Welcome to the end of the week and another edition of Happy Hour! Just sit back, relax, and enjoy your end of the week roundup of all things interesting in the land of money.
The QE Monster
The Fed announced QE3 yesterday with a $40 billion a month plan to buy mortgage-backed securities and reinvest the interest. The announcement came with the caveat that economic conditions call for low rates through 2015.
The big difference this time around, the Fed did not include an end date. In the past, the Fed has always provided a timeline for its QE purchases.
This is good news for potential home buyers. It will keep mortgage rates low and drop long-term mortgage rates lower over the next several months. Of course, this mostly pertains to new home buyers. Current homeowners won’t move if their current home is still underwater. So either home prices need to quickly rise to some break even point or a few million renters need to start buying soon.
As far as the markets, we can expect a similar reaction to past QE announcements. I’ll be covering this more, next week. But suffice it to say, there is a better time to take advantage of this announcement. No need rush into stocks now. The fact is the QE speculation has been priced into the market this past month. So we can expect a small selloff/correction as people take some profits. My best guess is somewhere in the 3 – 5% range between now and earnings season. When the market resumes its upward path. So stay tuned.
Despite all this, QE won’t fix the bigger problem. Monetary policy only goes so far when a fiscal policy doesn’t exist. The shameless inaction in Washington to pass any type of job creating regulation. Instead, those elected will hope and pray that more easing will spur companies to borrow and start hiring. If companies weren’t borrowing hand over fist over the past year with these low rates, a tenth of percent or two won’t convince them. And when this doesn’t work, the blame will be tossed at the Fed for screwing up.
One has to wonder where we’d be if Congress and the President actually put forward an agreeable policy that spurred job growth sometime in the last two years. I’d bet unemployment would be sub 7% and QE wouldn’t even be an afterthought. It’s too bad the folks in Washington can’t seem to do their job. Hopefully the voters remember that in November. Until then, the Fed will simply inflate our way out of debt to the detriment of our money.
- A New Semester Begins: Valuation Class Online – A great opportunity to learn about valuation. Aswath Damodaran is a professor at the Stern School of Business and freely provides the webcasts, lecture notes and exams online, for anyone who wants to follow along at home.
- Value Investment Strategies That Work If You Develop Patience – In my opinion, this is the number one reason most investors fail. Trust your research and be ready to wait.
- Market Fundamentals: Only the Brain Damaged Survive – A great run down of the importance of tracking economic data and why you should keep it simple.
- Valuing The Market By Earnings Yield– A quick and dirty way to find out if the market is over or under priced. Warning, there’s math involved!
- Plot Twist in the A.I.G. Bailout: It Actually Worked – Before the Fed announcement AIG was in the news about Treasuries plan to sell a huge portion of its stake. And at a profit.