Did Bernanke Pre-announce QE3 And More "Hope" Last Friday As Stocks Believe? Here Is Rosenberg's Take

Tyler Durden's picture

With today's market session merely a continuation of what happened on Friday, here is David Rosenberg's explanation of the market move seen following the initial dip on Friday, followed by the latest surge in stocks. Rosie's summary on what has been driving stocks higher over the past 48 trading hours? Simple - " the markets were responding to something and they were. It's called hope, and Ben gave them some." If indeed stocks are correct about QE3, look for Brent, WTI, Gold, and everything else to resume the upward climb, completely ignoring anything and everything that the CME decides to do with "speculative" margins levels.

From David Rosenberg:

Friday's Action in Context

What a session, or more like 'what a week!', as the Dow Jones Industrial turns in its best performance since early July via a 4.3% spike.

It was almost like a replay of the FOMC press statement about a month ago (August 9). The markets didn't know what to do with it, selling off and then rallying, and then closing near the session highs. The Dow fell big in the session (down over 200 points, but by the end of the day, it had closed considerably higher (up by 135 points last Friday and was up over 400 points back in August).

There was a critical difference between Ben Bernanke's speech this past Friday and the one he delivered back on August 27, 2010, notwithstanding the similar equity market response (the S&P 500 with a 1.5% gain; the Nasdaq closed 2.5% higher). A year ago, Bernanke practically all but pledged another round of quantitative easing to combat deflationary pressure.

This time around, there was more discussion about fiscal policy than there was about monetary policy and there was no discussion about deflation. He largely reiterated what he said in July at the semi-annual congressional testimony about the "range of too/s" that could be deployed (i.e. extending the term of its assets and charging the banks interest on their excess reserves or even additional balance sheet expansion). But he spent most of the time putting the burden on policymakers down the beltway to act more forcefully ("most of the economic policies that support robust economic growth in the long run are outside the province of the central bank").

Still, the markets were responding to something and they were. It's called hope, and Ben gave them some.

First, the September FOMC meeting is now going to be two days, not one. This provides hope that the Fed will be spending time coming up with another investor-friendly stimulus package (to allow for a "fuller discussion").

Second, Bernanke sounded optimistic over the economic outlook (How can he not sound positive based on the position he holds?). Even so, his forecasting record in the past five years has been circumspect, at best.

Third, by putting the onus on fiscal policy, he is helping President Obama out in his quest for another round of stimulus, to be announced after Labour Day. This will likely include a range of goodies from mortgage market measures, to an extension and expansion of payroll tax relief and more money thrown at infrastructure — see Obama Pressed to Come Out Fighting Over Jobs on page 3 of the weekend FT.

So there is still hope for QE3, hope that Bernanke is right and a recession is averted and the hope that more fiscal stimulus is coming our way. (A tad ironic since in the GDP accounts we see that government spending contracted in volume terms for the third quarter in a row in Q2.)

But there are some problems. First, QE2 and last year's fiscal follies gave us one good quarter of GDP growth and that was it. Why will more short-term gimmicks be any more effective?

Second, the rally last Friday occurred with lighter volume on the NYSE. So call it a low-conviction rally, even if the August 8th lows have held thus far. The brutal down days see the market close at or near the lows and the up days see the market finish at or near the highs. The volatility is intense and still characteristic of a bear phase

Third, unlike August 27, 2010 when the QE2 hopes sparked a move out of bonds and into stocks — the 10-year Treasury yield shot up 16bps that day — there was no such shift this time around. On Friday, the 10-year note rallied 4bps to 2.19% — not providing the validation for the rally we saw in equities.

Fourth, this rally in the equity market in the past week has been noteworthy for its lack of leadership — the leader board is filled with thinly traded stocks and that is never a signpost of a healthy uptrend. And, as the Investor's Business Daily aptly points out, the areas doing the best are the gold miners, discount stores, tobacco and utilities. So this market bounce definitely has a 'defensive quality' feel to it.

Fifth, the market has yet to hit capitulation-like sentiment levels and the reality is that when you see articles like this surface on page B7 of the weekend WSJ — Those Safe Havens You've Been Flocking To Aren't So Safe — then you can rest assured that the bear market in risk assets has hardly run its course completely. There were enough bearish articles on gold in Barron's and the weekend WSJ (like Bubbly Gold might Take a Bath) that you know that there is little chance the yellow metal is in any danger of entering into a bear market any time soon.

Sixth, as anyone who has covered the asset classes over time would know, bonds lead the economy and the equity markets. A sub-1% yield on the 5-year note is ominous in terms of what Treasuries are signaling about the economic outlook..

Credit is already bracing for a recession, or some facsimile thereof, with high- yield debt turning in its bleakest performance since November 2008; and Markit's Crossover Index of European high-yield bond default swaps have gapped up to 724bps, a level not seen since the global economy was struggling to emerge from the Great Recession in July 2009 (see Rally in Equities Defies Credit Gloom on page 12 of the weekend FT).

