How To Play Bernanke's QE3

Federal Reserve Chairman Ben Bernanke is speaking in front of Congress, and the prepared remarks basically said that QE3 is going to happen if the economy continues to worsen.

Make no mistake readers, it does not look like the economy is going to get better anytime soon, and that a third round of quantitative easing is on its way. Last time we saw $600 billion in U.S. Treasuries be purchased. Who knows what we will see this time?

Bernanke said that the Fed could provide more explicit guidance about the balance sheet size, additional QE (which was mentioned yesterday in the FOMC minutes), and the potential for cutting interest paid on bank reserves.

Bill Gross tweeted in early June that a QE3 could come as interest rate caps, but Bernanke in his prepared remarks hinted at additional purchases of securities. It will probably be some astronomical amount, perhaps over $1 trillion, and is the sole reason that the equity markets are soaring today, with the major indexes up around 1% each, respecitvely.

We could see more Treasuries be purchased, we could also see real estate investment trusts (REITS), corporate bonds or a mixture of mortgage-backed securities in the third round of QE, should it come to fruition.

With Japan doing their own form of QE, and "The Bernank" hinting at it, the only way to not get crushed by the oncoming inflation is to be in equities, and high-yielding debt. This is effectively known as the "Bernanke put" and he and the FOMC will do whatever they can to keep asset prices high as this is the only thing they can show works. Unemployment continues to remain stubbornly high and the June jobs report was nothing short of abysmal.

Commodities, real estate and high- beta names should do well in a "QE" environment, which as the Fed says, is data dependent.

If the July jobs report comes anywhere close to the June jobs report The only way to keep profiting from the endless printing of money that the Fed is doing is just keep staying long what's been working for the past 18 months: metals, commodities, real estate, tech stocks, and staying away from banks and housing stocks.

A hint of QE3 was first talked about at the June 22 FOMC meeting, which was BEFORE the June jobs report. The incredibly weak jobs report will only add fuel to the QE fire.

In June, just 18,000 jobs were created, and April and May saw a net revision of 44,000 jobs less than originally expected. The unemployment rate rose to 9.2%, and if you factor in U6, which is the real unemployment rate in the country, it is over 16%.

Additional QE will destroy the purchasing power of the U.S. dollar already more than it has been hurt, and inflation is likely to continue to rise, hurting the average U.S. consumer who is not trading the markets.

So how to play this?

ACTION ITEMS:

Bullish:
Traders who believe that QE3 is a certainty might want to consider the following trades:

• Going long commodity related names, such as BHP Billiton (NYSE: BHP), Potash Corp. (NYSE: POT), Rio Tinto (NYSE: RIO) and Cliffs Natural Resources (NYSE: CLF) should work, as they did the first two times around. Commodity related ETFs such as the Copper ETF (NYSE: JJC) may also do well.

• High beta tech names like Baidu (NASDAQ: BIDU), ARM Holdings (NASDAQ: ARMH) and Apple (NASDAQ: AAPL) should also work in this scenario.

• Real estate names, like Simon Property Group (NYSE: SPG) and Vornado Realty Trust (NYSE: VNO) should outperform, as hard assets are likely to be great stores of value.

Bearish:
Traders who believe that QE3 is not going to happen may consider alternate positions:

• Shorting any of the above mentioned names could be profitable if the July jobs report is strong and June is revised sharply higher.

• Going long the U.S. dollar, and the PowerShares DB US Dollar Index Bullish (NYSE: UUP) could also be profitable, as the dollar is likely to move higher if no QE is initiated.

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