“Never permit a dichotomy to rule your life, a dichotomy in which you hate what you do so you can have pleasure in your spare time. Look for a situation in which your work will give you as much happiness as your spare time.” — Pablo Picasso
Well, Ben Bernanke finally pulled the trigger on QE3, after what must have seemed to be, at least to an impatient Wall Street, an indeterminable period of Hamlet-like waffling and indecision.
But he did it, and he did it with a double-barreled shotgun.
The degree of the Fed’s commitment to the latest round of quantitative easing was certainly embraced by investors last week. All the major indexes notched sturdy gains following the FOMC announcement on Thursday, with the momentum carrying through Friday’s session.
For the week, the Dow Jones Industrial Average (DJIA) gained a healthy 2.2%, ending the week at 13,593, a closing level not seen for the Blue-Chip index in over five years. The S&P 500 Index rose 1.9% over the same time period, landing at 1,465 and continuing a strong trend that has seen the benchmark index land in the black eight weeks out of the last ten sessions. Meanwhile, Apple powered the Nasdaq (COMP) to the highest levels it’s seen since back in 2000, and COMP ended the week at 3,183.
In a nutshell, Bennie and the Feds said the Fed would make open-ended purchases of up to $40 billion in mortgage debt each and every month until the cows came home, or until the economic recovery gained solid footing, whichever should happen to occur first. The purchase of mortgage debt would, if the Fed action has its intended effect, help to prop up the lagging housing market.
As an additional stimulus bone, Ben offered to continue to keep the federal funds rate at the current near-zero level it currently holds. The duration of this aspect of QE3 is expected to continue until the middle of 2015, extending the current period by more than one year.
The Fed probably is counting on prodding investors more fully into equities, as bonds are obviously not going to be yielding high yields any time soon. The assumption, perhaps, is that a rising tide in the equity market would eventually allow corporations to start using the hordes of cash it collectively sits on for increased levels of hiring, thereby addressing the stubbornly high level of unemployment that continues to haunt the economy.
There is a relatively good chance that all this balance-sheet expansion on the part of the Fed will have at least a certain amount of success in growing the nation’s economy. However, there is also the potential of limited progress, and perhaps even digression, should Washington fail to resolve one of the areas of immediate concern, and that is the matter of the “fiscal cliff” that is approaching.
The fiscal cliff is the name coined for an event that could happen as soon as the end of the year. It references what the U.S. economy could “fall off of” should the august body of lawmakers, a.k.a. Congress, fail to halt the spending cuts and tax hikes that will automatically happen unless a bipartisan effort is made to stop it.
Bernanke hopes there is enough common sense to avoid such a thing from happening. Still, he believes that his latest efforts at QE will not be sufficient should lawmakers fail to come up with a new agreement by the end of the current year.
The resultant spending cuts, in other words, would soundly thrash the mighty efforts of Big Ben and company. Let’s hope his optimism survives the gridlock that has been so prevalent in D.C. for most of the last couple of years.
What the Periscope Sees
The Middle East situation remains far more volatile than perhaps many analysts care to acknowledge. Relatively speaking, the escalation of rhetoric surrounding a possible Israeli strike on Iran may be the least worrisome issue, at least for the moment. That’s because last week’s deadly series of protests and attacks on U.S. embassies could quickly escalate into a broader sphere of violence, as the multiple countries involved may fall to factions beyond the control of the respective governments in Egypt, Tunisia and Libya, as well as for additional countries in the region.
While a further deterioration in the area’s situation can hardly be, at this point in time, considered to be a Black Swan event, a strong hedge against further regional violence would seem prudent.
One simple play to consider is in oil, which would skyrocket in a number of related Middle East scenarios, such as further attacks on U.S. embassies, an increased U.S. military presence in the region, or a further escalation of tension between Israel and Iran.
By selecting an ETF that is based on oil, such as USO (United States Oil Fund), which tracks the price of light sweet crude, one can anticipate that it would serve as a strong hedge against an increase in the region’s problems.
As an additional consideration, should the regional unrest scale back, and the equity market continue its current uptrend, then the hedge also would add alpha to a participating portfolio, as energy would be expected to benefit from additional Wall Street gains resulting from the QE3 action of the Fed.
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
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