QE2 and S&P reaching 1,350?

The intention of QEs, as the Fed spelling it clearly, is to boost core CPI. For the equity market, this equates to PE multiple expansion. QE1 did manage to stabilise CPI for a while. But the Fed considered it inadequate to fight the deflationary forces, hence the launch of a $600 bln QE 2.

The Fed will start purchasing US Treasury debt from Nov. 12 onwards. The rate of purchase will be $5 bln per day, as opposed to the $5 bln per week we have seen since mid-August. Between Nov. 12 and Nov. 19, some $30 bln to $43 bln of liquidity will be injected to the markets, representing about 50 percent of the liquidity ($76 bln) poured by the Fed since mid-August.

If QE2 is to raise core CPI to 2.5 percent, a level consistent with pre-crisis levels, the PE multiple is to increase to its pre-crisis level of 14 times. At 14X forward PE, the S&P should close to 1,350, up 12.5 percent from a current level of 1,200.

Supposedly, company executives and private equity will take advantage of low rates and tight spreads to leverage up companies. Let's see if we'll see increase in dividends, share buybacks, M&As and LBOs.