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bigdumbnugly's picture

bernanke's speech only kicked the can about kicking the can.

erik's picture

"Greece's Venizelos says recession is affecting to a degree fiscal goals"

I'm guessing that he is the master of understatement.  The next set of Greece austerity data will be uninspiring no doubt.  That should help Finland stand firm on their collateral demand.


kito's picture

no qe3 coming. remember snake oil salesmen never give you the cure, only the hope of one.  

AlmostEven's picture

But snake-oil salesmen always give you the snake oil (in this case, more printing). The cure (economic recovery) is the item that won't be delivered.

TradingJoe's picture

Algo ramp! Then Algo Dump!

bogey4's picture

Somebody forgot to tell gold...

baby_BLYTHE's picture

He is going to print again. Not too hard to bet against. Remember, he believes he can get almost the same effect just by hinting/threating it.

But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

He may be a political stoge, but always a true academic at heart 

SheepDog-One's picture

Not with markets within 10% of all time highs and the dollar around low 70's, not a chance in hell.

Of sure there will be ZIRP and swaps and stock and bond manipulation and free money under the table to banks, but no QE3 announcement that will mean anything at all.

DavidC's picture

Agree 100%. there is NO way Bernanke will overtly QE3 unless he HAS to. If he can get a 700 point Dow turnaround and 170 point turnaround on S&P just be hinting, why on Earth would he actually DO it unless there's no alternative?


SheepDog-One's picture

No Bernank did not announce QE3, he said theres an FOMC meeting in Sept which will be not 1, but 2 days, and by the looks of things by then DOW will = 15,000 so QE3 is DOA big time.

espirit's picture

Agree SD-1.  Market rally on dismal news and low volume, so QE unnecessary.  No brainer.

SheepDog-One's picture

Yep, wheres ANY need for QE3 at all? If the DOW can spike 250 on this mornings dismal news, then no emergency stock pumping money needed from the FED.

The Bernank is now in spin cycle, his ONLY advantageous position is right here in 'QE3 Limbo Land', kicking it down the road a month here and there and let machines melt it all up based upon nothing.

Spastica Rex's picture

Bernanke is a salesman. He sells confidence.

"If man had faith even as small as a mustard seed..." and whatnot. Bernanke is moving mountains with his mind.

Cruel Aid's picture

Even computers are going to lock in gains at some point.

Jobs program from the honcho, Balance sheet shuffling from the wizard... are computers really that dumb.



hedgeless_horseman's picture

Remember that QE is to support the treasury market, not the equity markets, the support of which is only a side effect.


sun tzu's picture

When the Fed dumps $1 trillion into treasuries, there is an extra $1 trillion from the private sector to dump into stocks and commodities. 

Bring the Gold's picture

Only as stupid as the quants who program them...draw your own conclusions.

Really though, smart dumb, what does it matter when they are perma fleecing the churn? Profits trump brains.

Smiddywesson's picture

I wish you were wrong SD1, but it's all about kicking the can, and if Uncle Ben can kick the can without using the last bullet in his gun, he isn't going to fire it off.


Sequitur's picture

Take away too big to fail and the Fed "backstop" of worthless U.S. dollars, and watch market value evaporate by 50%, minimum.

Entire market is a charade, and the foundation is garbage U.S. dollars, the ultimate counterparty risk, backed by nothing except $16 trillion in on-sheet liabilities, tens of trillions more in intergovernmental unfunded liabilities, and a whopping $100 trillion in total on- and off-balance sheet liabilities that can never be paid for. This is not an exaggeration.

Throw in private party derivatives, none of which is publicly disclosed, and seriously, the number is too big to fathom.

Efficient market: utter bullshit.

Totally rigged market with massive insider trading, plus private and governmental interference to prop up bankers: truth.

scatterbrains's picture

blog ?  If so I need to add ya to my list.

Smiddywesson's picture

Efficient market: utter bullshit.

Totally rigged market with massive insider trading, plus private and governmental interference to prop up bankers: truth.

Yes, but hasn't that always been the truth?  It's too hard to make a buck trading an efficient market, so conspiracies form in every market, at all time frames, to earn a quick buck.  That is why you will never see an efficient market.  The game is to spot the scam and trade with the winners.

11b40's picture

I agree on just about everything you said except the part about US$ backed by nothing except debt.

It may be financed by debt, but the US war machine is unlike anything ever in the hitory of mankind.  The ultimate backstop, and the rest of the world knows it, too.  Wanna' fight about it?

Ned Zeppelin's picture

It's all about guns and gasoline.

IBelieveInMagic's picture

There is also the big military that stands ever ready. That provides cover for most of the financial wizardry.

andybev01's picture

If you don't buy this market, we'll shoot this dog.



iDealMeat's picture

Both the Boomers and the Unemployed are sucking full force from the Gubberment teat, at an increasing clip. Obama desperately needs those demographics for a win. So you can bet they will be given a 20% dose and 80% hopium until the day after 2012 elections.

