How to Play Today's FOMC Meeting

Today is the latest meeting of the Federal Open Market Committee, and honestly very few people know what to expect out of the meeting. Also keep in mind that this is Ben Bernanke's third press conference, after the FOMC decided to have Bernanke give press conferences to discuss monetary policy, similar to what the ECB does. We have heard grumblings in recent weeks about the potential for an additional round of quantitative easing, as the New York Federal Reserve President William Dudley and FOMC Vice President Janet Yellen have mentioned more easing in recent speeches. Federal Reserve Chairman Ben Bernanke has also talked about the potential for QE3 if the economy continues to worsen, and has hinted through out the year that the Fed will do what it can to support employment, but that it can not act alone. It needs the help of Congress as well. Recent economic data, save for yesterday's PMI and today's ISM, have come in largely better than expected, which may suggest that QE3 is not around the corner. The advance reading of third quarter GDP was 2.5%, as expected. That is sharply higher than the less than 2% growth we saw in the first half of the year. On the other hands, unemployment is over 9%, and remains stubbornly high. It is part of the Federal Reserve's dual mandate to maximize employment. We get the October nonfarm payroll report on Friday, and expectations are for 85,000 jobs. This is well below what the country needs just to keep up with population growth, and the Fed will look to see if it can help boost employment if we get a number around there. With Dudley and Yellen making headwinds with the potential for more easing in recent days, the thought is there, but markets are not pricing in anything in. The economy does not look like it is going to go gangbusters, which could be lead to third round of quantitative easing is on its way. The last round of straight quantitative easing was buying $600 billion in U.S. Treasuries. Operation Twist, enacted in September, was to buy $400 billion worth of longer dated U.S. Treasuries, and sell shorter dated ones. In his speech last week, Dudley said that the Fed is not out of bullets. In his speech, Dudley said, "In addition, we have discussed the range of policy tools available to promote a stronger economic recovery even as we keep inflation pressures in check." What will comprise of the tool (QE) is not known at this point, but some have talked about mortgage backed securities being purchased to help the slumping housing market. With Japan and the Bank of England doing their own forms of QE, and "The Dudley" 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 October jobs report may show that unemployment remains stubbornly high. Commodities, real estate and high- beta names should do well in a "QE" environment, which as the Fed says, is data dependent. 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 BHP, Potash Corp. POT, Rio Tinto RIO and Cliffs Natural Resources CLF should work, as they did the first two times around. Commodity related ETFs such as the Copper ETF JJC may also do well.

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

• Real estate names, like Simon Property Group SPG and Vornado Realty Trust 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 UUP could also be profitable, as the dollar is likely to move higher if no QE is initiated.
  
  

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