Riding Bernanke’s Bull: Stock Market and ETF Commentary (DIA, SPY)

As expected, last week was momentous in many ways, with the control of the House of Representatives returning to the Republican Party and the announcement of “QE2” by the Federal Reserve. 

Both were almost foregone conclusions but both will have important ramifications in the weeks and months going forward.

Markets reacted strongly to the news and we’ll take a look at what it all means and where we might be going from here. 

The whole situation reminds me of the old movie, “Urban Cowboy,” staring John Travolta, where he hung out in a bar in Houston and put quarters in a mechanical bull and rode the bucking beast until he was thrown off or the ride came to an end. 

In our economic version today, we have the bull market and Chairman Bernanke with a bag full of quarters, feeding the bull with easy money.  We’re all along for the ride and some will get thrown off, some will survive or the bull itself might simply burn out or break at the end. 

Looking At My Screens 

As discussed last week, major indexes remain overstretched and overbought and bullish sentiment remains at extreme levels.  However, this week’s market action took out serious resistance levels and returned the major indexes to yearly highs.  Also we’re entering the seasonal “best six months of the year” when stock prices tend to generate the best returns. 

The View From 35,000 Feet 

The big news of the week, of course, was the Federal Reserve’s launch of “QE2” and the reactions to that, both in the markets and around the world.  Equity and commodity markets jumped sharply as the prospect of $600 Billion in debt buybacks by the Fed means more liquidity, most likely a declining dollar and continuing appreciation in commodity prices. 

Reaction around the world was less positive, however, as Brazil, China and Germany all registered their displeasure.  Expert analysis of “QE2” was mostly negative with David Stockman, one of the architects of Reaganomics, declaring on Bloomberg Television that it was similar to heroin that one day might kill the patient, Jim Rogers quoted by Bloomberg that Bernanke doesn’t understand economics, Paul Volcker, a former Fed Chairman himself, saying that he didn’t expect overpowering results and that it could create inflation, and Bill Gross, Chairman of bond giant, PIMCO, calling it “something of a Ponzi scheme.”

As I read around the blogosphere and news media, about the only positive comments I heard about QE2 came from Chairman  Bernanke himself, who wrote an OpEd piece in the Washington Post, delivered a speech in Florida and made statements on Jekyll Island defending his recent actions. 

On Friday, the jobs report came in substantially better than expected while the lesser watched household survey declined for the fifth month in a row and pending home sales declined -1.8% from a previous growth rate of +4.3%. 

While most of the news focused on the Fed, other interesting developments were taking place around the world.

Greece has an election coming up this week and its bond spreads remain at record highs, while the European Central Bank refused to disclose internal documents detailing how Greece hid the true extent of their government debt with derivatives.  Bloomberg requested the information but was refused access because of the potential “acute risk of roiling the markets.”  Truly amazing. 

What It All Means 

What this all means is that very likely we’ll see a declining dollar, rising stock prices since the Fed Chairman has all but said that rising prices are his goal, and little real net effect on the economy.  The forecast boost to GDP from “QE2” is just a half a point and some analysts say that as much as $4 Trillion would be needed to boost GDP enough to reach the Fed’s employment and inflation goals.  

The other factor is the very real possibility that the Fed is once again blowing another huge bubble with the “Bernanke Put” following the “Greenspan Put,” and how that might end is unknown but potentially frightening.  

Like in “Urban Cowboy,” Dr. Bernanke is feeding quarters to the bull, and we can only hope that the bull doesn’t blow up and that we can successfully complete our ride.

The Week Ahead

This will be a comparatively quiet week on the reports front as earnings season winds down and with few reports on tap for the week. 

Economic Reports 

Tuesday: September Wholesale Inventories 

Thursday: Initial Unemployment Claims, Continuing Unemployment claims 

Friday: November Michigan Consumer Sentiment 

Sector Spotlight 

Winners: Silver, Hong Kong, Home Construction 

Losers: Spain, Bonds, Biotech

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