Market Overview

The Little Town That Could Change The World, Again

Friday, August 26.

Jackson Hole, Wyoming.

For a place renowned for its beauty, peace and serenity, Friday will be one of the busiest, and perhaps the most important day in the history of this small, historic, skiing and fly-fishing resort.

Of course, this is where the Federal Reserve's annual symposium is held, and in last year, it was the launching pad for a second round of quantitative easing. Federal Reserve Chairman Ben Bernanke said last year in August that the Fed would be willing to do whatever is necessary to keep the economy from stalling, and in November, the second round of quantitative easing, known as "QE2," launched. It was an additional $600 billion pumped into the economy, and it kept stocks rallying until June, when it ended.

Now there are trillions of dollars hoping that Bernanke and the rest of his doves will able to overcome the hawks at Jackson Hole, and announce a program so massive it will make your head spin.

We've seen Goldman Sachs noted economist Jan Hatzius say that he now expects QE3 as his base case, given the recent weak economic data. We got something in the way of a second version of Operation Twist, when the Fed met two weeks ago, but stocks did not nothing to after the announcement the Fed would keep rates at current levels until at least mid 2013.

"We now see a greater-than-even chance that the FOMC will resume quantitative easing later this year or in early 2012. We have changed our call because today's statement suggests that the committee's reaction function to incoming economic news is more dovish than we had previously thought," said Goldman's chief economist, Jan Hatzius in a note after the Fed met on August 9.

It is abundantly clear we are in a recession, and that the stock market does not reflect the overall economy. Many have argued in recent weeks that we never exited the recession from 2008-2009, and we have simply bounced along the bottom, despite the rallies in stocks.

To the bulls, Bernanke announcing QE3 would be akin to something like a superhero, with some calling Bernanke Superman. To the bears, QE3 would only mean higher inflation, higher commodity costs, and the inevitable kicking the can down the road until the chickens finally come home to roost. Either way, it would not surprise me to see Bernanke announce something to help the economy on Friday, and U.S. Treasury yields are reflecting that sentiment this morning.

The playbook for QE3, and Jackson Hole has been handed to you in recent weeks, despite all of the market turmoil in the equities markets. What worked before will work again, once all the turmoil settles down. It could take weeks for the turmoil to settle down, with perhaps the Jackson Hole speech being the catalyst for ending the volatility.

There is always the chance that QE3 does not get announced on Friday, especially with the recent hotter than expected CPI data we saw last week. July Consumer Price Index (CPI), and it was extremely hot, coming in at 0.5% versus estimates of 0.2%. Core CPI came in at 0.2%, inline with estimates. Yesterday, we got Producer Price Index (PPI [FREE Stock Trend Analysis]) for July, and it was also sharply higher than expected. PPI came in at 0.2%, versus estimates of 0.0%, and Core PPI rose 0.4%, versus estimates of 0.2%.

The whole world will be watching to see what Ben and the gang does on Friday. I know I sure will be.

ACTION ITEMS:

Bullish:
Traders who believe that QE3 is coming on Friday might want to consider the following trades:

  • The playbook is the same. Oil, ags, gold, tech. Go long names like Potash (NYSE: POT), SPDR Gold Trust ETF (NYSE: GLD), Mosaic (NYSE: MOS), BHP Billiton (NYSE: BHP), Apple (NASDAQ: AAPL) and ARM Holdings (NASDAQ: ARMH) are all names that come to mind.

Bearish:
Traders who believe that the Fed will disappoint on Friday may consider alternate positions:

  • If Goldman's base case is wrong (and it rarely is), and QE3 does not come, consider going long the dollar. PowerShares DB US Dollar Index Bullish (NYSE: UUP) is a way to play it if QE3 does not come.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: Ben Bernanke Federal Reserve Goldman SachsLong Ideas Short Ideas Econ #s Economics Trading Ideas Best of Benzinga

 

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