Fed Policy Hurts Main Street, Creates Bubble Stocks

TheStreet.com

NEW YORK (TheStreet) -- This afternoon we learn the status of QE3 and QE4, the latest two rounds of quantitative easing programs instituted by the Federal Reserve last September and December. QE3 is an open-ended program where the New York Federal Reserve Open Market trading desk purchases $40 billion of agency mortgage-backed securities each month. QE4 adds another $45 billion of longer-maturity Treasury notes and bonds each month.

The stated intent of these purchases is to bring down long term interest rates, not to artificially prop up the stock market. Yields are higher, not lower and thus Fed policy has failed. Instead of bringing down interest rates, cheap money has been used to speculate in the stock market resulting in the ValuEngine valuation warning. The stock market bubble includes stock specific bubbles.

The weekly chart for the Treasury 10-year yield shows that the lowest yield was 1.377% set in July 2012, before QE3 and QE4 were implemented. With a current yield of 2.616% this yield is up 123.9 basis points.

Chart Courtesy of Thomson/Reuters

What the FOMC states after its meeting ends today will likely determine whether or not the 10-year yield holds its 200-week simple moving average at 2.557%. As the chart shows, this yield fell below the 200-week in October 2007 just before the FOMC cut the federal funds rate to 4.50%. It wasn't until Dec. 16, 2008, that this rate was cut to 0.00%. This corresponded to the low 10-year yield at 2.016% shortly thereafter. Note that in each period where this yield rose, the 200-week SMA held as support in April 2010 and February through April 2011. This makes the current test extremely important as Treasury traders react to the Fed statement.

My hope is that Fed Chief Bernanke will begin to taper QE purchases before he leaves office in early 2014.

Federal Reserve policy has hurt Main Street USA in several ways.

The 0.00% federal funds rate has shut out savers on Main Street. Savers are those who do not invest in the stock market and depend upon interest on bank CDs for living expenses. Since the end of 2008, savers have had to trim the principal of their nest eggs, as there is virtually no interest income to pay for necessities.

Many banks have not passed the recent higher Treasury rates to savers. On May 4 the yield on the 5-year note traded at 0.625%. Today this yield is at 1.404%, but the four 'too big to fail' banks still post 5-year CD rates between 0.40% and 0.55%. If you shop around at the smaller banks on Main Street you can find a 2.00% rate, but then you get hit with a penalty fee if you cash in your current CDs prematurity at the bigger banks.

I would like to know why banks are allowed to raise credit card rates. I checked my credit card rates and they range from 7.90% to 24.99%. Double digit credit card rates are unfair and reduce consumer spending on Main Street.

Banks claim they want to increase lending to small business. Not true! My business checking account had a line of credit with an interest rate at 5.25% at the end of 2009, 200 basis points above the 3.25% prime rate. During the credit crunch my bank was merged into one of the four 'too big to fail' banks, and shortly after the name change was made on the building, my rate was raised to 500 above prime to 8.25%. Last week I received notification that the spread will move up to 600 raising the rate to 9.25%. This tells me that the big banks do not want to lend to small businesses.

Fed policy has led to speculative bubbles fueled by that 0.00% federal funds rate. Crude oil peaked at $147.27 per barrel in July 2008 and then the bubble burst. Gold peaked at $1923.7 the troy ounce in September 2011 and then that bubble popped. In late 2008 and into 2009 the price of a gallon of regular gasoline fell below $1.50 per gallon. The 0.00% funds rate and quantitative easing has been a license for Wall Street speculation. Gasoline back above $3.50 taxes consumers and increases the cost of living on Main Street. This hurts the economy as consumers reduce driving.

The Federal also had a hand in the inflation and bursting the housing bubble. Home prices went parabolic into June/July 2006 then the bubble popped. Today cash buyers and investors are outbidding real buyers on Main Street leaving qualified buyers as renters. This is a re-inflation of the housing bubble.

On Tuesday S&P released its Case-Shiller Home Price Indices and the 20-city composite rose 2.4% in May vse. April. The year-over-year gain was 12.2% and the media called this positive. From the mid-2006 peak home prices are still down 25.0%. Home prices are up 16.5% since bottoming in March 2012 and this gain is re-inflating the bubble as home prices should rise by a rate slightly above the rate of inflation.

In a separate survey released on Tuesday we learned that home ownership is at a 17.5-year low.

On Tuesday I read that President Obama told the New York Times that when he appoints the next Fed chairman he wants someone who will focus on policies that will ordinary people. Don't hold your breath!

One bubble that has not yet popped is the stock market. With cheap money not available on Main Street, Wall Street is speculating in the stock market. This table shows five of many sell rated bubble stocks. I chose these due to name recognition.

The five bubble stocks profiled today are rated sell according to www.ValuEngine.com, and are overvalued by 28.8% to 86.6% with gains of 16.1% to 123.8% over the last 12 months. All are well above their 200-day simple moving averages which reflects the risk of a reversion to the mean.

Reading the Table

OV/UN Valued: Stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-engine" rating is a strong sell, a "2-engine" rating is a sell, a "3-engine" rating is a hold, a "4-engine" rating is a buy and a "5-engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Value Level: Price at which to enter a GTC limit order to buy on weakness. The letters mean; W-weekly, M-monthly, Q-quarterly, S-semiannual and A-annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: Price at which to enter a GTC limit order to sell on strength.

Amazon ($302.60) set an all time high at $313.62 on July 26 then the stock was downgraded to sell. My quarterly value level is $272.68 with semiannual risky levels at $313.60 and $324.33. The all time high tested the low end of this range giving buy-and-trade investors the opportunity to book profits.

Delta Airlines ($21.20) has been flying high setting a multi-year high at $22.01 on July 29. My quarterly value level is $15.59 with a weekly pivot at $21.33.

DuPont ($57.68) set a multi-year high at $60.40 on July 23. My quarterly value level is $43.42 with a weekly pivot at $53.85 and semiannual risky level at $61.73.

General Dynamics ($85.65) set a multi-year high at $86.60 on July 24. My semiannual value level is $77.43 with an annual pivot at $86.80 and my annual risky level at $90.45.

Ingersoll Rand ($61.10) set a multi-year high at $63.35 on July 22. My quarterly value level is $43.68 with a semiannual pivot at $62.60 and a semiannual risky level at 466.74.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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