High Hopes for QE3

I’m a little surprised by how high QE3 expectations have risen. Given how much flack the Fed took for QE2, and the commodity inflation it sparked, I expected the market to be opposed to another round of liquidity-pumping.

But that’s the semi-psychotic nature of the stock market, at times. Investors might complain about the spending, about the monetary expansion and the rising commodity prices. Still, stocks like liquidity, even if it is inflationary, and even if it creates imbalances and potential bubbles in the economy.

The Fed is at its week-long meeting in Jackson Hole, Wyoming. It was at the end of this meeting last year that the Fed announced QE2 was coming. Now, investors are hoping the Fed will announce a new round of stimulus at the end of this week.

I think more quantitative easing is a mistake. Sure, it would create a rally for stocks. And it keeps borrowing costs in line, which is good for government and banks. But that’s really just about it.

Quantitative easing won’t create jobs and it won’t create demand.

We need fiscal policy to help create jobs. But unfortunately, Congress and the Obama administration have done a poor job with fiscal policy. Virtually all of the government stimulus we’ve gotten has been focused on propping up poorly performing sectors like autos (cash for clunkers) and housing (homebuyer credit).

This did not create demand or jobs.

President Obama is pledging a jobs bill to be announced in September. I can only ask: what took so long? It’s been kind of obvious that we’ve needed help for the unemployed for a while now…

Gold prices are actually down today. I can’t remember the last time gold prices were in the red. Of course, the decline today is less than 1%. If you’re looking to buy gold, you can afford to wait a bit. A good gold correction should be worth 10% or so.

Bank stocks have been trading horribly the last couple of weeks. I told you Bank of America (NYSE:BAC) was broken. But I am surprised at how poorly JP Morgan (NYSE:JPM) and Citi (NYSE:C) have been doing.

Citi, especially, is back to its March of 2009 prices. Citi is not facing the same mortgage-issues as BofA. And Citi has a forward P/E of 5 and is trading at half its book value.

Now, clearly, investors are driving the price lower because they believe there are risks on the balance sheet that don’t show up in valuation metrics. And there is no reason to try and catch the falling knife, as they say. After all, Citi looked cheap at $30.

Keep an eye on the financials and especially Citi and JP Morgan. The financials will have to participate if we are to get a meaningful rally.

Tech stocks are doing their part today. For all the concern that tablets and smartphones are hurting the PC business, one analyst is out today saying that the "tablet effect" won’t be nearly as bad as expected. This analyst is calling Microsoft a "buy."

Oil prices are rebounding today after solid manufacturing data from China. The potential for a slowdown in the Chinese economy is one of the things that’s been weighing on the market.

China will have its day to threaten the global economy with some kind of meltdown. But that’s probably still a year or two away…

Oh, the irony. The head of Standard & Poor’s is stepping down less than a month after S&P downgraded the U.S. credit rating. He said he "was ready for new challenges". But this seems like a political thing.

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