Disappointing Economic Data; QE3 to the Rescue?

After reading about this morning's economic indicators and how three of the four announced were very disappointing, we were surprised to see the equity market in the positive; more specifically, as we are writing this, S&P 500 is up approx. 2 points at 1387. We thought we should provide some type of perspective explaining this. So here it goes.

While the housing, manufacturing, initial jobless claims, and industrial production economic data were all disappointing this week, such disappointment has once again brought to the forefront the idea of Bernanke and the Fed coming to the rescue with another QE. Of course, the probability of another QE declined sharply, as we had suggested in March. However, hopes and dreams based on more Bernanke-type of equity market steroids remain alive, especially after seeing just how moderate the current economic growth rate is. We must note that the disappointing data may answer the question of whether or not Alcoa is the bellwether of the economy, at least for now.

Along with disappointing economic news, another factor that may give Bernanke the 'ok' for a QE is lower oil prices, which we have seen the last couple of weeks. Lower oil prices are driven by the not-very-impressive economic data, but also by what appears to be a prioritized strategy by the White House, which is to downplay a possible attack on Iran using various methods. We certainly suggested this to the White House in one of our previous posts.

Examples of some of the methods used include the so-called 'P5+1' negotiations that took place last weekend in Istanbul, Turkey. That will be followed by another meeting between Iran and the countries that have imposed economic sanctions and are threatening to bomb it, in Baghdad next month. The White House has continued to ignore negative comments made by Israel's Ben Netanyahu regarding the 'P5+1' as it knows that if it agrees, then the oil market will further price in an attack on Iran by US and Israel; and if it disagrees, then the market will further price in an attack on Iran by Israel.

The latest method used by the White House was President Obama's announcement of his plans to rein in oil speculation. This is very amusing to us. We see and hear both US political parties continue to voice support for Israel's objective to hit Iran, they continue to push for additional oil embargo and economic sanctions that basically reduce supply of oil for some period of time in Europe, Middle East and Asia; and then they blame the higher oil prices on traders and Iran.

With all of this said, it appears that the combination of bad economic news and various methods used to downplay a potential attack on Iran, have once again raised the possibility of the Fed and Bernanke proposing and executing yet another QE. In our opinion, if they do decide to take such action, it has to be done sooner than later because the Fed cannot and must not risk being viewed as a political factor in the upcoming Presidential election. By the way, we believe it certainly is one.

Lastly, we must note that one thing is positive about the market - earnings reports. Although some companies have missed expectations, most have not. However, these are Q1 earnings results, which ended at the end of March. Some early April economic data show that Q2 may not be off to a good start. Then again, corporate management teams and their investor relations departments can very easily play it safe and provide, as they say, 'conservative' guidance in order to keep the sell-side analysts' estimates low enough to beat, so the market can react positively. We remain cautious regarding the equity market.