How to Play the Fed Announcement This Afternoon

Editor's Note: The Federal Reserve's statements today are going to have immediate impacts, and they'll generate immediate profit opportunities, too. Shah wanted us to get this out to everyone right away - here he is.

Analysts, economists, and Fed-watchers are telling everyone the Fed is going to announce its plans to start tapering this month - cutting back on the $120 billion of Treasury bills, notes, bonds, and agency mortgage-backed securities the Fed buys every month.

They're not telling you what a mistake that's going to be, or how it's going to slow the economy, or impact the stock market, or how to protect yourself or profit from it. So, I will.

The problem with tapering isn't that the Fed is going to cut back its purchases. In fact, it should have done that years ago...

The problem is it's announcing it - in just a few hours' time.

The Fed will compound that mistake if it announces a timetable, for example, saying it will taper by $15 billion a month until it gets to zero, where it won't be buying any more bonds or MBS, and then will start raising rates.

By announcing what it's doing and when, the Fed is giving traders and investors and opportunity to "front-run" it.

And that means there's a lot of money on the table for us, too. Here's what to do about it...

The Fed Will Set Off a Predictable Chain of Events

The front-runners banked some tidy gains when the Fed last announced it would be keeping rates low. Investors knew how the Fed would lower rates, and they traded and invested accordingly.

There isn't an analyst, or economist, or investor who knows what they're talking about who won't tell you the stock market's been rallying for years in the Fed-manipulated low interest rate environment. Bond investors will tell you the same.

Most of the money the Fed prints to buy the trillions of dollars of "assets" it parks on its balance sheet, which now holds $8.6 trillion of Treasury paper and mortgage obligations, ends up back in financial assets, meaning the stock market and bond market.

A tsunami of printed money has gone into the stock market because "There Is No Alternative" (TINA); bonds and fixed-income investments don't pay any worthwhile interest.

However, if you're a bond trader, an institutional fixed-income manager, or simply prefer the typically lower-risk profile of interest-bearing investments, you do what they all have been doing: You leverage your purchases of bonds with borrowed money. That's how you get a worthwhile return on fixed-income investing.

Of course, that leverage comes with risk. But bond investors have been keen to take on that risk because the Fed's been their backstop. The same is true for equity investors.

Now, by announcing it's going to taper (and maybe even giving an exact timetable for tapering), the Fed is telling investors it's time to deleverage, to pare back on bond holdings because it's not going to be backstopping them with massive purchases every month, and it's going to raise rates.

We Can Profit by Front-Running the Front-Runners

In response to this, traders will sell their bonds, which will ironically drive rates even further as well as hand them losses on their less valuable bond holdings. If rates rise faster than markets can adjust, they could dampen economic growth by making capital more expensive.

If rates rise too quickly on account of investors front-running the Fed, inflation expectations will rise, since rising rates are, in and of themselves, a sign of increasing inflation.

What's the Fed going to do then? Start buying bonds again? Lower rates? Lose the public's confidence?

That's what it's setting itself up for. That's why announcing policy prescriptions is a mistake. It never should have started telegraphing its moves.

But since it does, and because it's going to telegraph that it's tapering and raising rates, we can front-run the other front-runners.

The right move here is to buy inverse bond ETFs, because they go up in price as rates increase and bond prices tumble. The one to look at is the ProShares UltraShort 20+Year Treasury ETF (NYSEArca: TBT).

That's because TBT makes gains as an inverse of the performance of the ICE U.S. Treasury 20+ Year Bond Index. That puts you in a great position to take advantage of the Fed's mistake - and the selling spree that mistake is going to cause.

If you'd like to trade it - for big, fast profits, no less - you can buy call options or a call spread on a leveraged inverse bond ETF like TBT, too.

The truth is there's no end to the profit potential possible when you stay a step ahead of the Fed. My free Total Wealth subscribers are going to hear from me every time there's a chance at cashing in. They'll get more strategies and picks, too, like my weekly Buy, Sell, or Hold videos and my recommendations for investing $100 every week.

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About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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