QE3?

"Enjoy when you can, and endure when you must." - Johann Wolfgang von Goethe

Europe is a mess.  Italy has just been downgraded and Greece will default at any moment.  The stock market, the only beneficiary of the Federal Reserve's quantitative easing, is struggling and the fear around the world has pushed gold to new highs.  Every investment conference I go to touts gold and gold mining stocks.  A bubble is starting to form in the space.  Don't get me wrong it is still a long way from a bubble but it is coming.  I would still load up on the gold mining stocks as the market has not yet priced in the gold price move but I doubt that this will be a long-term hold but rather a short-term trade.

The Federal Reserve is currently meeting.  They have extended the meeting an extra day to make sure that everything that needs to be discussed is discussed. They have a lot to talk about and I believe that a lot of what will be said will be about another round of quantitative easing.

It is clear that the stock market needs the juice provided by the Federal Reserve to operate.  Take the stimulus away and it is all over for the stock market.  The housing market continues to drag and the shadow inventory will begin to show up in the very near future forcing prices even lower.  The government entities are holding almost 1 million houses in inventory.  They need to unwind these but there is no market for them.  Add to this the number held by the banks and it is easy to see why the price of housing has nowhere to go but down.

With all of these issues and the problems in Europe, the Federal Reserve has no option but to continue to print money.  They are already adding to the Eurodollar reserves.  Even though I believe that the policy is flawed they are too deep into it to stop now.  The questions are how large is the stimulus going to be and when will it happen?  I believe that they will announce round three at the close of the meeting this week and that it will be a large amount.  The reason for this is that this is really one of the last opportunities that they have without bringing into question their neutrality.

Already there is a lot of mud slinging going on in congress and President Obama has recently unveiled a tax hike aimed at the rich.  Jobs and a balanced budget are front and center in the political debates and the Federal Reserve cannot be seen to support either side.  Delaying the inevitable will create a situation that drags the Federal Reserve into the political spotlight.  It cannot afford this if it is to remain intact.  Already there is a high level of distrust of their policies and the politicians are eager to find somewhere to place the blame.  What easier target than the Federal Reserve.

Therefore I believe that if we are to see some new easing it will be in the very near future and could easily be tomorrow.  As such if you are a gambling man you could take a swing that it happens tomorrow and go long the market as if the announcement happens there should be a good upside pop.  On the flip side I believe that the market is starting to price in another round of easing and if it does not happen you could be in for a huge decline.  A safe way to play this is to buy options on the market.  If you straddle the market with a put and a call option at the money then you could benefit no matter which direction the market goes.  All you need is a big move and I believe that one is coming.

As this is a short-term trade I would not go all in on this but would limit your risk by moving the bulk of your investments into cash if you have not already done it.  Look to alternate investments options and if you are at a loss as to what those may be contact me and I will point you in the right direction.