Why Size Matters, Fundamentals Don't, And What's Priced Into Stocks

Tyler Durden's picture

QE3 is more like a longer but lighter version of QE1 Extension (given its size and composition) and as Morgan Stanley's Adam Parker points out, despite two outsized weeks of MBS buying the impact had a much more positive affect on HealthCare and Financials than on Technology and Discretionary sectors (though with oil prices already high this time - the negative feedback into the economy and equity markets is potentially different). However, as we noted recently, it seems fundamentals matter less than ever as S&P 500 return correlations to the Fed balance sheet are as high as ever and while hope springs eternal, unconventional policy remains a far more statistically significant driver of equity performance than European sovereign spreads, jobless claims, or even earnings revisions. Critically, the S&P 500 would be dramatically lower given over a year of rolling six-month negative returns if we adjust for the Fed's exuberance - and the symmetry of market-to-Fed reactions bodes ill for any deceleration in balance sheet expansion.


So it's QEternity or bust.


The Fed's effects on equity markets over the past two decades have been short-term in nature, highly dependent on the size of the move, and most importantly, symmetric - boding ill for any future balance sheet contraction or even reduced easing.


So far, the announcement of size and composition of QE3 looks like a light version of the QE1 extension


...during the QE1 extension, which at present seems most relevant to the QE3 announcement, Health care performed best, discretionary worst.


...but the 26-week rolling correlation of the change in the Fed’s balance sheet and the S&P 500 return was highest during QE2, and lowest last December when European tail risk began to decline.


...as we have commented many times recently, fundamentals and economics don’t matter when unconventional policy (or even dovish language) is being deployed. Sadly, there is some evidence this is right, given that since the start of QE, initial claims and earnings revisions, among other things, have been less associated with S&P 500 returns – and in the case of earnings revisions, perversely associated with S&P500 returns.

S&P 500 changes do not appear to be driven by changes in fundamentals; they have been inconsistently related to market returns during the QE periods and have generally been insignificant market return drivers.


as rather stunningly, over the past 26 weeks, two-thirds of the S&P 500 returns could potentially be explained by the Fed’s balance sheet changes...

and it is quite possible that performance of the market would have been negative without the unconventional policy...


It would appear from this final chart that a great deal of the current market is pricing in Fed action - as more than a year of rolling returns are now negative if it were not for the actions of Bernanke...


What Might Be Different This Time?


One big potential difference between today and prior periods of unconventional policy is the price of oil. Will QE3 drive further commodity price inflation? And, if so, will there be negative feedback into the economy and equity markets? We suspect so given the fragility fo global growth.


Source: Morgan Stanley

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bigdumbnugly's picture

it's the diam that puts em in siam

AldousHuxley's picture

QE = fed buying that overpriced house to lock in profits for lending banksters so they don't lose money on defaults.





Popo's picture

> " despite two outsized weeks of MBS buying the impact had a much more positive affect on HealthCare and Financials than on Technology and Discretionary sectors "

In other words, the money went straight into the ponzi and bypassed the consumer.   We have an enormous amount of evidence that this is all QE ever does (and the Fed also has this evidence).   To continue to provide QE is to continue to *knowingly* rape the consumer and increase the power of the ponzi overlords.

slaughterer's picture

I do not really know if I can trust the guys at MS: what does David "balls to the walls" Tepper think of QE3? 

ACP's picture

Remember this is QE4. QE3 was extended until the end of the year and QE4 is overlapping it. Two stock manipulation schemes going on simultaneously.

TheSilverJournal's picture

Why would equities sell off? Sell equities in exchange for what?...Bonds? That just doesn't make sense to me.

Biflation's picture

It doesn't matter. Either way the Fed is in it. Eventually will rescue the shit out of all markets, not ready for a crash yet. Be patient and write your silver journal.

slaughterer's picture

Today showed Potter cannot ramp ES without ramping the CBOE commodity index with it. 

NoTTD's picture

This "size doesn't matter" post should be paired with the new Italian study indicating global warming has reduced penis size.

resurger's picture

Just push that fu cker to 1,500

slaughterer's picture

And thus was the close VWAPed by the angelic algos.  Let it be done. 

Northeaster's picture

Didn't we just read here that The Fed still has $3.9 Trillion to go? Fundamentals don't matter when the goals is to create an illusion, profit off it and get out before endgame.

Gamma735's picture

I know ZH loves charts and all.   And charts make all this seem scientific, but what it really boils down to is that unless the sheeple wake up the dollar bubble will continue.  Two truths about bubbles, they always go on longer than you think they can and they deflate far faster than you can imagine.

toomanyfakeconservatives's picture

The rampant criminality bubble is about to burst faster and harder than anyone could imagine when the MASS ARRESTS occur... http://tinyurl.com/cd5cyjo/

automato's picture

A friend of mine got divorced about 10 years ago and his ex-wife is now collecting disability from Social Security based on his earnings. He is about to get married again and says his new wife will ALSO qualify for Social Security based on his earnings with not one penny of reduction for any of them. Is this some type of loophole? Can you marry 10 different women and ALL of them collect Social Security based on the higher earnings of the spouse? Sounds like the Welfare scam of all time!

JR's picture

It’s disappointing to realize that the owners of the Federal Reserve who are major investors in all of the markets are able to coordinate their purchases and sales with the official announcements. The Fed makes the policy decisions and they are private investors.

It almost makes you wonder how it’s possible for Goldman Sachs, for example, to make a bad bet, other than for show.

In that the Congress designated that the owners of the Fed be kept secret and in that the owners who now control the currency and have used their leverage to influence the equity markets and the political structure of both the Congress and the Administration, either their names should be made public or they should be barred from transacting business in the markets. Here in Frederick Mann’s The Economic Rape of America (1992) is the best and latest report on who these owners are thought to be:


There has been much speculation about who owns the Federal Reserve Corporation. It has been one of the best kept secrets of the century, because the Federal Reserve Act  of 1913 provided that the names of the owner banks be kept secret. However, R. E. McMaster publisher of the newsletter The Reaper, asked his Swiss banking contacts which banks hold the controlling stock in the Federal Reserve Corporation. The answer:

  1. Rothschild Banks of London and Berlin
  2. Lazard Brothers Bank of Paris
  3. Israel Moses Sieff Banks of Italy
  4. Warburg Bank of Hamburg and Amsterdam
  5. Lehman Brothers Bank of New York
  6. Kuhn Loeb Bank of New York
  7. Chase Manhattan Bank of New York
  8. Goldman Sachs Bank of New York.

In The Secrets of The Federal Reserve, Eustace Mullins indicates that, because the Federal Reserve Bank of New York sets interest rates and controls the daily supply and price of currency throughout the U.S., the owners of that bank are the real directors of the entire system. Mullins states:

"The shareholders of these banks which own the stock of the Federal Reserve Bank of New York are the people who have controlled our political and economic destinies since 1914. They are the Rothschilds, Lazard Freres (Eugene Mayer), Israel Sieff, Kuhn Loeb Company, Warburg Company, Lehman Brothers, Goldman Sachs, the Rockefeller family, and the J.P. Morgan interests."


Diesel Seven's picture

Hard to believe WTI is down 6.9% ytd, yet US$ gold and silver are up 12.8% & 22.15%. If you live in the US, thank <insert deity preference here> for the petro dollar. One must wonder how awful things would be (will be) for the US without the petro dollar advantage.

orangegeek's picture

WTI oil is leading the way down.




US Dollar to rise and markets to fall soon.    It's gonna get messy out there.

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