FYI | Nov 11 2010
By Craig Ferguson, Director of Strategy at Antipodean Capital
Craig Ferguson offers some (preliminary) thoughts on financial markets after the Federal Reserve announced part 2 of its quantitative easing program.
Ok, so the Fed have committed to an extra 600bio of bond buying for H1 2011, and with 250-300bio of mortgage reinvestment that brings the total to 850-900 billion of bond buying, certainly enough to meet middle of the road expectations, and exceed the more modest lower totals out there. The Fed have kept the commitment open ended in terms of extension, depending on how the economy interacts. The bulk of the buying is in the belly of the curve (5-7yrs).
The first thing to say is that the Fed has met market expectations. It has stopped short of putting in place a truly effective program though. The curve has steepened in the US, and this is because the commitment to buy 2-3% of 30yr bonds was just wimpy in our view. There may be a reason we don’t know of as to why the 10-30yr bucket was not where the bulk of the buying is to occur, but we do know that failing to do so will do little to flatten the curve further.
The Fed stopped short of an explicit open ended inflation target too. So this was clearly not the outcome we think would give the Fed the best bang for their buck. But the fact that extra QE2 is now underway means that yields will stay low, the USD weak, and this will give the US economy, housing, and stocks, the best chance possible to rise over the next 6-12mths. In that sense, the Fed has “got it done”, and the Bernanke put remains alive and well.
This is the perfect alignment for stocks. Extra stimuli; a Republican House (just short in the Senate) that will likely extend the Bush tax cuts; the 3rd year of the Presidential cycle coming up; continued weak USD policy and low US yields. Let’s see how the coming days and weeks pan out, but our expectation for a powerful 30-40% stocks rally in 2011 builds momentum.
With all the fuss about QE2, markets have forgotten about US economic data, and recent data weren't half bad. A continued set of data like this into Q1 ’11, with the backdrop of an ongoing QE2 program, would be nirvana for corporations – the double dip fears will abate, easy money and low yields would continue, and we’d expect corporate profits to do well in ’11. This is the sort of thing that would put corporate cash balances back to work, whether through M&A, buybacks or new investments. Don’t forget the data.
The one thing that we think is an incredibly likely policy response from the Obama administration, stressed as it will be in the next 2 years, is a tax holiday for corporate cash held o/s. This same policy, brought out of the drawer by the Bush administration back in 2005, rallied the USD from 1.36 v EUR to 1.16. Rather than pump the economy full of wasteful give aways (one off cash payments etc) that have little MT effect, this is the one measure that will definitely find bi-partisan support in the divided House/Senate makeup that the US now has.
We think the odds of it being announced between now and end ’11 is very high – more than 75%. When/if it is, then the USD decline will, even if for a ST period of 6-12mths, end, and then reverse to the tune of 7-10%. Depending on where the USD Index is when/if announced will determine whether the USD maintains its 3 year range 70-90. However this policy would spell short term pain for USD bears, and we would not be one if it is announced.
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