Biderman on QE, market pops and some more.
The US stock market is now up about 16% since early June when the Fed Wire, also known as Wall Street Journal Reporter John Hilsenrath, pre announced the fourth Fed easing. In order to answer the question how much more in higher stock prices can we expect from the current Fed easing, let us look at what happened after prior Fed easing. The first Fed easing was announced March 2009, and stocks soared 50% through April 2010 before correcting 20%. To be clear, by stocks I mean the S&P 500. Then in August 2010, when the second Fed easing was preannounced stocks jumped 40% up until April 2011 before another 20% correction. Then in September 2011 after the third easing was announced stocked popped 30% peaking in April of this year, but dropped only 11% before fourth easing was preannounced in June.
Guest post by Doug Short.
Another light-volume day saw the major US index split the difference at the flatline. The Dow closed 0.09% higher and the S&P 500 0.13% lower. The 500, my preferred metric, fell at the open and it its intraday low in the first 15 minutes of trading. The opening price served as resistance at the intraday high about 90 minutes later. The downward trend since the QE3 spike on Friday morning appears to be leveling off, but the absence of volume suggests that the market is still in a wait-and-see mode. So we’ll wait and see what tomorrow brings.
The index is now up 16.04% for 2012. From a longer-term perspective, the S&P 500 is 115.7% above the March 2009 closing low and 6.8% below the nominal all-time high of October 2007.
And here is a 15-minute snapshot of the trend over the past seven sessions, which shows the behavior of the index leading into the QE3 announcement the aftermath to date.
A few market comments by Peter Tchir.
The Fed Wants to Know What You Buy for a Country that has Everything?
We need an increase in real final demand. That is what will turn our economy around. Unfortunately, real final demand generation isn’t one of the tools in the Fed’s workbox. Asset buying is. That is all they really have left, next to just giving everyone $1 million.
But QE is not a good tool for increasing final demand. Sometime it can help, but with the current situation, I don’t think it will do anything, at least not for domestic final demand.
But how do you get people to buy more when so many already have so much?
We have a record number of people receiving food stamps. That is sad and awful, but QE3 isn’t going to spur final demand from this group. No amount of mortgage bond buying is going to get a penny directly into the pockets that need it most. We need to create jobs, but jobs come from final demand and this large group will not increase that just because the Fed is buying mortgages.
Then there is the rich. The group that owns most of the stocks but is already doing well and already spends a lot of money. This group is the most likely to directly benefit from QE, at least in the short term. Certainly their stock portfolios jumped in value. Anyone who hasn’t re-financed now can, but seriously, how many people is that? The Fed purchases will keep a group of professionals in banking and the legal side busy, but now we are talking about a relatively small group of people. The problem here is that this group has been spending at a relatively “normal” pace. Is their spending really going to increase? A $3,000 purchase of jewelry versus a $2,500 one otherwise? Does that do much? When QE1 was enacted, this group was on its heels. It was nervous. It wasn’t spending. It was freaking out how suddenly it was impossible to get a jumbo mortgage. But by and large, that is a distant memory.
Must read interview with Michael Hudson, via Renegade Economist.
KF: We welcome to the show Professor Michael Hudson, Distinguished Research Professor at the University of Missouri-Kansas City, the leading Post-Keynesian university in America. It’s been fantastic to see, Michael, that the public profile of UMKC has really taken off with Randall Wray, yourself and Stephanie Kelton being quoted quite widely these days. Can you explain what Post-Keynesianism is?
MH: The fact that we all have a very similar approach is what has enabled us to challenge the neoliberal Chicago School. Our approach is heterodox – we see that money is created, basically, on computer keyboards. When a bank lends money, they create a deposit by writing a loan. You sign an IOU, the bank has a promissory note from you to pay them interest and they open a deposit in your name. The Federal Reserve does the same thing, as does any central bank, except for Europe’s. On their keyboards, they can simply do what a commercial bank does, namely, create money by creating a bank deposit for the banks to draw on. That is basically how the Bank of England, the Federal Reserve Bank of New York, the national banks of China, Russia and other civilized countries create a finance of government deficit. That is why government debt in almost every country has gone up and up and up every year for the last few centuries. And as the government spends money into the economy, this is the money and the spending and the income that enables economies to grow.
As we warned about Spain to revive the market nervousness a few days ago, we are suddenly back to watching those Spanish yields climbing again. Markets do not like uncertainty. The contradictory messages from Spain, is once again making investors “confused”. With markets at critical levels, vol at relatively low levels, and an extreme reading in the put call ratio, you should be prepared for a sharp pullback.
Spain is still in pain. From El Pais.
“Uncertainty is a risk,” said the Spaniard, who is also the EU commissioner for competition. “Sometimes it is difficult to take a decision and this is a very complicated situation. Any alternative has its pros and cons, but to maintain uncertainty implies a risk that the debt market or another factor increases tensions again. We have learned in the past two-and-a-half years where these tensions could lead to.”
According to government sources, Rajoy wants to delay asking for a second bailout on top of the rescue package for the country’s banks and may even eschew the option if the economy improves sufficiently to avoid the political stigma involved.
However, Economy Minister Luis de Guindos is in favor of requesting a second intervention as soon as possible to ease market pressures. He would like to see one of the European rescue funds buying Spanish debt in the primary market to trigger purchases in the secondary market by the European Central Bank (ECB).
What about the Treasury Yields? A few charts by Doug Short.
What’s New: I’ve updated the charts through Friday’s close. The S&P 500 closed the week at a new interim high. The index is now up 16.55% for 2012. From a longer-term perspective, the S&P 500 is 116.7% above the March 2009 closing low and 6.3% below the nominal all-time high of October 2007. I’ve tweaked some of the charts below to include the new round of quantitative easing. Interestingly, the 10-year yield rose 15 basis points over the past week and is up 45 basis points (a 31.5% rise) since the historic closing low on July 25th.
Here is a snapshot of selected yields and the 30-year fixed mortgage one day after the Fed announced its latest round of Quantitative Easing.
Hussman of Hussman Funds notes some rather interesting signals in his latest weekly market update.
As of Friday, our estimates of prospective return/risk for the S&P 500 have dropped to the single lowest point we’ve observed in a century of data. There is no way to view this as something other than a warning, but it’s also a warning that I don’t want to overstate. This is an extreme data point, but there has been no abrupt change; no sudden event; no major catalyst. We are no more defensive today than we were a week ago, because conditions have been in the most negative 0.5% of the data for months. This is just the most negative return/risk estimate we’ve seen. It is what it is.
Since we estimate prospective return/risk on a blended horizon of 2-weeks to 18 months, we are not making a statement about the very long-term, but only about intermediate-term horizons (prospective long-termreturns have certainly been worse at some points, such as 2000). As always, our estimates represent theaverage historical outcome that is associated with a given set of conditions, and they don’t ensure that any particular instance will match that average. So while present conditions have been followed by extraordinarily poor market outcomes on average, there’s no assurance that this instance can’t diverge from typical outcomes. Investors should ignore my concerns here if they believe that the proper way to invest is to bet that this time is different.