×

Bernanke’s ‘Exuberance’ Could Lift S&P By 8%

During the technology bull market, Former Federal Reserve Chairman Alan Greenspan defined the investing mood of the public as irrationally exuberant. Today could it be the current Fed Chief whose spending is so uninhibited?

“We find it ironic that in December 1996, when Mr. Greenspan suggested that perhaps there was some ‘irrational exuberance’ elevating asset prices in the United States, the dividend yield on the S&P 500 was 2 percent,” said Doug Cliggott, head of U.S. equity strategy for Credit Suisse, in a note. “Here we are 14 years later, and it appears the Federal Reserve is on the cusp of large scale asset purchases with the clear goal of inflating asset prices. And the yield on the S&P 500 today is again 2 percent. Perhaps we are entering a new age of ‘artificial exuberance’.

Cliggott, who made a name for himself by calling the top of the tech bubble when he was employed by JPMorgan, is pointing out quite an interesting role reversal at a time when stocks relative to dividend payouts are valued at virtually the same levels. While the strategist certainly has his doubts about whether large scale assets purchases by the nation’s central bank will work, it’s not stopping him from calculating how much buying power Ben Bernanke’s incremental purchases could have.

By his calculation, every $100 billion yield-lowering Treasury purchase will add nine points onto the S&P 500. Cliggott gets to that figure by using a proprietary valuation method that indicates $100 billion in government bond purchases will lower the risk-free yield by three basis points, or .03 percent. That in turn translates into a three index point gain in the S&P 500. If the purchases total as much as $1 trillion, as Cliggott believes possible, that means a 90-point, or 8 percent, rise in the S&P 500.

The Federal Open Market Committee is expected to unveil its plan for these purchases at the end of their next meeting on November 3rd. But don’t get all exuberant yourself yet.

Stocks turned lower yesterday after Fed Bank of St. Louis President James Bullard said that the stimulus may be rolled out in “small increments’’ as needed, deflating the hopes of those wanting that $1 trillion reflation Kaboom.

A CNBC survey of economists, fund managers and traders this month showed that they believe, on average, the Fed will announce plans to purchase $500 billion worth of assets. Respondents also gave estimates as low as $100 billion and as high as $1.5 trillion. By Credit Suisse’s math, a $500 billion purchase would add just 45 points, or less than 4 percent, to the S&P 500.

To be sure, anticipation of this move may already be baked into the market during the rally since the summer. For this reason, in the end, Cliggott believes the S&P 500 will get to just 1200 at the end of ‘QE2’ in 2011 anyway.

* For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.

______________________________________________________
Got something to say? Send us an e-mail at fastmoney-web@cnbc.com and your comment might be posted on the Rapid Recap! If you'd prefer to make a comment, but not have it published on our Web site, send your message to fastmoney@cnbc.com.

Trader disclosure: On October 22nd, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Pete Najarian owns (BAC); Pete Najarian owns (GDXJ); Pete Najarian owns (YHOO); Pete Najarian owns (DOW); Pete Najarian owns (DD); Pete Najarian owns (AAPL) call spread; Pete Najarian owns (AKAM) call spreads; Pete Najarian owns (NFLX) call spreads; Pete Najarian owns (F) Bonds; Terranova owns (APA), (AAPL), (AXP), (C), (CRM), (GOOG), (GS), (FCX), (ISRG), (MMM), (ORCL), (PCP), (PEP), (PFE), (TBT), (UPL), (VRTS), (XBI); Cortes owns (K); Cortes owns (TSN); Cortes is short crude oil; Cortes is short gold; Cortes is short (RSX); Cortes is short the U.K. Pound; Cortes owns the S&P 500; Grasso owns (ASTM), (BA), (BAC), (C), (CSCO), (JPM), (LPX), (MO), (MOT), (NDAQ), (PFE), (PRST)

For Joe Terranova:
Terranova is chief market strategist of Virtus Investment Partners, LTD.
Virtus Investment Partners own more than 1% of (ABAX)
Virtus Investment Partners own more than 1% of (ALK)
Virtus Investment Partners own more than 1% of (AMKR)
Virtus Investment Partners own more than 1% of (CASS)
Virtus Investment Partners own more than 1% of (CSVI)
Virtus Investment Partners own more than 1% of (IGE)
Virtus Investment Partners own more than 1% of (LDR)
Virtus Investment Partners own more than 1% of (LPHI)
Virtus Investment Partners own more than 1% of (MGRC)
Virtus Investment Partners own more than 1% of (NRCI)
Virtus Investment Partners own more than 1% of (DBV)
Virtus Investment Partners own more than 1% of (XLB)
Virtus Investment Partners own more than 1% of (XLP)
Virtus Investment Partners own more than 1% of (XLY)
Virtus Investment Partners own more than 1% of (XLF)
Virtus Investment Partners own more than 1% of (XLI)
Virtus Investment Partners own more than 1% of (XLU)
Virtus Investment Partners own more than 1% of (SUBK)
Virtus Investment Partners own more than 1% of (WDFC)
Virtus Investment Partners own more than 1% of (YDNT)
Virtus Investment Partners own more than 1% of (DRYS)

For Steve Grasso:
Stuart Frankel & Co and it’s partners own (COG)
Stuart Frankel & Co and it’s partners own (CUBA)
Stuart Frankel & Co and it’s partners own (GERN)
Stuart Frankel & Co and it’s partners own (HSPO)
Stuart Frankel & Co and it’s partners own (MCD)
Stuart Frankel & Co and it’s partners own (MERC)
Stuart Frankel & Co and it’s partners own (MGM)
Stuart Frankel & Co and it’s partners own (NWS.A)
Stuart Frankel & Co and it’s partners own (NYX)
Stuart Frankel & Co and it’s partners own (OPEN)
Stuart Frankel & Co and it’s partners own (PDE)
Stuart Frankel & Co and it’s partners own (PFE)
Stuart Frankel & Co and it’s partners own (PRST)
Stuart Frankel & Co and it’s partners own (RDC)
Stuart Frankel & Co and it’s partners own (TLM)
Stuart Frankel & Co and it’s partners own (XRX)
Stuart Frankel & Co and it’s partners own (SDS)
Stuart Frankel & Co and it’s partners own (UAL)
Stuart Frankel & Co and it’s partners are short (QQQQ)


For Michael Woolfolk
***No Disclosures***

For David Bank
RBC is currently providing (CSC) with investment banking services
RBC intends to seek compensation for investment banking services from (CSC) in the next 3 months.