All eyes will be on Ben Bernanke this Wednesday as the Federal
Reserve finally spells out the details of its much-anticipated
second round of Quantitative Easing, known as "QE2." [For more on
QE2 and how it works, read
this InvestingAnswers.com article
]
The Fed
's efforts to stimulate theeconomy throughbond buybacks have led
investors to already open the champagne.
As
I noted recently
, the S&P 500 has already appreciated by more than $1 trillion
simply in anticipation of any presumed benefits. But in recent
days, economists are beginning to doubt whether Mr. Bernanke is
going to bring out the large cannons, or simply a set of
pea-shooters. More specifically, will QE2 be large enough to get
theeconomy going, buying back up to $1 trillion in bonds, or will
the Fed believe that a few hundred billion dollars will be
sufficient?
A pair of fresh economic data points point to the latter. Last
week, we saw a moderate drop in weekly jobless claims that makes it
clear that unemployment is at least not getting worse at this
point. And then on Monday morning, the Institute of Supply
Management (
ISM
) announced that its manufacturingindex shot up to 56.9 (handily
above the economic expansion/contraction line of 50.0), which is
the highest reading since May.
The ISM figure had been cooling in recent months back toward the
50.0 mark, but the just-released figure represents a fairly bold
reversal. Indeed, a separate measure of new factory orders posted
an even more robust reading of 58.9, which is good news for the
economy
, but bad news for QE2. After all, Mr. Bernanke's original goal
with the
bond
buybacks was to get the economy going and not to simply create
party-like conditions for equity investors.
Theinflation threat
Mr. Bernanke has another reason to announce a more modestly-sized
easing program. Some have expressed concerns that a massive
trillion dollar expansion of the Fed's
balance sheet
will create eventual conditions for surging
inflation
. Sure enough, the ISM data also noted anuptick in manufacturing
pricing pressures. These pressures usually appear when the broader
manufacturing sector is operating closer to 80% (it's below 75%
right now). But in many industries, so much capacity has been taken
off-line that they are likely operating well above 80% capacity.
Action to Take -->
If the QE2 package is as large as investors expect -- in the $750
billion to $1 trillion range, then the markets may well shrug, as
that is what investors seem to be anticipating. If the package is
any smaller, closer to the $500 billion mark, then investors may
look to quickly book profits on concerns that the QE2 will be
insufficient to really boost the economy. So we have a likely
outcome of either no reaction or a negative reaction. And that
looks like a perfectly good excuse to book profits.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.