Chairman Ben Bernanke rescues Wall Street

If the goal by Federal Reserve Chairman Ben Bernanke was to inflate asset prices, then he certainly has succeeded when looking at the average price of a stocks. The Value Line Arithmetic Composite Index, which measures the change in 1,650 stocks equally, hit an all-time high today, recouping all the losses from the technology bubble and housing bubble in just 2½ years.

But don’t breakout the champagne before opening your 401k. The index, created by the legendary investment advisory firm started in 1931, treats all 1,650 stocks the same, thereby making it impossible for actual investors to mimic. For example, a move in Exxon Mobil (XOM) counts the same as a change in Tootsie Roll (TR). That makes the index much more influenced by smaller, riskier stocks than the S&P 500 Index, which is weighted by market value.

What the measure is used for in the investment community is to calculate sentiment. The Value Line measure clearly illustrates the surge in equities as an asset class following the extraordinary measures by the Federal Reserve to smoke investors out of fixed income by pushing interest rates to effectively negative territory. And the fact that it is hitting a record high is giving investors such as Gluskin Sheff’s David Rosenberg, who cited the measure in his note today, and others, reason for pause – not celebration.

"It makes sense that this liquidity works its way into many asset classes with a tremendous amount going into equities," said Jim Iuorio, a trader for TJM Institutional Services. "But the stocks’ lofty levels are a little bit misleading as they are priced in U.S. dollars and the exact value of the dollar is debatable."

The gains in the Value Line Index trounce the returns in the more widely-followed indices. The S&P 500 is still off 21 percent from its 2007 record close hit the October before the credit crisis struck. The Dow Jones Industrial Average is off 19 percent from its record hit during the same month.

Now that the Federal Reserve has announced its intention to purchase $600 billion in U.S. Treasuries, interest rates have actually gone up in Bernanke’s face, leading some to question the effectiveness of the quantitative easing strategy. But others point to the jump in average stock prices – as measured by Value Line — as reason for its effectiveness.

"The chart also proves that Ben Bernanke has succeeded with QE," said Brian Kelly of Kanundrum Capital. "Rising stock prices increase household net worth, and magically Bernanke has then created a whole bunch of credit worthy borrowers. Invisible hand stuff should follow."

Individual investors are not feeling like they have recouped their losses from the technology and housing bubbles. In fact, last month was the first time they pulled money out of bonds and into stocks during this whole equity rally.

At the very least, maybe the Value Line index will show people how we are still slaves to following just 30 to 500 large cap stocks every day to determine our mood and our wealth. It’s been that way for a long time, beginning with Wall Street’s focus on large companies that tap capital markets and are deemed worthy of their research, and culminating today in the exchange-traded fund craze.

Maybe it’s time for investors to break away from all that and take some of the investing into their own hands. All they needed was a few average stock picks and they could have made their money back.

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. 


John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team.

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