Are stocks headed to all-time highs?

Thursday's Fed decision has sent risky assets flying on a wave of cheap-money optimism. Will it be enough to send stocks over their 2007 highs?

By Anthony Mirhaydari Sep 14, 2012 2:47PM

Stocks, commodities and other risky assets blasted higher in reaction to the Federal Reserve's unveiling of what the market has already dubbed QE3. But it is, in reality, different from and far more aggressive than the previous stimulus efforts seen in late 2008 (QE1), late 2010 (QE2) and late 2011 (Operation Twist). The new effort, which will target mortgage securities, is unlimited in that it has a set target of $40 billion a month in purchases but no set end date.

 

The program will continue -- and could be expanded -- until the job market improves "substantially." Combined with its already extended Operation Twist initiative, the Fed will now be pumping $85 billion a month into the economy through the end of the year -- similar to the pace of monetary injection seen during the $600 billion QE2 program. And if the Fed continues until the unemployment rate falls to 7% -- which may not happen until 2015 -- the purchases could result in $1.4 trillion worth of new stimulus.

 

Investors reacted positively to the news, boosting the "risk on" trade as economic growth and inflation expectations surged higher. In fact, the Dow Jones Industrial Average is now closing in its 2007 peak with enough velocity and cheap-money accelerant to possibly push to new all-time highs.

 

 

Crazy talk?

 

Consider this: Investor sentiment has been dour and money has been coming out of stocks and moving into bonds over the last few months. Now, a reversal is upon us, with capital rotating into cyclical, economically-sensitive stocks and small cap issues. This rotation has just started. And it's likely to continue. 

 

Why? The Fed's actions are boosting economic growth expectations and inflation expectations. Both are positives for stocks and negatives for bonds.

 

There will be plenty to say about the Fed's actions in the days and weeks to come. But for now, know that it will be a near-term positive for the housing and stock market (boosting both is a stated goal of Fed chairman Bernanke). And that should help boost consumer confidence since both areas are very important for net household wealth.

 

There is also the chance that inflation overshoots to the upside.

 

With monetary stimulus both here and overseas revving up, the situation is vulnerable to food and energy supply shocks that could whip up inflation. A pre-election Israeli attack on Iranian nuclear facilities is my main worry since it would cause crude oil to spike, undermine the consumer confidence boost of QE3, and neutralize any benefit of additional monetary policy stimulus.
 
This is what happened during QE2 in the middle of 2011 as a result of the Arab Spring protests.


Producer price inflation is already inching higher. The Producer Price Index increased at its highest monthly rate in three years in August. The 1.7% gain came on much firmer food and energy prices. Food inflation rose by 0.9% and energy spiked by 6.4%, which included a 13.6% rise in gas prices, itself the largest gain in three years. 

 

The Dow is just 425 points from 14,000. I think it will get there soon, encouraging fresh buyers to jump into a fast rising market as greed overrides fear.

 

 

As a result, I'm recommending my newsletter clients and readers harvest profits from existing precious metals positions and rotate the capital into new areas of strength including industrial and emerging market stocks. As a result, I'm adding Caterpillar (CAT) to my Edge Letter Sample Portfolio.

 

Existing positions include VelocityShares 3x Silver (USLV), up nearly 100% since I added it in late July; First Majestic Silver (AG), up 40%; and Market Vectors Junior Gold Miners (GDXJ), up 26%.

 

Disclosure: Anthony has recommended CAT, AG, USLV, and GDXJ to his newsletter subscribers.

 

I found CAT with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)



Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​​​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
 


 

VIDEO ON MSN MONEY

39Comments
Sep 14, 2012 3:33PM
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Concentrating the money in the hands of the few.  We will not recover until the TBTF banks are dismantled, like Ma Bell was dismantled, for the good of humanity.
Sep 14, 2012 3:22PM
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What the hell good is it?! All i know is if gas goes over 4 bucks again, and it looks like it may due to this nonsense, i will cut back on buying, driving etc again!!  As will millions of others.  That should help the economy ,huh?
Sep 14, 2012 5:58PM
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Just another politically motivated move by the Fed too maintain the current administration and their politically appointed jobs. Mind you it would be no different if the current administration were republican.

Career politicians have become a virus slowly destroying the economic life of the country. Since some very significant laws and programs that apply to the common citizen do not apply to the American Royalty in the legislative branch perhaps it is time for term limits. We can impose them...don't vote for the incumbent.
Sep 14, 2012 3:24PM
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Yes, but  the value remains the same.  They are just adjusting for Ben's money printing.  500 billion new dollars should fuel an 11% rally, as people flee dollars to something that will retain it's value.  Stocks are a better holding than dollars losing value as we speak.

Buy Stocks, Specie and solid foreign currency.  Dump bonds, CD's and dollars.

Protect you purchasing power.
Sep 14, 2012 3:58PM
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Till the bottom falls out SOON!

Bernanke and OBama make the prices of oil go up so food and oil and everything goes unbuyable and then plants close and lay offs are an everyday thing. THIS MAKES THE ECONOMY BETTER? Good thinking Obama and Bernanke. Not the brightest bulbs in the box.

