What Does QE3 Mean?

pauline_yong

Publish date: Sun, 16 Sep 2012, 07:31 AM

Someone asked me QE3 announced during the market peak, will the stock price go higher?

To answer the question, let us understand what QE means. QE stands for Quantitative Easing. It is a kind of monetary policy that increases the money supply in the financial institutions, so that the financial institutions have more funds at lower cost for lending.

The key here is "more lending", so that consumers borrow money to spend and firms borrow money to invest, all these will drive at more economic activities and finally reflects in the GDP figures.

Hence, whether QE3 will work depends on the willingness of the consumers and producers to borrow money to expand their economic activities. Let's take a look at the following charts:

The first chart is the US consumer confidence index. We can see the general improvement in the confidence level in the consumer sector.

However, the US business confidence (Chart 2) is rather weak with figures below 50 for the last 3 months.

This may mean that the QE3 of US600 billion of fresh funds may not reach the desired result that the US government wants.

So does that mean we shall stay on the sideline and keep our money in the bank? No! Because your money in the bank will lose purchasing power as the bank rate is negligible. We should invest in dividend stocks and income generated assets such as REITS or even properties.

Recently, I took advantage of the sell down in the KLCI by re-balancing my portfolio. I cut loss on non-performing stocks and switch to dividend yielding stocks. Immediately I see my portfolio appreciated 4% within a week.

Currently, all major indices are pointing at bullish trends, however do take note that the US market has been in an uptrend since June, the next resistance for the S&P 500 is 1480. As for our KLCI, you may want to take into consideration of our election risk, and switch to dividend stocks or REITS.

Happy Investing!

Discussions

3 people like this. Showing 14 of 14 comments

lotsofmoney

The present QE is specifily to buy the bankrupt asset off the bank's balance sheet. The banks will benefit and the CEOs will get another 10million in bonus. Nobody else will benefit except for the psychotic stock market, commodities and currecy market.

I do agree with you to swtich to dividend stocks.

2012-09-16 10:22

alexisvics

When US government starts printing more US dollar, its time to buy share, comodities and gold.

2012-09-16 11:04

kkbee

more lending and more stimulation.....they keep on repeating this. Why not just do another QE4 next week and QE5 another week later

2012-09-16 11:20

andy118

Why does QE's does not work in the US? QE's most probably benefit the rich people who can afford to borrow cheaply from the banks and invest all over the world to reap gains from the stocks, bonds, currency, commodities etc. Meanwhile the poor are too poor to borrow from the banks (or the banks would not lend to these high risk borrowers) to invest or to consume more.
At the moment it do benefit us stock kakis but we have to be careful for they may run off suddenly leaving us in the lurch. They are here to make money not for charity.
Just worth my 3 sens. Happy investing.

2012-09-16 11:36

sure88

Read what Marc Faber has to say about QE 3.
A good read since we have an extended
weekend ahead.!,

2012-09-16 12:02

KC Loh

Mr everyday-doom-coming Faber has been predicting wrong for the past 2 years. Next year maybe his year! :)

2012-09-16 12:09

KC Loh

in my mind, Bernanke's hands are tied. he had to respond to ECB's positives. Banking on job returns is the only way out after no more fiscal policy room to manouver. So far 40bn buying of bond every month is good to keep debt rates from ballooning only. However inflation will cancel out any positives in the long run. The only flaw i can see is he declared he is leaving interest rates low til 2015. after the QE3 wears off, and without proper handling, that will be the start of recession, stagflation and God forbids, depression.

he need to raise interest rates as soon as 2 or even 3 solid quarters are reported.

2012-09-16 12:24

KC Loh

good write up:
http://biz.thestar.com.my/news/story.asp?file=/2012/9/15/business/20120915210426&sec=business

an addict fix at the most and Malaysian stock is at all time high again. Vulnerable to bear now and problems in middle east!

2012-09-16 13:56

KC Loh

in short, get out of US dollar denomination backed business and focus on counters that trades mainly in East Asia, India, Russia and Latin America!! Select local defensive stocks! :)

2012-09-16 14:04

kkbee

when it comes down, do another QE again.
when feel tired and need to look strong again, just inject another steroid shot

2012-09-16 14:45

KC Loh

that can work, provided you wanna see the 2nd biggest economy in the world turn to another zimbabwe!

2012-09-16 14:59

KC Loh

good reading : http://online.wsj.com/article/SB10001424052748703730804576314953091790360.html

2012-09-16 15:04

kkbee

this reminds me of our Japanese banana money

2012-09-16 15:09

nick

Yep. An inevitable economic downturn is coming soon. This easy money will end up in assets, creating another big bubble. Dow is approximately 6% from it all time high of 2007. US unemployment rate stands at 8.2%, with debts of almost 100% of GDP. It makes me wonder whether the US stock market is severely overvalued considering the economic environment they are facing.

2012-09-16 21:23

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