So QE3 is coming?

Last week, BTIG's Dan Greenhaus pointed out on air that the Fed minutes were more dovish than the market had interpreted. He posited that following the market's unenthusiastic reaction to the Fed minutes, his team did some deeper reading, and found that there was more pro-stimulus sentiment among Fed governors than met the eye. Today Bernanke spoke, and the market reaction was rather interesting. Initially markets, led by gold (equities followed) sold off. Then, as Bernanke began to acknowledge just how difficult market conditions are, markets found their way back. As I write, the S&P, which had gone negative about 6 handles, is now up 10. So perhaps the market is starting to see what Greenhaus saw last week. It may seem crazy, but that is how this market works. The worse the perceived economic news, the better for markets, because the more bad news, the greater the likelihood that QE3 will be initiated.

Be very careful to take the market's short term delight with a strong grain of salt.

If you watched his testimony today, it becomes quite clear that the Fed has not made up its mind as of yet as to whether or not it will act. Bernanke had some very intriguing Q&A, particularly with the likes of Bob Corker and Chuck Schumer. Schumer told Bernanke not to expect anything to get done in congress, and thus, to get to work on his own. Corker questioned Bernanke as to why he was not more critical of congress, and did not stand up to them more. All else aside, it became clear that congresspeople have accepted their own ineptitude. Bernanke did however say explicitly that were sufficient action to be taken by congress to help bolster the economy, the Fed would be less likely to come to action.

We have, for good reason, become very skeptical of anyone we see with a microphone who sits in front of congress. Bernanke however, has been pretty consistent and straightforward (regardless of what you think about the job he has done or the job he has). I think it is entirely possible, and even likely, that the Fed has not made up its mind. He made it clear today that policy action is possible in the future, but he never denied that in the past. Its a lot about nothing, especially considering there is limited evidence that QE3 will actually do anything to boost the economy. More liquidity does not mean more economic activity.

Fortunately bank earnings have given the stock market a real reason to be happy. But complacency is simply too high in this market. The mere fact that the bad news = good news scenario is how market participants are thinking tells us that we are in denial. Those who watched the Warren Buffet interview last week heard his pessimism, as he blatantly stated that things have gotten materially worse in the last 6 weeks in the Europe. He was also not as "gung-ho Go America!" as he usually is. Buffet has probably been the economy's best cheerleader since the crisis began in '08. To ignore his shift in tone (all we do is listen when its positive) simply highlights collective investor denial. Europe somehow manages to keep muddling through, but it is past the point of return. The bid for the dollar will remain in this market as the inevitable doom sets in over Europe,  sending equities lower. This market is simply too complacent, trading at 1357 (S&P) right now. Let's take a look back in a month, I think we'll be lower.