Sep 14, 2012 5:45PM
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The number may be an all time high but the value??? Not so much.
Sep 14, 2012 5:39PM
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Higher prices for all goods will not increase demand and will not create jobs. This is a kick in the

balls for Main St. and a gift for Wall St. pigs.

Sep 14, 2012 8:28PM
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I'm confused here Anthony - I thought you would want to own the gold and silver miners with all of the inflationary pressures building in the new QE infinity program?  Are industrials really going to outperform these precious metal names with costs of commodities going higher?
Sep 14, 2012 4:39PM
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In theory, this might work. Here's the problem..... Corporate leaders, wall street, politicians and speculators will end up with any gains (if any), and they will pocket any proceeds and call their fellow Americans lazy and unhirable. They really think that ALL Americans owe them the shirts off their backs. Plain and simple, it's a credibility problem.
Sep 14, 2012 6:42PM
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The fall will be in the fall.

I think there may be a "fiscal cliff" bear market coming soon, but it probably won't last long and likely won't be extremely steep either - that is, if this Congress can work together for ONCE.

Hopefully CONgress will get its act together soon!



Sep 14, 2012 6:16PM
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Screw Wall St and the greed mongers that work there!  This is grand larceny and our gov supports it.  Someone needs to explain to me how it is that housing stocks are supposedly "going thru the roof" when there is still a depressed new home construction market.  What are investors betting on that we will return to the hey days of over 1 million new homes built per year?  Well guess what...it isn't going to happen for a variety of reasons including demographic shift and a younger generation who doesn't look at buying a house as the "American Dream" nor a primary investment vehicle.  We may see some uptick on multi-family housing both for low income and higher income people but with a few exceptions I don't see a strong demand for single family homes.  This market it totally overpriced but as long as Ben and The Boys have their fingers on the buttons it won't go down.  So it is time to play the game "Who Do You Trust"?  I guess nobody cares anymore about Europe now that Draghi has supposedly waved the magic Euro Wand and fixed every countries ills including Greece, Spain, Portugal etc.  All more bullsh*t and just another tatic from the USA playbook for economic stability built on smoke and mirrors.
Sep 15, 2012 2:38PM
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you know what they say !!   what goes up must come down !!!
Sep 17, 2012 9:05AM
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Surprisingly VL....You seemed to feel if anyone points out any faults in your logic,ideas or statements; They are nothing but a condescending voice in the forest of lost souls...

Your over usage of the explanation towards your peers, seems condescending in it's own right.?

 

When such a poster as Mavre offers their own veiwpoint as a differing opinion, or points out some fallacies in your's;....They are the one "supplying a load of pickle juice."

 

I find quite often that an opposing veiwpoint is somewhat "refreshing and illuminating" and refutes the droning of others; That may be constantly beating on the same drum...

You may check with spellcheck, if you feel it is necessary. 

Sep 14, 2012 7:46PM
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euro and yenthe clock strikes ten qe ben fed is hen no more white collar down with dollar
Sep 14, 2012 8:01PM
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I would be careful with CAT....it looks hot but an International Boycott due to its work with the Israeli Gov/Military could negatively impact!
Sep 17, 2012 7:28AM
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"The Treasury prints money - NOT the Federal Reserve. Banks are not lending because they reap a greater return by using capital to invest in derivatives and currency trading. Lending out money only produces minimal returns due to the low interest rate environment, so you only allocate capital that is a "sure thing" to be paid back - ie. very low risk of default in order to earn a low rate of return.

Replace the Federal Reserve with WHAT?!? A private National Bank? HA! Another Government Agency? Double HA!"

 

I never said the Fed prints the money. It establishes the quantity of currency by selling bonds We the People are indebted to repay. When Hank Paulsen was Secretary of Treasury (former CEO of Goldman Sachs) and insisted in TARP, he was telling Congress to authorize indebtedness for the People whose contracts would, because they could, be purchased by Goldman Sachs using cash borrowed from the Fed at the ridiculously low Bank Rate. When Nixon took us off the Gold Standard in 1973, Founders still ran many American corporations, we manufactured the best quality and the workforce was paid a fair wage. When you say the Dollar remains the same value as did in 2002, you forget to consider that- we import everything, we make very little and none of it necessities. Big business sold the factories and trade secrets, exported jobs and terminated the workforce. There's no comparing now to any time in America's past. Stocks are at record highs without ANY substantiation. Look out your window, sir. The WHOLE WORLD is frustrated with money grubbers and many nations are rising up in protest. There is no longer a separation between politics and finance, due mainly to the Gramm Leach Bliley Act. Your post was condescending not illuminating. Where do you run to once you've screwed the whole world?

Sep 15, 2012 11:55AM
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Sorry, but maybe the Cart is growing Wings....So it can sail closer to the Sun..
Sep 17, 2012 6:34AM
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Looks more like a set-up by the Skull and Crossbones Club to steal all the money in America. There isn't any economy so the artificial climb of stocks is fixed on purpose for purpose.
Sep 16, 2012 5:29PM
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Typical, Bernanke trying to save Obama and Obama destroying America.  Time to be smart and get your money out of the market.  Four more years of Obama and no one will have anything.
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