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Welcome to the 2nd Half of the Show – QE3 a Welcome Sight for Investors

It’s hard to believe that the 2nd half of 2011 is here already, and where does the time go? Josh will be 17 this month. It feels like just yesterday, I was announcing his birth in one of these newsletters. Times have changed for the better as I had a mustache then (Why didn’t somebody stop me?). Although, from an investor standpoint, it’s not so good as the market was at about the same level as it is today.

The worsening employment situation, as evidenced by this morning’s jobs report clearly shows that we’ll be slogging through the mud for a long time to come. However, lucky for us a new quarter is upon us and with it a new earnings season. At last something for the market to focus on other than Europe and the US economy. After all, it is earnings that really drive stocks. Sure, the worsening economy will have a negative effect on earnings, but it shouldn’t show up this quarter.

Pimco’s Bill Gross said it best:

“Corporations are in the catbird seat. They’ve got cheap financing, cheap leverage. They’ve got cheap labor and the ability to move from one country to another at their will. And so corporations basically have done very well.”

What Bill is essentially saying is that with all the excess liquidity sloshing around the economy from the quantitative easing programs and the continuation of QE Mini-me, corporations couldn’t help but prosper. This has translated into stellar earnings which will be reflected in this quarter’s as well, which I expect to push stocks to new highs. Although, if earnings disappoint, the recovery rally is over.

However, these advantages are quickly dissipating as corporations are running out of magic powder to increase productivity from workers. The continued high unemployment, over- leveraged consumer and our aging population will continue to hinder new large scale consumption until the next generation, the “Echo Boomers,” begin entry into their peak spending period, which is not for several more years.

Even though the economy has strengthened, much if not all of it has directly increased the deficit. On the surface, the massive borrowing needed to fund the stimulus programs, appears to be a good move, as it gives an instant and immediate boost to the GDP. This makes it like prosperity and good government policy. Unfortunately, it cannot substitute for private sector investments which are necessary to drive our nation’s long-term growth. More debt means higher future tax burdens, draining future private sector investments, and decreasing returns on investments. This reduces current and future private sector investments, which directly impacts future growth. This is discussed in great detail in Facing Goliath – How to Triumph in the Dangerous Market Ahead, a must read for every investor.

Therefore, barring another full scale QE3, this could very well be the peak in this cycle’s earnings phase, and investors have to prepare accordingly.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.