Long ago, in the days before passenger ships featured climbing walls, ice rinks, onboard zip lines, and nonstop gastronomic gorging sessions, stately ocean liners plied the transatlantic route between London and New York. It was on this date in 1938 that the largest liner of its era was launched in Clydebank, Scotland. Christened the RMS Queen Elizabeth, the vessel was pressed into service as a troopship during the Second World War and later operated as half of Cunard’s transatlantic service along with her seafaring sibling, the RMS Queen Mary. In 1969, she was replaced by the RMS Queen Elizabeth 2, commonly known as the “QE2” during its long run that concluded in 2008. For a generation of cruise passengers, the acronym QE2 represented the last survivor of the age of the transatlantic passage, but today’s Fed watchers have given it an entirely new meaning.
Investors have been hoping that the Fed can salvage the smoldering hulk known as the American economy and they are increasingly pinning those hopes on a second round of quantitative easing, dubbed “QE2” by pundits. Just a few short weeks ago, as loyal readers of this column will recall, a public consensus was gelling around the idea that the Fed had run out of effective monetary tools, and the major indexes were sinking fast. But now, like a geriatric passenger reaching for his third shrimp cocktail of the evening, traders appear to have concluded that more is better and the markets have responded by turning in a stellar September performance.
Trouble is, traders are acting as though QE2 is a foregone conclusion, and they are buying on the assumption that the ship has already sailed. The markets have floated to higher levels on optimism that the Fed will act and that its policies will be effective. Market participants should keep in mind that since it is going to take some horrendous economic data (yes, it can get even worse) to convince Captain Bernanke to fire up the engines, that very data may spook the markets, so it is probably overly optimistic to expect things to run on cruise control for the next few months. Sharp-eyed investors may have taken advantage of the duty-free prices available during the market’s summer swoon, but this remains a trader’s market. Those same investors may choose to hold a core long position, but it seems to me that it might be a good idea to trim the sails by taking a few profits now and then. You don’t want to be far from a safe harbor should the seas turn choppy.
Upon retirement from service, the original “QE” was eventually sold to an owner who intended to convert her into a floating university, but unfortunately the grand old lady burned and capsized in Hong Kong harbor in 1972. Before the above-the-waterline portions of the ship were sold for scrap, you may recall that the wreck was featured in the 1974 James Bond film “The Man With The Golden Gun”. While the Fed’s original QE may have failed to float our economic boat, bullish types are betting that the movie’s title can also serve as a description of Chairman Bernanke as he embarks on QE2. If Ben succeeds in getting our economic ship of state up to anything approaching “full speed ahead,” the market could make some real headway against the recessionary currents that have slowed our long journey to recovery, and finally leave the bears behind on the pier for good.
All ashore that’s going ashore.
Bernie McSherry is senior vice president for strategic initiatives at Cuttone & Company.