David Evanson and Oliver Pursche
Minyanville.com, Fall, 2012
There’s no other way to say this: QE III, being actively debated by the Federal Open Market Committee (FOMC) as I write this, is a bad idea.
Quantitative easing III (or as I like to call it, QE Infinity) is usually talked about in terms of the risks it poses for inflation. And while this risk is palpable, it’s not near term. The near term risk is that in finally admitting the economy or the recovery – take your pick – is weak enough to require further intervention, the Fed has set the stage for a sell-off in stocks. This admission, in and of itself, could be a catalyst for a sell-off in stocks.
You might be tempted to call that a reach. And perhaps it is — but if so, there’s plenty of other stimulus to send stocks down, in my firmzzs view. To wit:
The most recent unemployment report is one of the worst I’ve seen in years. This is not because the economy didn’t create as many jobs as the ADP report forecast, but because the labor participation rate fell to a record low of 63.5%.
July employment data was revised downward.
FedEx (NYSE:FDX) warned that a slowdown in global manufacturing activity would hurt its bottom line. This was followed by a warning from Intel (NASDAQ:INTC), which lowered revenue and earnings projections. We believe that this is likely just the beginning. We can see our way toward corporate earnings estimates for the fourth quarter being cut by as much as 25% from current levels.
I don’t believe investors should short this market. There’s still some giddiness left, perhaps as much as another 2% to 4%. However, I would advise investors to start paring back risk.
The only positive note from this mess is that commodities could benefit from a sliding dollar. Note that the euro is hovering at multi-month highs, trading above $1.29. Here’s some stocks that could benefit from QE Infinity.