Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Quantitative Easing And Stock Market And Foreign Currency.

|Includes: ICICI Bank Ltd. (IBN), JPM, TM

Martin Feldstein in a recent WSJ Op-ed has written about Fed's QE program. There is a popular notion that there is a direct correlation between QE program and the Stock Market. Increase in QE causes the markets to go up and any signs of stopping or reducing the Fed's QE cause the market to drop.

The Japanese Nikkei is up 50% in the past 4 months ever since the Bank of Japan indicated that it will have their own version of QE. This kind of correlation leads to incorrect conclusion that QE and Stock market growth has 1 to 1 correlation between them. Yen Dollar exchange rate in the past 4 years has gone from 100 Yen to 1 Dollar to 80 Yen to 1 Dollar and now currently back to 100 Yen to 1 Dollar. The financial media has two different versions for the effects of QE. One is that there is a flow of money from outside Japan into Equities therefore the stock market is up. Now what happens to the cash generated by sales by domestic investors is not mentioned. The other effect is on the foreign exchange market, the start of carry trade by Japanese investors is mentioned in the press as cause of drop in exchange rates. The flow of money from Institutions investors from outside Japan in Japanese stock market is excluded in the Yen devaluation against dollar.

Martin in his article has mentioned that Earnings of companies have grown by about 50% since the recession peaked and the PE ratio of stocks has dropped from 21 to 17. The drop in PE ratio is a sign of reduced demand from investors. Increase in QE probably does not encourage investors to dump bonds and buy equities. Had this be true the PE ratio would have increased. Ultimately over longer period what really matters for share prices is underling cash flows represented by earnings. Some of the popular stories mentioned in the press are just stories. It probably drives some investors, to ride into market, which causes momentum and momentum is a very popular driver of the market. It is okay to be part of momentum, but when to get out of the wave is quite tricky and investors should take note of that.