The Bernanke Put

Ben Bernanke
Ben Bernanke

The Bernanke put: Last week, stocks sold off on concerns the Federal Reserve was in no hurry to implement a third round of quantitative easing (QE3) or, possibly, extend “Operation Twist.” Today, stocks will be sold at the open because...job growth is weaker than expected...and QE3 is more likely?

The answer, of course, is that two different sets of trades are at work: In the first, those who trade the Bernanke put , in the second, those who have been buying into slow but steady growth.

If the Bernanke put is still active, stocks should hit their lows early this morning, and then move up.

Is this really a fall off a cliff, or a buying opportunity? The January and February job numbers might have borrowed from March, and the concern is that this may be the case with other data, like retail. Does this mean that the 11 percent gain in the S&P 500 index has also borrowed from the future?

It’s possible. So if you have a pullback, will it be a mild, five percent pullback, or something worse, in excess of 10 percent? A 10 percent drop would wipe all of the year's gains.

We need more data, but remember this: Midyear pullbacks or corrections are the norm. The average year-to-date decline in every year since World War II has been a decline of 9 percent from the prior year close. There have been declines in all but seven years since World War II, according to Sam Stovall at S&P Capital IQ.

What does this mean for stocks? One sector that will likely be affected: homebuilders. The main concern is well-known: Current price-to-book multiples are well above their 10-year averages (about 1.5) versus single-family housing starts, which are well below their 10-year averages.

Bulls have argued that with an improving economy, it is quite possible for valuations of builders to be elevated (true), but if you buy into the below-2-percent-gross-domestic-product-growth scenario, the homebuilders are overvalued.

The argument has been that we bottom in housing and the economy will catch up with the valuations. But the macro is not going to catch up. Bears can argue that nothing from the home sales data warrant the valuation.

Another possibility: A bifurcation in builders. Toll Brothers and Lennar, both higher-priced builders, might do better as that segment of the market will likely hold up better, while lower-priced builders like PulteGroup or KB Home might have a tougher time with slower job growth.

Remodelers will likely continue to do well, so Home Depot and Lowe’s Cos. will still have plenty of customers, but some like USG Corp., that have more exposure to builders than remodelers, might have trouble.


1) China's March Consumer Price Index was stronger than expected, up 3.6 percent year-over-year vs. 3.4 percent expected. This will put some limitations on their ability to reduce bank reserve requirements. Chinese first-quarter GDP is due Thursday.

2) An Apple downgrade? BTIG downgrades Apple to "neutral," and removes its $600 price target, which was surpassed. Analyst Walter Piecyk cites: 1) squeezed margins in the post-paid wireless industry; 2) the need for a price cut in the iPhone; and 3) the "elevated expectation that the company will deliver another revolutionary product into the market."

A downgrade of Apple is a rarity: Of 52 analysts covering Apple, only seven do not have a "buy recommendation.

Piecyk has been at this for a long time: He is well-remembered for a $1,000 price target on Qualcomm in December 1999, which moved the stock from $500 to $659 is a single day, a 30 percent jump. After splitting 4:1 on Dec. 31, 1999, Qualcomm hit an all-time high of $200 ($800 pre-split, $100 at current split-adjusted price) on Jan. 3, 1999, and moved down steadily from there, along with other tech stocks.

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