Stocks rallied fiercly today after the durable goods number came in better than expected:
"*U.S. AUGUST DURABLES ORDERS FALL 1.3%; EX-TRANSPORT RISE 2%"
Another trigger today weas famed hedge fund manager David Tepper's comments on CNBC today:
David has a lot of "street cred" after averaging 40% returns annually over the course of 17 years including a whopping 130% return in 2009. Tepper earned over $4 billion alone in 2009.
He also does very few interviews so needless to say when he does come out of hiding people listen.
Here is his basic thesis as heard above:
""Either the economy is going to get better by itself in the next three months...What assets are going to do well? Stocks are going to do well, bonds won't do so well, gold won't do as well," he said. "Or the economy is not going to pick up in the next three months and the Fed is going to come in with QE.
"Then what's going to do well? Everything, in the near term (though) not bonds...So let's see what I got—I got two different situations: One, the economy gets better by itself, stocks are better, bonds are worse, gold is probably worse. The other situation is the fed comes in with money."
Tepper's case is a very compelling one for the short term in my eyes. I had one problem with his comments and it appears many traders voiced similiar concerns on the street:
Bob Pisani explained it nicely in his blog:
"Tepper bullish...but what does it say about moral hazard?
Hedge fund manager David Tepper, on CNBC, has sparked an interesting debate among traders.
Tepper is bullish on stocks and feel the risk reward is on the upside. Why? Because the Fed is your friend. Quantitative easing (QE) is going to trigger a move out of bonds and into stocks.
But a number of traders say this is exactly the problem:
"If Tepper on CNBC didnt just wake up the Fed to the moral hazard of QE I dont know what will," what trader said. "Is this the creation of expected inflation or are they generating stagflation through their communique?"
The Bottom Line:
I share the same concerns.
Here is another concern that I thought about today:
By threatening another QE, the Fed has forced the market to chase risk because they believe the Fed has their back via QE2.
This "perception of safety" is forcing money to get out of bonds and chase stocks. We saw this today as the 10 year dropped and yields rose:
The question I have is how do we continue funding ourselves via selling treasuries if the Fed and their QE2 talk is causing investors to bail on bonds and pile into stocks?
The way I see it: The Fed's QE2 jawboning may have very well backfired on them. We cannot afford a large rise in interest rates due to the massive amount of treasury issuance that this country has done over the past several years.
The Fed knows this and if a stock pile on continues, it may be forced to back off of their QE2 idea EVEN if the economy continues to drag.
For the short term I expect the Ponzifest to continue. Longer term I think the Fed may have well just painted themselves into a corner.
Dosclosure: Now new positions taken at the time of publication.