainty surrounding the Eurozone’s ability to contain, let alone solve, its “Black Debt” crisis, and economic indicators from the U.S. have been very disappointing. This week’s Philly Fed report was dismal. Eric Green, economist at TD Securities, described it as “exceptionally weak, almost macabre.” (Philly Fed report evokes dark images from economist) When major analysts describe the markets using terms commonly found in the nightmarish parts of H.P. Lovecraft stories, investors become skittish.
Some respond with anger. “They’re mad as hell, and they aren’t going to buy the dips anymore” is how the Wall Street Journal described small investors. They are an unhappy lot who are “too frightened and too angry to buy, they are simply watching with a sense of helpless horror.” An online survey conducted by a team of psychologists asked Americans questions designed to determine the impact of the recent financial turmoil on their mindset. The results were discouraging. When asked how angry they felt about “the financial challenges facing our country now,” 59% said they were either “moderately” or “very” angry, and 52% said they were either “moderately” or “very” fearful. “The mood of investors is at least as bad as in the darkest days of early 2009, when the financial world itself seemed about to end.” (Too Flustered to Trade: A Portrait of the Angry Investor)
Others respond in a more active manner - they panic and sell out of the equity markets, blindly running for the exits as they allow fear to take over their decision-making process. “Janet Moffett says that her stomach dropped on Thursday as her anxieties about the economy worsened. The 73-year-old Beverly, Mass., resident, who retired in April, planned to call her financial adviser after she ‘settles down’ to ask that he move more of her $200,000 investment portfolio into cash. Otherwise, she says, ‘I think I am going to be wiped out.’” (Last Straw or Time to Buy?)
Some professional money managers may be turning more bullish after the recent sharp declines. Hedge fund manager Barton Biggs appeared on Bloomberg Television this week, saying, “We may be in the process of making an important bottom...if analysts and investors really believed the S&P earnings estimates, the market wouldn’t be selling where it is.” (Biggs Says S&P May Be Bottoming, Priced for 15% Profit Drop) However, Mr. Biggs tends to be bullish even when bullishness is unwarranted. For example, he was bullish in late May this year. As Phil observed, “If you are always telling people to buy-buy-buy, can anyone really follow your advice?” (Biggs Says Stock Bears Wrong Even as Economy Slows: Tom Keene)
Lee Adler of the Wall Street Examiner is less optimistic. He explained, “As Treasury prices rise, the shorts are squeezed and margin calls go out, forcing liquidation of equities and some commodities, forcing even more margin calls. Dealers, who no longer have the support of the Fed in absorbing Treasury supply, must commit an increased portion of their resources to absorbing massive waves of new Treasury supply before distributing it to the market. Until the end of July, they had been short Treasuries on balance, and had to absorb big losses as a result.”
Lee also warned that the flow of money out of mutual funds, is troubling. “Mutual fund investors unloaded a mind bending $23.5 billion net of domestic equity funds in the week ended August 10. That was up from $10.4 billion the prior week as the cascade of money out of those funds accelerated. If we project this to a monthly rate it will obliterate all previous monthly outflows going back to 2007. This should not be taken as a contrary indicator. It forces fund managers to liquidate holdings. Furthermore, these flows have a good history of leading the market. Inflows should begin to increase a month or two before the market bottoms, if past history is any guide.” (Lee’s WSE - Professional Edition)
Joshua M. Brown, of “The Reformed Broker,” blog, discussed strategies he developed over the years to survive market crashes. He points out the importance of acknowledging the reality of the situation and he explains why the advice of brokerage firms is neither unbiased nor helpful during times of crisis. “Watch sentiment more closely than technicals or fundamentals. Pay attention to the squishier things in a crash (even more) than you would normally... There is no math to this, a lot of it is ‘feel.’ Abandon any hope or intention of catching the bottom. You won’t and it is unnecessary. Suspend disbelief... Anything can happen in a crash, there are machines making the trades and they have no respect for the prestige or standing of a particular company.” (Downtown’s Rules for Surviving a Crash)
