QE3
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How to Profit from QE3 When the Fed Pulls the Trigger
In one form or another, the U.S. Federal Reserve soon will introduce a third round of quantitative easing (QE3) or a related major economic stimulus program.
A statement from the most recent Federal Open Market Committee (FOMC) meeting of the Federal Reserve reported that, "Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery."
President of the Boston Federal Reserve, Eric Rosengren, called for an open-ended program to allow for the Federal Reserve to buy bonds like it did during Quantitative Easing 2. He pointed to the high unemployment rate as the main reason more stimulus is necessary.
"That calls for a more substantive action than we've taken to date," he said. "We need a pro-growth monetary policy," adding that the current state of the economy is "not sufficient."
Federal Reserve Chairman Ben Bernanke announced Quantitative Easing 2 at the August 2010 Jackson Hole economic policy summit. It consisted of the central bank buying $700 billion in U.S. Treasury bonds to finance the U.S. budget deficit.
Rosengren now wants the Federal Reserve to have an unlimited authority in that area, held in check only by the reaction of market forces.
Those market forces reacted very strongly to QE2, forcing the U.S. dollar down in value while prices for commodities such as oil, grains, gold and silver soared.
In addition to the commodities price rise, select stocks performed well during QE2 as consumers spent more and emerging markets enjoyed a heavy growth period. These are the companies investors should buy ahead of QE3, which is on its way.
How to Profit from QE3
The most important factor to consider when hunting for stocks to buy ahead of QE3 is a robust dividend framework.
With the Fed keeping interest rates low as it tries to repair the U.S. economy, dividend yield is crucial.
Or, as Money Morning Global Investing Strategist Martin Hutchinson put it, "In Ben Bernanke's rotten world, a few select high-yield investments are practically a necessity these days."
According to investing legend Jack Bogle, founder of the Vanguard Group of mutual funds and creator of the first mutual fund, dividend income has provided more than 40% of the historic total return of a stock.
Besides money in your pocket, dividends represent a commitment of the management to return capital to investors. Dividend income also proves that the company is sound enough to reward its shareholders without hindering the future growth prospects of the business operations.
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Gold Prices Rise as All Signs Point to More Stimulus
Gold prices were on the rise again today (Wednesday) as the market digests the recent spate of global economic data that could warrant more stimulus measures - and send metals prices soaring.
China reported last Friday that its July consumer price index (CPI) rose to 1.8% from the previous year, representing its lowest jump since January 2010. Industrial production declined to 9.2% from June's 9.5% thanks to slowing growth in heavy industrial production. Retail sales fell to 13.1% from June's 13.7%.
There's more: July exports increased 1% from the previous year, while imports rose 4.7%, exemplifying a weak external demand, but also a slowdown in Chinese investment.
As if this wasn't enough news to fuel a little action in the gold markets, Japan continued the trend on Monday with news that its economic growth in the second quarter had slowed down more than anticipated.
Also triggering stimulus speculation was news out of Europe that the Eurozone's economies contracted in the second quarter. The European Union's statistics office said yesterday (Tuesday) that six countries were in recessions.
"It looks like the gold market will continue to be held up by the sentiment of expected central-bank stimulation," Marex Spectron Group said in a report Tuesday. "The downside risk is limited."
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No Need for Vacation When You Can Fight Over the Fiscal Cliff
Republicans are not willing to let Democrats go over the fiscal cliff and take all of us with them - at least, not without a good fight.
Just the sound of it - going off the cliff - echoes disaster. But that is where we're heading if Congress doesn't act to extend the Bush tax cuts or avoid the automatic spending cuts that will go into effect Jan. 1.
Little can be expected to be resolved over the next month as Congress takes off for its annual five-week August recess.
However, House Speaker John Boehner (R-Ohio) vowed Wednesday to call the House back into session to cement approval if Senate takes action to prevent fiscal cliff. The GOP has made its commitment to averting the fiscal cliff crystal clear and is encouraging the Democrats to work out some kind of agreement.
"If the Senate follows the House in passing legislation to stop the entire tax hike-including the small business tax hike-in a manner that requires House approval before it can be sent to the president, it is our commitment that the House will reconvene immediately to ensure the measure is enacted at the earliest opportunity. But, in order to avert the threat to our economy, the Senate must join the House in acting to stop the entire tax increase," Boehner and three other House GOP leaders wrote in a letter to Senate Majority Leader Harry Reid (D-NV).
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Today's FOMC Meeting: We Could Wait Four More Months for Action
The U.S. Federal Reserve continued its wait-and-see stance today (Wednesday) and remained in idle mode when it said and did little at the conclusion of its two-day Federal Open Market Committee (FOMC) meeting.
