The End of QE2 (FDX)

Today is the first day of the post-QE2 economy. We’ve been living under
the influence of liquidity injections for the last months. And we enjoyed
a spectacular rally that pushed the S&P 500 up 300 points, from 1,050
to 1,360 between September and April.

At this point, there’s probably not much reason for us to consider the
success of QE2. On the one hand, it cost $600 billion to increase the
market cap of the S&P 500 by 30%. That’s about $3 trillion in market
cap. From that perspective, each of the Fed’s $600 billion created $5 in
stock valuation.

And investors did take notice (and profits): individual investors have
withdrawn $52 U.S. equity mutual funds over the last 9 months. That sum
doesn’t offset losses from the financial crisis, but most investors
probably didn’t meaningfully participate in that rally, even though
profits were there for the taking.

On the other hand, QE2 was inflationary. The IMF says that a
$10-per-barrel rise in oil prices shaves a half-point off U.S. GDP
growth. Oil prices rose around $20 a barrel during QE2. So, perhaps we
lost a full point of GDP growth, around $1 trillion as consumers had to
spend more on energy (and food) and less on other stuff.

Top Performing Small Cap Stocks: Friday 6/17 (NCT, AXN, BPZ, PRMW, ZRAN)

Small cap investors have been searching far and wide for the hottest
stocks, including the beaten-down real estate market.

On Friday they found a winner in Newcastle Investment, a New York-based
investment company that holds a portfolio of debt secured by commercial
and residential real estate. Primarily it focuses on commercial property,
which makes up $2.7 billion of its $4.2 billion in holdings. Bringing
back its dividend brought back investor interest.

Investors will be waiting to see this week if Federal Reserve
policymakers telegraph their interest rate intentions when they announce
the outcome of a two-day meeting on Wednesday afternoon.

Last Friday, the Russell 2000 index finished 0.03 percent higher, and is
still just above break-even for the year. The Standard & Poor’s Small
Cap 600 rose 0.04 percent, and is up 1.3 percent year-to-date.

Friday’s Top Performing Small Cap Stocks (Data provided by Capital IQ)

Ticker

Company Name

Closing Price

%Change (1Day)

NYSE: NCT

Newcastle Investment

$5.59

27.0%

AMEX: AXN

Aoxing Pharmaceutical

$0.98

18.0%

NYSE: BPZ

BPZ Resources

$3.53

16.9%

Nasdaq: PRMW

Primo Water

$13.14

16.7%

Nasdaq: ZRAN

Zoran

$8.29

15.1%

Newcastle Investment (NYSE: NCT): The real estate
investment and finance company reinstated its cash dividend and said that
it has nearly doubled its cash investments.

Aoxing Pharmaceutical (Amex: AXN): The Chinese drugmaker
that specializes in narcotics and pain-control medications announced that
it had received a patent in its homeland for an oral derivative of opium.

BPZ Resources (Nasdaq: BPZ): The oil and gas company
which concentrates on exploring Peru and Ecuador released promising
estimates on the production potential for an offshore site. Shares traded
as high as $6.83 in early March.

Primo Water (Nasdaq: PRMW): The distributor of purified
bottled water through retailers, announced pricing for a secondary stock
offering of 6 million shares. The North Carolina company, owned in part
by water softener-maker Culligan, went public last November.

Zoran (Nasdaq: ZRAN): The developer of digital signal
processing technologies used in many electronics agreed to be acquired by
British chipmaker CSR for $484 million, about 30 percent less than the
initial offer in February because of a deteriorating share price.

Shift in Sentiment?

The “slowing growth” theme we’ve been discussing
has now worked its way into the headlines. Today’s
ADP report that the private
sector added a less than expected 179,000 jobs in April is being billed
as a sign that the recovery is not moving as fast as we’d like.

Today’s oil inventory report is also being
interpreted as measure of slowing growth. Crude inventories rose 3.2
million barrels last week, higher than expected.

Lost in the Shuffle (intc, rtn, msft, tlt, aapl)

It was somewhat lost in the shuffle in Wednesday.
Investors were so stunned at Fed Chief Ben Bernanke’s admission that
commodity inflation might accelerate over the next few months before the
Fed is forced to act on interest rates, they missed the part where the
Fed lowered its 2011
GDP
growth estimates from a range between 3.4% — 3.9%
to 3.1%.

For anyone pinning his or her hopes on 3.9%,
that’s got to be disappointing.

But after yesterday’s first read of Q1 2011
GDP growth — a
measly 1.8% — investors are likely to take another look at the total
message delivered by the Fed.