12/17/2010 07:05 pm ET Updated May 25, 2011

Santa Bernanke Giveth and Taketh Away

Christmas began early on August 27 for equity lovers, when Santa Ben unveiled his plans for QE2 in Jackson Hole, Wyoming. The Standard and Poor's 500 index has gained a splendid 17% since then according to my Forbes mate Steve Schaefer in his "Exile On Wall Street" blog. Be advised that 60% of that double-digit advance was due to commodity-related stocks like oils, metals and agricultural production.

Example: FCX, Freeport McMoran (which Streettalk has consistently recommended as the preferred way to play copper prices ) rose from $87 a share on October 1 to $113 a share today, December 17.

That is a run-up of 35% in three months of QE2. Please send BB at the Fed, 20th and Constitution Ave NW, Wash. D.C., 20551 a thank you note. And CC the White House and Congress for the fiscal stimulus Bernanke requested in Germany a few weeks ago. (The $120 billion from the reduction in the payroll tax and the $180 billion from retaining Bush tax cuts is essential for the economy.)

Santa Bernanke's gift bag for equity lovers meant that bondholders -- who had been pouring money into fixed income mutual funds and exchange-traded funds received only painful tidings. What a fall from grace! Since October 1, long term treasuries have lost 15% if you measure by iShares exchange-traded fund, trading under TLT.

Hardly anyone expected the 10-year treasury bond yield to rise 115 basis points from 2.35% to 3.50% since early October. It's yield is a hugely wide premium of 260 basis points over the 0.9% core inflation level.

Bond mutual funds just endured their first outflow of the public's money, signaling the possible run for cover. All sorts of Wall Street gurus are declaring the bull market in bonds over; the bull market in stocks about to gain momentum.

Bond pros like Robert Smith of Smith Capital reckon the 10-year treasury will rise again and yield 2.50% over the next 6 months -- making it a hell of a trade from here. Sums up Smith: "No job growth, no credit extension, currency debasement, monetary inflation." I would add the putrid picture in housing, where higher mortgage rates make absolutely no sense as conditions continue to deteriorate.

"U.S. housing starts is the quintessential leading indicator for economic activity and right now it is going absolutely nowhere," writes David Rosenberg in his "Breakfast With Dave" blog (Gluskin Sheff).

The perverse rise in interest rates together with financial contagion among European sovereign credits and banks has also strengthened the dollar -- which means as we have learned all-too-well -- that gold prices fall in inverse relation to the dollar.

So, weakness in the Euro and higher interest rates (the 10 year U.S. treasury yields a premium over the 10 year German bund) has led to a correction in gold prices, which sare now off some $60 or $70 an ounce.

An excuse for hedge funds with hot money to book already incredible profits. Gold falling in price is mainly an unexpected ramification of Santa Bernanke's QE2 giftbag.

Looking to New Year surprises, it's best to look to the 2011 offerings of the People's Bank of China for more interest rate hikes, more radical tightening that could put a dampener on that other band of believers in emerging market stocks and bonds.

We may yet get blindsided by the policy requirements of the inscrutable Chinese. I'm reading The Party, The Secret World of China's Communist Rulers by Richard McGregor for tips on my portfolio.