Bill Strazzullo, chief market strategist at Bell Curve Trading, is well-known for his generally bearish outlook on the markets. He appeared on CNBC this week to discuss what he feels are the current trading ranges for the markets. “What you’ve got to get your arms around is what’s the new trading range.” He believes investors should be reducing exposure to the S&P in the 1,200 to 1,250 range and adding stocks at the low point of the 950 to 1000 range. For the Dow, he recommends selling in the 11,300 to 11,700 range and buying in the 9,000 to 9,400 range. (Dow 9000 Possible - and It’s a Buying Opportunity: Strategist)
The Eurozone’s continuing slow motion meltdown is having its own negative impact on the markets. The crisis has dragged on without any solution, as fiscal contagion spreads from peripheral countries (Ireland and Greece) to pillars of the European economy (Italy and Spain). It is now threatening to engulf France and Germany, the EU’s two largest economies. So far, there has been an implicit expectation that taxpayers in Germany will be willing to pay to preserve the Euro, no matter what the price. However, that notion is now being challenged. Germany’s people are openly expressing their hostility to the endless bailouts, and asking “Who will be left to bail us out?” (All eyes on Germany in Europe debt crisis)
Examining what is different today in comparison with several weeks ago - when the markets were higher and the VIX was around 17 - it seems clear that many changes have been largely about perception. Perceptions have turned very negative and the media has been increasingly playing on fears (e.g. the U.S. debt ceiling crisis and the big default scare). Conversely, if the economy gets so bad, and the stock market falls low enough, many believe the Fed will step in with another short term fix to prop up the stock market - QE3.
Ben Bernanke will speak this coming Friday, August 26, at the annual central banking meeting in Jackson Hole, Wyoming. According to currency strategists at BNP Paribas, “‘Risk in the coming week and ahead of the all-important Jackson Hole address by Fed Chairman Bernanke on Friday may revolve in large part around the incoming eurozone economic news’... This time round, however, there are a lot of doubters that Bernanke has anything more to offer. See related blog post on David Rosenberg’s projections that the Bernanke “put” is dead.” (6 days, 18 hours, 51 minutes to Bernanke’s Jackson Hole speech)
Phil observed, “The markets tank right at the time we’re auctioning off a ton of T-Bills. This has happened every time since QE2 ended and then, on Friday – BERNANKE SPEAKS AT 10! Imagine what kind of epic market crash we will have if he throws an air-ball on Friday!” Traders will be listening closely to Bernanke’s comments, looking for hints about the launching of QE3.
QE3 or not QE3, is the question. Joe Weisenthal of Business Insider thinks more easing is unlikely, due to growing inflation. (The Odds Of Imminent QE3 Are Rapidly Plunging) St. Louis Fed President James Bullard remarked, “I think it is a much tougher call to do more QE this time around than it was last year. The inflation picture is different this year than it was last year and the risk of deflation is much more remote than it was last year.” (Fed’s Bullard Says New 2013 Rate Pledge Not a Signal for More Bond Buying)
If the Dollar strengthens, and the previous inverse correlation between the Dollar and the Dow reemerges, the stock market is likely to drop, barring significant extraneous factors such as a Eurozone meltdown, or an unexpected outbreak of civil unrest. Of course, extraneous factors are already in place - the Eurozone’s debt crisis, the unrest in Syria, the Japanese triple disaster of earthquake, tsunami and nuclear meltdown, and the civil war in Libya. On Saturday evening, Zero Hedge reported, “As if the global liquidity crunch was not bad enough...geopolitical risk is back after headlines from both Libya and Israel indicate that the Levant region is on the verge of systemic instability once again.” (Geopolitical Risk Is Back As Libya And Israel Make Headlines) What were once rare, “black swan” events are now happening in clusters, with extraordinary events merging into a giant mutant “Swanzilla” that is destabilizing the financial landscape.
We will be watching key issues next week - the handling of the “Black Debt” crisis in the Eurozone, the unrest worsening in the Middle East and other regions, and Bernanke’s speech on Friday. Any of these have the potential to greatly move the Dollar and the stock market. If the EU debt crisis harms the Euro, the Dollar may benefit, and this may hurt equities. If Bernanke announces some form of QE3 on Friday, the Dollar will likely drop, which is likely to boost both stocks and commodities. And, as Zero Hedge writes, “Alas, when geopolitics enters the equation, the only certain thing is a surge in uncertainty. That this will likely not benefit global equity markets goes without question.”
