By Brandon Matthews
Attention all economists! Throw away those PhDs! All you brokers out there, forget everything you learned. Finance professors, stop teaching. As it turns out, the Fed has turned your years of expensive education and decades of experience into just another asset bubble that it has decided to burst. To borrow a line from Enemy of the State: Mr Bernanke, you're either incredibly smart ... or incredibly stupid. And just like in that movie, we'll have to wait and see how it all plays out.
The following short video is the bullish percent sector bell curve from September 1, 2010 through December 31, 2010, put into motion. The best time to buy stocks are when the sectors they represent are on the left side of the chart. The right side of the chart suggests over-bought sectors, where new positions should be avoided and all long positions hedged. Nearly every sector has shifted far to the right, and have done so without the benefit of the retail investor. There continues to be no significant mutual fund inflows despite this shift in nearly all sectors. Good economic news is supposed to have positive effects on equities.
Thanks to QE2, all news -- good and bad -- has positive effects on equities. The NYSE Bullish Percent touched 80%, just two percentage points below its all-time high. Historically, this signals a red flag to market professionals, and this time is no different as people such as myself are sitting in joyful anticipation of a much-needed correction. However, it's beginning to look like Mr. Bernanke will never allow this to occur.
I had an epiphany this week while listening to CNBC. Two analysts were discussing the rise of Bank of America (NYSE:BAC) shares despite the problems that plague the banking giant. I realized then that QE2 has nothing to do with job growth, despite its billing. We are looking at government-sponsored stock market manipulation at its finest! The Fed is creating an asset (or, to be more specific, equity) bubble -- and it is doing so in a way that is purely evil genius. I think Mr. Bernanke will not be satisfied until the sector bell curve looks more like this:
I find it suspicious that stocks that have no business appreciating, such as Bank of America, have continued to do so. In fact, the only conclusion I could make from the debate was that BAC would need a miracle, or more specifically, a sudden and profound recovery in housing. This was the "Aha!" moment. You see, King Goldman Sachs (NYSE:GS) knows the intentions of the Fed, and that is why I believe BAC (and every other asset class, for that matter) is up. Let's be honest. Goldman Sachs always wins. Nothing goes up without its permission. They are after all, the Goldman Sachs.
Economists universally agree that a true recovery cannot happen without a recovery in housing. I believe the last projection I saw indicated that Florida has an 80-year supply of houses currently available. Municipalities are facing Armageddon scenarios, as property tax revenue declines arising from vacant homes are expected to test the financial health of cities nationwide.
What this country needs is an asset bubble! What better way to create immediate wealth than through the equities markets? Stocks will rise, creating new millionaires and, more importantly, creating new homeowners. I repeat: Mr. Bernake, you're either incredibly smart ... or incredibly stupid.