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How Ben Bernanke Could Crash the Stock Market

By Jeff Clark
Thursday, April 7, 2011

There will be no third quantitative easing program.
 
The Fed's second quantitative easing program (QE2) is set to expire at the end of June. Investors are widely anticipating that our dear Federal Reserve Chairman Ben Bernanke will announce another QE plan and to continue injecting the financial markets with $6 billion to $8 billion every day. But my guess is they'll be disappointed.
 
Oh sure, there's a good economic case for QE3. The economic recovery is still on shaky ground. Unemployment remains uncomfortably high. Even with the vast printing of new money, inflation remains stable – unless, of course, you actually count the things that have gone up in price.
 
So why not keep the charade going? It's done wonders for the financial markets so far. Stocks are way up. Interest rates are artificially low. And unless you have to eat food or use fuel, there's been no downside.
 
Unless you're Ben Bernanke.
 
 
Poor Ben. Here's a man who believes his policies prevented a global depression. He saved the banking industry, kept the U.S. economy afloat, prevented unemployment from reaching record levels, and saved the earth from Martian invaders.
 
But he gets no credit for any of it.
 
Instead, he's lambasted in front of Congress, ridiculed in the newspapers, humiliated online, and de-friended from just about everybody's Facebook page. The man gets no respect.
 
My guess is he's anxious to give people a taste of what things would be like if his QE programs weren't around... at least for a little while.
 
No one appreciates the drug dealer until the agonizing moans of the withdrawing heroin addicts drown out the sound of the TV set. "Do whatever it takes to quiet them down!" people shout. "Just get things back to the way they used to be."
 
Appreciation for central bankers is likely quite similar.
 
We all complain about the devaluation of the dollar, the unending deficit spending, and the lack of fiscal discipline, which are all aided by quantitative easing. So, too, is the run-up in stocks and the low interest rates.
 
"Just wait," Bernanke thinks to himself. "Let's see what everybody moans about when QE2 ends."
 
We're not going to see a QE3 program until we get a glimpse of what life is like without daily injections from the Fed. Maybe then the pundits will show a little appreciation for the market's drug dealer.
 
If you're buying stocks or bonds based on the premise that QE3 is on the way, you may want to rethink that idea. It may make more sense to think about what might happen when there's not an extra $8 billion coming in to prop the markets up every day. Look at what happened last year when QE1 ran out, just before QE2 kicked off.
 
We're probably headed for something similar sometime this summer. As we get closer to the end of QE2, it's a good idea to start locking in gains and possibly look to profit from a few short sales.
 
Best regards and good trading,
 
Jeff Clark




Further Reading:

Last week, Jeff shared a chart that helps predict the market's next move. "If you want to know where stocks are headed next," Jeff writes, "keep an eye on the chart." Read more here: Here's How to Tell Where Stocks Are Headed Next...
 
There's one group of stocks you'll want to own, even if the dollar self-destructs. Learn more about what Dan Ferris calls the ultimate portfolio to protect yourself from the "End of America" Scenario.

In The Daily Crux
Market Notes
Euro (FXE), Australian dollar (FXA) and Canadian dollar (FXC) funds all break out to 52-week highs.
 
Silver Wheaton soars 50% in less than three months as silver prices soar to 31-year high.
 
Natural gas "PUD" play SandRidge Energy rockets 146% in five months.
 
Delta Airlines and China Eastern Airlines hit 52-week lows as fuel prices surge.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1335.54 +0.2% +12.3%
Oil (USO) 43.37 +0.6% +3.2%
Gold (GLD) 142.38 +0.2% +28.2%
Silver (SLV) 38.62 +0.7% +119.3%
U.S. Dollar 75.89 -0.1% -6.7%
Euro 1.43 +0.7% +6.9%
Volatility (^VIX) 16.90 -2.0% +4.1%
Gold Stocks (^HUI) 597.14 +0.1% +38.7%
10-Year Yield 3.55 +1.7% -10.6%

World ETFs
Symbol Price
Change
52-Wk
USA (SPY) 133.66 +0.3% +14.5%
Canada (EWC) 34.21 +0.0% +20.8%
Russia (TRF) 24.32 -0.2% +15.8%
India (IFN) 33.25 -0.1% +12.5%
Israel (ISL) 17.75 +1.2% +6.2%
Japan (EWJ) 9.87 -0.9% -6.3%
Singapore (EWS) 13.94 +1.0% +20.3%
Taiwan (EWT) 15.43 +2.0% +21.5%
S. Korea (EWY) 65.69 +0.3% +26.3%
S. Africa (EZA) 75.61 +1.3% +23.6%
China (FXI) 46.07 +0.2% +6.7%
Lat.America (ILF) 54.70 -0.4% +12.6%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service (OIH) 162.20 -2.0% +28.2%
Big Pharma (PPH) 67.09 +0.2% +6.2%
Internet (HHH) 73.82 -0.7% +19.9%
Semis (PSI) 17.69 +0.3% +25.9%
Utilities (XLU) 32.20 +0.7% +10.1%
Defense (PPA) 20.47 +0.4% +10.3%
Nanotech (PXN) 9.55 -0.3% -8.9%
Alt. Energy (PBW) 10.58 -0.8% +5.5%
Water (PHO) 20.40 -0.3% +15.2%
Insurance (PIC) 17.18 +0.5% +12.2%
Biotech (PBE) 22.19 +0.1% +12.5%
Retail (PMR) 21.07 +0.7% +16.5%
Software (PSJ) 27.37 -0.1% +22.9%
Big Tech (QQQQ) 57.26 +0.3% +18.4%
Construction (PKB) 14.55 +0.1% +18.9%
Media (PBS) 15.23 -0.1% +14.6%
Consumer Svcs (IYC) 71.52 +0.1% +16.4%
Financials (IYF) 60.27 +1.1% +3.7%
Health Care (IYH) 69.82 +0.3% +6.8%
Industrials (IYJ) 71.67 +0.1% +23.0%
Basic Mat (IYM) 82.92 -0.8% +27.1%
Real Estate (IYR) 59.51 -0.1% +18.5%
Transportation (IYT) 96.79 +0.0% +22.6%
Telecom (IYZ) 23.87 +0.2% +21.1%

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