We remain “cashy and cautious,” and have only one trade idea this week (below). King, at this time, is cash. Cash is good, cash is flexible, and cash lets us buy stocks when they go on sale. After Bernanke speaks on Friday, we may have a better idea of where the market is headed. As Lee Adler of the Wall Street Examiner puts it, “we need to keep our noses to the wind for whatever malodorous plans come out of Jackson’s Hole this week.”
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the S+P has big resistance and support at 1121 - if it goes through there then mexican chartists would say 'adios muchachos'
Good to know but how do you play it?
Somewhat relevant anecdote: Last Saturday evening in the southern German city I live in I attended a meeting of concerned citzens against the EFSF & ESM. There were talks by people who were pointing out that both facilities would be unconstitutional under German law. Even though there were only about 60 people there, it was a start, and was certainly an indication that resistance against the Euro bailout is building in Germany.
The organizers are planning a demo march on 16 September, and are trying to get as many participants as possible. The Bundestag vote on the ESM is scheduled for 23 September, so they are trying to get people agitated before then.
My wife attended with me, and afterwards she suggested we should (quickly) put all of our money into silver & gold ... bless her ...
If you don't believe a QE has been going on as long as the earth rotates into the sun, then you shouldn't listen to the FED any more.
The government is an institution of propaganda and lies, run by a bunch of sociopaths with a Royalty obsession.
D.C. is the enema of the people. It lives in a cocoon, the members living by an entirely different set of laws, rules, ethics, morals, and conscience. It is as if a country offshore in the Atlantic has tethers to every state in the union (dare say the globe) that they pull on and release as they see fit, while they do whatever the fuck they want, and fuck you and I.
Those calling for more taxes, more government are just as insane as every psychopath that ever lived.
Like it or not, QE3 has already started in stealth mode when the worldwide intervention to reduce the price of oil occurred about a month ago.
time123
admin at http://invetrics.com
Create your own job, create your own economy. Govt is dead.
how do they finance the deficit without QE3 ?
The stock sellers like you are already doing QE3, not Ben. But he is the smartest guy in the room, he knew he can not launch QE3, otherwise inflation will out of control. So he pulled the stock market now everybody bought treasury like no tomorrow. Problems solved: inflation going down, treasury sold and banks bought stocks at huge discount with cash nobody wanted not too long ago.
There will be QE again and again. We are just not sure of the timing. It will not stop until the markets make it stop. These robots will continue to do what they do until they get it right or until the entire system blows.
How much in Derivatives is out there, not regulated, spawning under the top of the septic tank, rotting away until it stops everything. 100 Trillion or more? I do not think anyone really knows. Lets just say enough to buy lunch.
They are going to do it. I can feel it....
Don't ask me any questions. There are only feelings one gets sometimes and they have been pretty accurate in my world.
TMS expanding at 12%:
"In brief, the headline on the U.S. monetary rate of inflation, as measured by our preferred broad TMS2 metric, increased to a 12% year over year rate in June, 70 basis point higher than the 11.3% rate of increase posted in May. That’s the highest showing since February 2010, when TMS2 rung in at a rate of increase of 13.3%."
Here's the numbers and charts:
http://www.forbes.com/sites/michaelpollaro/2011/07/17/true-austrian-mone...
Thank you to Mr Pollaro!
With everyone running to Treasuries due to uncertainty over the markets & QE3, it seems to me The Fed will have a better chance of achieving its public commitment to low interest rates by doing nothing. The mysteries of how much QE3 and when is helping Bernanke achieve this single goal more than the act itself ever can. What I wonder is whether Bernanke’s public commitment is what he really cares about most? At the very least we are going to find out once again who his true friends are.
Week of the Swanzilla, Bitchez!
http://www.youtube.com/watch?v=QJwSXl8XvyM
As the traders came home from their travels to every port in the Mediterranean and the Pacific, Atlantic Indian and every other ocean, they brought the wares from all the world, and with it, the black debt. As they moved the misery followed. This time like the last, no antibiotic was available to stop it. The contagion spread throughout the known world.
"Black Debt", well put.
oops, my bad...involuntary double post.
