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
's efforts to stimulate theeconomy throughbond buybacks have led
investors to already open the champagne.
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
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
) 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
, but bad news for QE2. After all, Mr. Bernanke's original goal
buybacks was to get the economy going and not to simply create
party-like conditions for equity investors.
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
will create eventual conditions for surging
. 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
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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