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QE3 Slow to Impact Mortgage-Backed Securities

Investor’s first read - Brooksie’s edge before the openTuesday, September 18, 2012 9:08 a.m.DJIA: 13,553.16S&P 500: 1461.19Nasdaq Comp.: 3178.67Russell 2000: 858.90Now that the Fed has

Investor’s first read – Brooksie’s edge before the open
Tuesday, September 18, 2012 9:08 a.m.

DJIA: 13,553.16
S&P 500: 1461.19
Nasdaq Comp.: 3178.67
Russell 2000: 858.90

Now that the Fed has answered the long-awaited QE3 question, what will investors worry about next?
How about – will QE3 work? Prior to the Fed’s announcement of QE3, the Street was relishing unsettling economic reports, since they increased the likelihood of the Fed opting for stimulus.

Now, those reports won’t be so palatable, as was the case with the Empire State Manufacturing Survey yesterday showing a sharp drop in economic activity for New York and adjacent areas.

Well, the Street will have to give QE3 more time to gain traction. Unlike QE1 and QE2, this time around the Fed has set no money or time limit for its stimulus. However, it is not without its hurdles.

While the purchase of Mortgage-backed securities (MBS) is designed to ease the cost of mortgages its impact will be limited by the inability to process them. Originators are swamped and sources say the time between agreeing to a loan and closing it run close to three months, up from one month.

That said, Fed chair Bernanke noted in his news conference that while QE3 targets MBS, it can also benefit equity and house prices, as well.

TODAY: Good possibility of a brief rally followed by a slip to DJIA 13,487 (S&P 500: 1455).

DIVIDEND PAYING STOCKS: I see a lot of recommendations for dividend-paying stocks. It is important to note that the price of a stock is “marked down” by the amount of the dividend on the ex-dividend date, i.e., you get a dividend on which you pay a tax, but the value of that stock is less by the amount of the dividend.
That may not matter if the Street perceives the stock as attractive because it pays a dividend and “bids it up”, thus offsetting the mark-down.

A stock should be bought (owned) for its prospects and suitability for one’s portfolio, not just because the company pays a dividend.

FACEBOOK (FB) at $21.52:

Today: A break above $22.15 calls for an attempt to hit $23. A rally failure indicates a drop to $21.12. At some point we should see a pick up in selling from traders who bought lower and sellers who were alarmed by its drop below $18 and are going to use this rebound to lighten up.

FB’s Sept. 4 low of $17.55 is looking pretty good right now, though a move down to a smidge below $19 as a “test” is possible.

I think I have achieved the goal that I set in May, that is to offer daily guidance for followers of FB starting at $34 on May 21 with my warning about a drop to the $24 – $26 area, which it did shortly thereafter. Following a rally back into the 30s FB dropped into the low-20s where on August 2, I forecast a low for the stock at $16.88.

On September 4, it hit $17.73 before rebounding into the 20s over the last six days. I plan to cut back on coverage, commenting on occasion when I think it would be helpful.

I don’t own, nor have I ever owned FB. Generally, I don’t recommend or comment on individual stocks. I started covering FB technically after its IPO because I felt at $34 it was very vulnerable in face of all the misunderstanding and hype. At some point, I will drop coverage. I would like to see readers through the full cycle, from the $34 where I picked it up as “going lower” down to a bottom.



Empire State Mfg Svy (8:30) – Dropped to a minus 10.41 in September after a 13-point drop in August to minus 5.85. in August, New Orders also dropped to 14.03 from minus 5.50.


Housing Market Ix (10:00) – Rose for the 4th straight month to 37 from 35 in August the best since 2007.


Housing Starts (8:30) – dropped1.1% in July after an 8.8%jump in June. Permits rose 6.8% after a drop of 3.1% in June.

Existing Home Sales (10:00) – Rebounded 2.3% in July to a 4.47 million annual rate reversing a 5.4% drop in June.


Jobless Claims (8:30) – Rose 15,000 to 382,000 for the week ended Sept. 8, partly due to Tropical Storm Isaac and Labor Day The 4-week average is now 375,000

Markit PMI Mfg flash In. (9:00) – Final Aug. index was revised down 0.4 points to 51.5.

Philadelphis Fed Svy (10:00) –Improved to minus 7.1 in Aug. from minus 12.8 in July

Leading Economic Indicators (10:00) – Rebounded 0.4% in July after a drop of 0.4% in June.
Note: Economic data above is subject to revision, so what you see as the latest reading may change in the next report.

George Brooks
The writer of Investor’s first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

The Fed model compares the return profile of stocks and US government bonds.