If the market is entirely dependent on QE for it's survival, then it begs the questions: Isn't it already beyond repair? and is it worth saving?
It's called Keep the Kettle Boiling.
Or you can play Spin the Barrel with a Hollow Point
Dealer's Choice.
In a sane world what you point out would be obvious to everyone ... but the world is not sane.
In a sane world a system that relies on infinite growth and infinite credit to purportedly generate real lasting wealth would have been laughed off and consigned to the dustbin at inception.
You're assuming that folks understand mathematics (AND infinity), you should know better than that!
Rock and hard place, something has got to give. If you have physical, it does not matter either way because if they do and they pump up the markets again then ALL paper is worthless and even if you win big on the markets, the paper still remains worhless. Paper is paper, unless it is backed by something real and so long as people recognized how manipulated paper is and the fact the there is zero accountability in the system makes the continuing slide unstoppable. Prepare accordingly and be happy doing so.
the battleship USA is now unattached, either to QE impetus, or to economic growth, or to debt reduction; the only solutions are either hyper inflation, which is death for middle america or depression for five years; which is death for Oligarchs, at least the most exposed who run the TBTF banks and their surrogates. It brings us undoubtedly closer to radical solutions that we cannot even imagine in a nominal democracy with an elected republican congress.
Roubini is not saying anything different.
I doubt thqat the depression will be only five years, we're only three years into it and I expect another tenor fifteen years.
QE3 = Final nail in the $dollar coffin. The latest flavor of Jew Confetti goes to zero. How history repeats its self time and time again. Same scams pulled by the same entities.
Most importantly, Same Suckers.
Or, as the case may be, the confetti goes for $80 http://www.ebay.com/itm/5lb-Bag-Shredded-Money-Currency-Bulk-approx-10-0...
My daughter brought home a small bag of "shredded money" yesterday. Her friend had given it to her as a "gift". The friend had traded several dollars to buy shredded dollars. Companies are now providing this as a service. To help ease inflation presumably? Bullish for silver and gold.
I ran the tally and it appears that we have more problems than solutions.
Good summary with good links, thanks.
QE3 is just around the corner. A plumber plumbs,
a carpenter hammers and the Fed prints. It's
in their nature.
Tyler, are you still prediciting QE3 announcement at Jackson Hole?
<--- YES QE3 AUG26
<--- NO QE3 AUG26
That is the question!
My simple formula: if they allow the DOW to purposely dip below 9,600 by Friday, then they want QE3. The gambit is tricky because if the markets aren't fucked enough, then they risk getting even more heat. So they allow markets to tank and can't be criticized since it'll appear like do or die no choice etc. What a smelly game. And no I'm not paranoid.
QE3 JULY 1 <-------me
Bernanke has to wean the world off the Fed"s announcements of QE. Everybody is getting too dependent on QE. The way people get dependant on vodka and sex.
How should Bernanke do it?.
Just like this. Do it and don't tell anybody. Especially the rumor mongers here at ZH.
Duh.
I'm starting to agree. I was anticipating QE3 before the affects of QE2 were completely erased as QE2 would then be seen as a failure. However, QE2 and it's inflationary affects are now a distant memory in the minds of the average American (I continually underestimate their stupidity). All we need is some more fear and another leg down in equities and QE3 will be accepted without question.
"I continually underestimate their stupidity" - imagine 2 monkeys throwing shit at each other, that is the approximate level of intelligence not only Americans but much of the world in general, only the literal shit has be replaced with verbal shit or some vitrual form thereof
We will get QE3 when the people not only accept it, they demand it.
"I have always loved Big Brother."
Alright then all you voters.....please list your condensed reasons as per above.
Ben will keep his options open as he always does. He won't announce QE3, but he won't rule it out either. He'll say that falling oil prices will ease inflationary preassures. Hard to imagine him coming out with QE3 on Friday, but there's really no question in the long run. He has to, or the scheme collapses under its own weight.
Nobody knows, the misery I've been in, the misery I've been in.
Nor do they know the launch date of operation fiat death.
All we know is that it will happen.
On a long enough timeline....................
Be happy. You share your soul in a significant time.
"May you live in interesting times"---old Chinese curse.