A typical pre-Fed surge?

Stocks are screaming higher Tuesday ahead of Wednesday's Federal Reserve decision. Here's what to expect, and few reasons to be skeptical.

By Anthony Mirhaydari Dec 11, 2012 7:10PM

Image: Federal Reserve Building (Hisham Ibrahim/Corbis)Equities gapped higher on Tuesday over what was initially blamed on better-than-expected German business confidence but has since evolved into positive expectations for Wednesday's Federal Reserve decision and press conference. As I've said before, Wall Street is looking for the Fed to maintain its current $85 billion-a-month bond purchase tempo.


But the kicker is that it will replace its expiring $45 billion-a-month Operation Twist program -- in which it sells short-term bonds to buy long-term bonds -- with a fourth round of quantitative easing, or QE4, that will keep the purchases the same, but fund them with newly created dollars instead. That's a more aggressive form of stimulus.


But, despite Tuesday's gains, there are seasons to be skeptical both of the positive impact of QE4 and the longevity of the market bump. Here's why.


First, it's worth noting that QE3 -- the $40 billion-a-month mortgage bond purchase program announced in September -- has largely been a disappointment. Both stock prices and mortgage security prices are below their post-September Fed meeting levels.


Moreover, if the Fed does this, it smacks of desperation. The European Central Bank is already talking about cutting interest rates into negative territory. If the world's major central banks do this, they will be essentially forcing savers to pay for the benefit of depositing their cash.


Clearly, that's dangerous and could affect the functioning of the financial systems in ways not yet fully understood.


Despite all the monetary stimulus that's been doled out already, with the monetary base here at home rising from around $800 billion before the financial crisis to nearly $3 trillion now, we don't have much to show for it. The employment-to-population ratio is mired at early 1980s levels. Small business confidence has just plunged to record lows.


There's more.


The Greek debt buyback wasn't as strong as expected. The Italian government is dissolving. The major banks are making major layoffs. Consumer confidence is down. General Motors (GM) is ramping up new car incentives to clear excess inventory. Best Buy (BBY) is selling cellphones at a loss to drive holiday traffic. And one in 6.5 Americans are now on food stamps.



The problem is that the credit channel remains constrained, something ECB chief Mario Draghi himself admitted. If people don't have any confidence, because they are worried about a default by the U.S. Treasury or higher tax rates, they're not going to be interested in leveraging up with credit.


That could make any market selloff related to the fiscal cliff/debt ceiling very scary indeed if people start to believe the Fed -- and other central banks -- are growing increasingly helpless to do anything about it.



And what of Tuesday's pre-Fed market surge? It's worth noting that stocks rallied ahead of five of the last seven Fed meetings this year. In three of the five rallied, the market sold off the day after the meeting.



Also, there is plenty of evidence that market was becoming overbought and vulnerable to a pullback. Sentiment had made a historic shift from the pessimism seen in late November to full-throated optimism now. Market internals have started to weaken with breadth narrowing as fewer and fewer stocks participate in the rallies. And other assets, such as industrial commodities, aren't participating.


To my eyes, this looks like a last gasp rally before a pullback develops. I remain focused on short positions including the ProShares UltraShort Crude Oil (SCO).


Disclosure: Anthony has recommended EUO long to his clients.


Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


Dec 12, 2012 12:27PM
When do we officially worry about QE V, VI & VII?   If the economy is doing so good, why do we need 40 billion/month in freshly printed money?   

We are on a collision course with reality.   The imbecile Obama and Ben are hitting the gas.   When we hit the wall, it will take 2-3 decades to recover from Obamanomics.
Dec 12, 2012 10:58AM
Where  in the world did reality go?   We now have a Nanny Market bought and controlled by a Nanny State.  Everyone is sitting around the tree waiting for Santa to bring more liquid to this already non market market.  The state funneling your money through big banks to hold up share price.  Don't fool yourself they are and always will be beholdin to their parent company the Fed.   The advice to protect the wealth class through this transition to world Corporatism seems firmly in place.  The end game will be what now?  This market is bought and paid for and now controlled by world Corporatism.  When, and I predict that is a given, decide to bring this market to near zero we will all face the same fate.  The US guberment is now the big dog in this market and I am frightened of having anybody having this much power over my lifelong investments.  Share price is no longer a result of a forward earnings curve. The transition of a new world currency is also a given and what "value" can you and I expect from this "fools" market. Way too much risk for me at my age. How in the world did we get here? You all must be keenly aware of the article just recently about moving forward to absorb the EU and its economy into ours. Did we hear one voice of skepticism?  I believe the best we did as Americans was take care of ours and set an example for fairness for the entire world.  To now in our weakened state attempt to "incorporate" the entire world is a big chunk of maybes. This "cliff" nonsense is just a precursor to a much larger question that we see not being asked. We as citizens have not been asked or informed of what our representation is actually up to on our behalf.  This activity behind the scenes is a secret and for a good reason.  Collapsing the world economy and financial system is paramount to finally gaining complete control and finalizing world Corporatism.  How much you and I will lose to to enable this should be the question we all need to ask.  And you can bet a ton we will only get the answer after we have lost our ability to question or influence their final action.  JMHO
Dec 12, 2012 7:58AM

This will not end well...  You cannot Print your way to prosperity, no matter what the imbecile Obama and Helicopter Ben tell you... 


Inflation is a TAX of the worst kind.  Raising Taxes has always SLOWED an ECONOMY, this will have the same effect.

Dec 12, 2012 2:05AM

Anthony quit trying to scare me ........


I see the head, but don't really see the shoulders...??

You tell me why I am buying....??


Dec 12, 2012 1:51AM

Brute.....Strange, maybe we could go back a "couple years" with the homes & heartbeat....?


Maybe 10-20 years ?? Guess you probably never heard or knew of  A."greenjeans" Greenspan.

Of course there are others?....See the top 10 or 15 (it should be).


Let's judge QE after most of it's over...

Dec 11, 2012 9:40PM
I think the Fed ought to delay it's QE4 decision until 12/21/12. That's when the world is supposed to end, so it will be apropos for the Fed to make one last desperate move to forestall calamity. Then we can all die...or at least the economy die. 
Dec 11, 2012 8:42PM
 "In a few years, we'll all collectively wonder how it was possible that most missed all the negative consequences associated with 4 rounds of quantitative easing."

Hey Brutus - ain't it the truth. We sure love our delusions - and desperately hold on to them tightly... right up until it becomes obvious to all that... THEY ARE DELUSIONS.

Remember "Animal House"?  An updated version of Dean Wormer's admonition might be ...

 "Entitled, stupid and deluded is no way to go through life, son".
Dec 11, 2012 7:46PM
Onward and upward, to QE4.  Remember a couple years ago, we were all wondering how it was even possible that almost no one saw any negative consequences associated with making home loans to anyone with a pulse.  In a few years, we'll all collectively wonder how it was possible that most missed all the negative consequences associated with 4 rounds of quantitative easing.  It won't be long now before Webster's puts a picture of Bernanke next to the word "insanity".
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