Wednesday, 13 October 2010

Stocks rise on hopes of Fed easing

US stocks rose again on Tuesday on further evidence that the Fed will begin another round of quantitative easing. Bloomberg reports:

U.S. stocks rose, erasing earlier losses and sending benchmark indexes to five-month highs, as Federal Reserve policy makers indicated they are ready to pump more cash into the economy to protect the recovery.

Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc. helped lead a recovery by the Standard & Poor’s 500 Index after minutes of the Fed’s Sept. 21 meeting showed the central bank was ready to ease monetary policy “before long.” King Pharmaceuticals Inc. jumped 39 percent, the most in 11 years, after agreeing to be bought by Pfizer Inc.

The S&P 500 climbed 0.4 percent to 1,169.77 at 4 p.m. in New York after sliding 0.8 percent earlier. The Dow Jones Industrial Average rose 10.06 points, or 0.1 percent, to 11,020.40 after earlier tumbling as much as 97 points. Both gauges closed at the highest levels since May.

However, Doug Kass thinks that the risk to the downside is growing for stocks even with another round of Fed easing.

QE 2 (quantitative wheezing?) will not meaningfully move the needle of domestic economic growth and will only have a limited impact on:

  • the jobs market, which is plagued by structural unemployment;
  • housing, which that is haunted by a large shadow inventory of unsold homes and in which mortgage credit will likely be further reduced by the moratorium on foreclosures; and
  • confidence, which is still mired in uncertainty regarding regulatory and tax policy (and that is undermined by high unemployment)...

While the immediate response to the likelihood of QE 2 has been to buoy asset prices, the domestic economy is stalling at around 1.5% to 2.0% GDP growth, and little improvement in the jobs market has been made. This hesitancy makes the slope of the recovery vulnerable to the unforeseen -- trade wars, policy errors and/or numerous tail risks from the last credit cycle (e.g., mortgage-gate).

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