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Quantitative easing hopes give stocks a boost

Federal Reserve
Federal Reserve
Joe Sohm, Getty Images

The stock market was having a tough day on Wednesday, until the Federal Reserve released the minutes from the FOMC meeting of July 31 - August 1. The minutes are closely watched for any signals indicating that the Fed plans on implementing another round of quantitative easing. The last two rounds of quantitative easing brought great rallies to the stock market. Quantitative easing is based on POMO auctions, wherein the New York Fed purchases Treasury securities -- worth billions of dollars -- on a daily basis. After the auctions, the Primary Dealers would take the sales proceeds to their proprietary trading desks, where the funds would be leveraged and used to purchase high-beta stocks. You saw the results: A booming stock market -- despite a stalled economy. This is why stock market pundits are waiting with abated breath for the next round: QE 3.

The report from the National Association of Realtors on Existing Home Sales for the month of July did little to encourage stock investors whose interests were not limited to the housing sector. The report indicated that sales of existing homes during July increased by 2.3 percent to 4.47 million, compared with June’s 3.37 million. The result was a tad short of the consensus expectation of 4.50 million homes sold. By 10:30, the major stock indices began their slide.

A report from Japan’s Finance Ministry on Wednesday revealed that the nation’s trade deficit expanded nearly twice as much as expected. The news re-ignited fears of a global economic slowdown which spooked the European stock markets and reduced investor enthusiasm in the States.

Once the FOMC minutes were released at 2:00, those hoping for QE 3 found some exciting language:

Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.

Nevertheless, a full reading of the minutes revealed that the Fed has yet to conclude that QE 3 will be necessary. As a result, the stock market boost which followed the release of the FOMC minutes was only enough to bring the Dow within 30 points of Tuesday’s closing level.

The Dow Jones Industrial Average dropped by 30 points on Wednesday to close at 13,172 for a loss of 23 basis points (0.23 percent). The S&P 500 advanced by only 2 basis points (0.02 percent) to finish at 1,413. The NASDAQ Composite enjoyed a decent increase of 21 basis points (0.21 percent) to close at 3,073.

With the exception of Lennar (LEN), Miami-based corporations had a bad day on Wednesday. As was the case with many homebuilders, Lennar (LEN) surged by 2.75 percent to 32.35 as a result of the positive report on existing home sales. Royal Caribbean (RCL) sank by 23 basis points (0.23 percent) to close at 25.99. Carnival Cruise Lines sank by 76 basis points (0.76 percent) to finish at 34.09. Ryder System (R) fell 1.84 percent to end the day at 41.19.

The following companies will be playing “beat the number” on Thursday with the release of their quarterly earnings reports: Hormel Foods (HRL), Regis (RGS) and Toro (TTC). Good luck!


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