QE3 is accomplishing what it was designed to do so far

Updated: 2012-10-06 08:10

(HK Edition)

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QE3 is accomplishing what it was designed to do so far

Monetary policy is accommodative in most nations and the Federal Reserve has embarked on an open-ended QE program. Thus, global stock markets are advancing and the uptrend is likely to continue for several months.

The QE program is working and accomplishing what it was designed to do i.e. clean the banks' balance-sheets and avoid a systemic collapse. The QE was never designed to assist the broad economy as swapping bonds for newly created currency units cannot help the distressed public. In reality, QE was ultimately unleashed to bail out the banks and it is working perfectly. After all, Mr. Bernanke is no fool and his 'stimulus' programs have removed systemic risk from the table.

Only a few months ago, investors were worrying about the implosion of the Euro zone but since Mr. Draghi's 'put' has come into effect, the single currency has rallied sharply.

I have repeatedly asserted that the Euro would not be allowed to fail and it appears as though my assessment was correct. Whether you like it or not, the Euro is the creation of the banking elite and you can bet your bottom dollar that the powers will do everything to ensure its survival. As things stand today, central banks have pledged to create additional currency units and they have promised to bail out the banks andtheir bondholders. Thus, it is hardly surprising that risky assets are rallying and unless there is an ugly surprise, this uptrend is likely to continue for several months.

Turning to the stock market, it is notable that Wall Street is leading the way and most American indices are near their recovery highs. In terms of breadth, the NYSE Advance/Decline Line is confirming this rally and the new 52-week highs are significantly greater than the new 52-week lows.

Moreover, the VIX has declined to below 15 and approximately 70 percent of the stocks listed on the NYSE are trading above the 200-day moving average.

Without a doubt, these are positive developments and the trend is up for now.

Over in the commodities complex, the CCI Index is holding above the 200-day moving average. However, given the ongoing open-ended QE program, its performance is disappointing. Given the state of the economy, industrial commodities will continue to struggle and they should be avoided.

Looking at precious metals, it appears as though prices are still caught in a tight trading range. It is notable that both gold and silver are struggling to climb above their recent highs and this is largely due to the commercials which have established a massive short position. Usually, the commercials are right about the near term direction of the market, but in this case, it is possible that they may get trampled by the bulls. Data shows that retail investors and large speculators are flocking towards precious metals and it is conceivable that this time around, the 'shorts' may get taken to the cleaners. Although we do not possess a crystal ball, it does appear as though precious metals are in the early stages of a multi-month rally which could last until spring.

Over in the currencies patch, the world's reserve currency is weakening and its trend is down for now. I often refer to the US Dollar Index as the world's fever chart and for now, the temperature is declining. In my view, the US Dollar Index has formidable overhead resistance around the 200-day moving average and it is likely that the greenback will weaken further.

Finally, over in the credit markets, US Treasury yields have risen over the past week and it seems as though they are headed higher. Elsewhere, high yield corporate bonds are enjoying quite a rally. Last but not least, peripheral European bond yields are coming down and they may fall even further. Income seeking investors should continue to park their capital in high yield corporate bonds and US mortgage REITs.

The author is CEO of Puru Saxena Wealth Management (www.purusaxena.com). The views expressed here are entirely his own.

(HK Edition 10/06/2012 page2)