Monday, September 17, 2012

QE & Stock Prices

There they go again. Last Thursday, the FOMC voted to implement open-ended QE3. Last Wednesday, the German Constitutional Court cleared the way for the establishment of the European Stability Mechanism. That will allow the ECB to proceed with its plan for unlimited QE in the euro zone.

So happy days are here again! The central banks will do whatever it takes to avert another Lehman Moment. For now that trumps concerns about the US Fiscal Cliff, the Euro Mess, and the China Landing. On the geopolitical front, there is a new worry, i.e., the “Arab Winter”--in addition to push coming to shove in both the Persian Gulf and the South China Sea. However, as I wrote last Wednesday, the bull has been charging to new high ground on performance-enhancing drugs provided by the Fed and the ECB. Instead of a meltdown, we have yet another melt-up relief rally:

(1) The S&P 500 jumped to 1466, up 1.9% w/w and 16.1% ytd. It is only 6.7% below its record high of 1,565 on October 9, 2007. The S&P 500’s forward P/E jumped to 13.1 last week, the highest since June 2008.

(2) The Wilshire 5000 rose to a new cyclical high of 15,354, only 2.9% below its record high on October 9, 2007.

(3) The S&P 400 MidCap index rose 2.2% w/w and 16.8% ytd, exceeding its previous record high on April 29, 2011. The S&P 600 SmallCap index is up 2.5% w/w and 17.0% ytd to a new record high.

(4) Dow Theory followers should be happy to see that the 2.2% increase in the DJIA was confirmed by the 2.8% increase in the DJTA.

(5) The central banks have certainly succeeded in turning investors into QE junkies. The S&P 500 rose 36.4% during QE1, 24.1% during QE2 (starting with Fed Chairman Ben Bernanke’s speech at Jackson Hole on August 27, 2010), and 4.2% so far since Bernanke’s speech at Jackson Hole on August 31, 2012. The S&P 500 is up 18.1% since the ECB’s LTRO1 was implemented on December 20, 2011, and 7.8% since ECB President Mario Draghi’s “whatever it takes” speech on July 26 of this year.

The question is how quickly will the latest injections of performance-enhancing drugs wear off?

Today's Morning Briefing: Feddie. (1) The game that never ends. (2) There they go again. (3) QE addiction. (4) Stomping on the tail. (5) QE-3.5 might work if QE-3.0 doesn’t. (6) Good for our Second Recovery scenario for 2013. (7) The Fed’s latest QE cleverly targets housing, which is improving already. (8) What if QE enables reckless fiscal policy, which worsens joblessness? (9) Schumer begged, so Bernanke delivered. (10) Melting up to a double top? (11) Retailers charging ahead. (12) “The Queen of Versailles” (+). (More for subscribers.)

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