I bet your TBTF = "too big to fathom" is pushing a Quad..

sun tzu's picture

Not the unemployed, but the welfare class. Most boomers are still working and will continue to work for another decade or more

Tsunami Effect's picture

Sequitur great post

Don't you get the feeling that Bernanke knows there is still a massive derivatives meltdown out there at S&P <1000? 

I mean, take a look at ISDA numbers here: http://www.isda.org/statistics/pdf/ISDA-Market-Survey-historical-data.pdf 

Value of swaps/deriv from peak to trough in 08-09 was a net loss of 60 Trillion!!!

From the trough to now, the notional has regained "only" $30 trillion of that.

So, somewhere, somehow, someone has to eventually mark down that $30 trillion loss, no?

That is unless the Fed can drive the markets past '07 high by punishing savers, trading ES (PPT) AND killing the dollar.

Markets always find a way to eliminate leverage at the most inopportune time and in the most violent ways.  This is a disaster built by the Fed and just waiting for a reason to happen.



sun tzu's picture

Not as long as FASB allows mark to imagination

Mountainview's picture

Loose, loose situation for the US...neither monetary nor fiscal stimulus work.... Tipp: Work the Current account balance...

LawsofPhysics's picture

The exponential destruction of fiat requires the exponential creation of fiat.  Equity algos are simply going along for the ride.  Relax people, we will all be equitiy and fiat gazillionaires soon.

adr's picture

You are actually right. The market has just become a hedge against inflation. You put your money in and it can go up exponentially, the problem is that is due to the destruction of the currency and everything costs more than the gain you got from the paper stock.

Just think what corporate profits would look like if the dollar loses half its current value again. Stocks may triple but what used to cost $10 now cost $100.

Any way you look at it we are heading for hyperinflation unless Bernanke and Obama are stopped. Deflation would actually cause sales to go up. Labor is a very small portion of the cost of items sold today. A mall store freaks out if labor as a percentage of sales climbs above 8%. Labor as a percentage of sales at a place like KFC is less than 5%.

The problem is that deflation in price will cause earnings to go down even if the business is still massively profitable and that is terrible for the stock price.

Bring the Gold's picture

You can put any Republican tool of the bankers like Bachman, Perry etc. in the Whitehouse and you will see more of the same. We've been marching to the exact same tune since Reagan. Supply side...espcially the supply of money. I have seen nary a difference in policy for 30 years when it comes to the financial sector and the banking policy. More clever ways of hiding the rot perhaps, more ingenious fleecing methods, keeping gold down ala Summers, but nothing like a whisper of real reform to stabilize the REAL economy. Nope, just more fuel for the FIRE.

Bring the Gold's picture

Ron Paul of course would be an exception unless he is some kind of triple-think DEEP mole which I highly doubt.

IBelieveInMagic's picture

Hence he will not be allowed in.

Lucius Cornelius Sulla's picture

Exactly.  US elections are a total farce.  Presidents are not elected, they are selected.  Romney has already been selected.  The status quo will have it no other way.  IMO, the only hope (if there is any at all) is for a third party to form to challenge the Demopulican Establishment.

nope-1004's picture

The problem is that deflation in price will cause earnings to go down even if the business is still massively profitable and that is terrible for the stock price.

If you assume no debt and a clean balance sheet, then yes.  But in todays world of horrific debts held by the big banks, deflation will kill them and their valuations.  People will start to walk from obligations and leave the banks holding more junk.

Deflationary forces are huge, but the big banks can't have deflation persist.  It gives too much power back to the consumer and slowly bleeds the debtor.


Lucius Cornelius Sulla's picture

but the big banks can't have deflation persist

As if they ever had a choice in the matter.  The 40+ year debt orgy has guaranteed a garantuan deflation of epic proportions.

zeroman's picture


SheepDog-One's picture

You missed the boat and have the life ring around your neck cutting off oxygen to the brain. 

BTW, disengage caps lock you look like a crazy person.

I love putting in a Fight CLub reference when I can.

papaswamp's picture

Hey Captain CAPS....might want to read the latest NFIB survey...you know of small businesses.

Smiddywesson's picture

Banks are insolvent

The USG is insolvent

State and local governments are insolvent

Housing is utterly hopeless

There are no jobs for millions of unemployed people

The biggest employer is the government

Tax revenues are in free fall

Hey, don't worry about it, small and medium businesses will pull us out of the hole, with no credit and no customers!  Just type it in caps a few thousand times and it becomes real!

Where did you hear that, CNBC?

andybev01's picture

Shhh *use your indoor voice*

chancee's picture

It's like magic!  The overnight futures opened the market higher right above the much ballyhooed 'pennant' plastered all over the blogosphere.  Who would have thought?  Gosh, that's never happened before.

scatterbrains's picture

now do a line chart closing basis and change your pennant to a flag pattern..  then compare it's flag shape to crbq, jjc, xom  etc and add TD's compression trade.