The central bank decided to leave rates unchanged, reiterated it would leave rates low through at least 2014 (not extending them to 2015 as expected) and did not announce a third round of quantitative easing.
The Fed chiefs did, however, voice that should conditions warrant, they are ready to step in and take aggressive steps to bolster the U.S. economy.
PIMCO's leader Bill Gross told CNBC that "a changing in policy landscape can be expected in a month or so."
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Today's FOMC Meeting Too Early for Action
There is little doubt that the struggling U.S. economy could use some goosing, and the U.S. Federal Reserve is in a position to deliver a good boost.
But, a move isn't likely at the conclusion of today's (Wednesday) Federal Open Market Committee (FOMC) meeting.
While a fresh spate of data suggests new steps from the central bank are warranted, many economists warn that the economy doesn't need immediate action - especially since the prior moves from the Fed haven't been very effective.
Growth has clearly slowed and unemployment remains elevated, but the sluggish pace of the U.S. economy may not be slow enough to compel the Fed to make an impactful move today, and any Fed decisions will be pushed to later in the year.
Today's FOMC Meeting: Not Ready for QE3
The U.S. Commerce Department last week reported that the U.S. economy grew at a paltry 1.5% annual rate in the second quarter, down from 2% in the first. Plus, the Labor Department reported initial jobless claims ticked up in the latest week while the unemployment level remains at a sickly 8.2%.
Fed chief Ben Bernanke maintains that his team is prepared to take further action if unemployment stays high, but he remains vague on what action might be taken.
With the reeling recession in Europe and a slowdown in stalwart China, global growth has been severely dented and is weighing on the U.S. economy. Those factors increase the odds of a third round of quantitative easing (QE3), but the Fed may not pull the trigger Wednesday.
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Keep a Close Eye on Gold Prices Next Week
The U.S. Federal Reserve is about to give a huge boost to gold prices, and the first push could come as soon as next week.
The parade of dismal economic reports both here and abroad has stoked hopes that more stimulus, in the form of a third round of quantitative easing, is imminent. A clear signal of when we can expect QE3 could come at next week's two-day Federal Open Market Committee (FOMC) meeting that starts July 31.
An increasing number of Federal Reserve officials are convinced the central bank must expand its stimulus operation immediately amid the recent spate of glum data signaling economic growth has hit a roadblock. Several members will push for urgent action, although some may move to delay a decision until September.
Fed Chairman Ben Bernanke told Congress last week that a fresh round of quantitative easing is an option the FOMC is mulling to try and lower the elevated unemployment level.
"We are committed to ensuring, or at least doing all we can to ensure, that we continue to make progress on unemployment," Bernanke said just last week.
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Expect QE3 After Geithner's Warnings
In testimony yesterday (Wednesday) before the House Financial Services Committee, U.S. Secretary of the Treasury Timothy Geithner may have inched us closer to QE3 when he warned that the U.S. economy will be slammed by two major factors: the immediate danger from the Eurozone debt crisis and fiscal cliff 2013 that is fast approaching.
"The economic recession in Europe is hurting economic growth around the world, and the ongoing financial stress is causing a general tightening of financial conditions, exacerbating the global slowdown," Geithner said in his testimony.
As much of the revenue for major U.S. corporations such as Ford Motor Co. (NYSE: F), DuPont (NYSE: DD) and Cisco Systems Inc. (Nasdaq: CSCO) comes from Europe, the damage is already being felt by both employees and shareholders. Cisco, down 20.52% for the quarter, recently announced the layoffs of 1,300 workers, about 2% of its global labor force.
Geithner cited other factors harming the U.S. economy, including the rise in oil prices earlier this year, cuts to government spending and slow rates of income growth.
Possible adverse developments in the future, particularly the fiscal cliff, led Geithner to warn that, "These potential threats underscore the need for continued progress in repairing the remaining damage from the financial crisis and enacting reforms to make the system stronger for the long run."
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QE3 is on Its Way – Here's How to Prepare
Federal Reserve Chairman Ben Bernanke spoke to the U.S. Senate Tuesday and yesterday (Wednesday) in his two-day biannual meeting with Congress - and failed to make any promise to institute more stimulus measures.
He did leave the door open for the Fed to do something - even if it won't commit to what that will be.
The markets rallied, although investors were disappointed that the Fed chief couldn't deliver a bigger commitment.
But make no mistake - quantitative easing, or QE3, is coming.
That is assured for one simple reason.
The U.S. government can find few buyers for its debt at current low interest rates. And as Bernanke has stated publicly, low interest rates will remain in place until at least 2014.
That means the Fed will have to continue its role of financing the budget deficit of the U.S. government through the inflation of its balance sheet.
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