Why There Will Be No QE3

Millions of investors, traders and money managers are pinning their hopes on one phrase. Trillions upon trillions of dollars are at stake here. Sorry to disappoint. There will be no QE3. Not on August 26th, anyway. This morning we got 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) 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%. Unemployment continues to remain stubbornly high, with initial claims back over 400,000 this week. It came in at 408,000, versus estimates of 400,000. The unemployment rate in this country is over 9%, and if you count underemployment and people who no longer count, more than 16% of the country is hurting. Yesterday, two important members of the Federal Reserve came out and said that monetary policy should not be used to help stock investors, and there are sharp consequences for the Fed's actions. Goldman Sachs GS and Bank of America Merril Lynch BAC have come out and said that they expect a third round of quantitative easing, with Goldman using QE3 as its base case. We appear to be talking ourselves into a recession, and with the latest data out of the Philadelphia Fed this morning, (-30.7 vs 2.0 estimate), it looks like that is happening. Morgan Stanley last night basically came out and said the U.S. is dangerously close to a recession. The full report can be viewed here, courtesy of ZeroHedge. It does expect non traditional easing out of the Fed, but with massive amounts of negativity towards the Fed, will the Fed actually do anything? No. Recent CPI, and PPI have been incredibly hot, and additional rounds of quantitative easing only raises inflation. The Fed's job is to watch inflation, and make sure it stays tame, not get the S&P to 1,400. If the Fed does something in the way of QE3, it could risk losing some independence, or perhaps losing one of its dual mandates. The "Bernanke put" as Richard Fisher so referred to yesterday, is not there. It is not going to happen in August at Jackson Hole, Wy. The Fed has done all it can to try to stave off the recession, and it did so for two years, with two rounds of quantitative easing. It will not do another one for fear of what happens if it does. Additionally, there is no appetite for fiscal stimulus from Congress, especially after the S&P downgrade at the beginning of the month. Bill Dudley, President of the New York Federal Reserve, said that the lower interest rates should provide more support for the economy, and we should see stronger growth in the second half. It sounds like Dudley is just sticking his head in the sand. It is not going to rebound in the second half without some kind of government intervention. QE3 is not happening, and the Federal Reserve is out of bullets, arrows or whatever ammunition you want to talk about. Sorry guys. ACTION ITEMS:

Bullish:
Traders who believe that QE3 will happen might want to consider the following trades:

• Everything will rally on QE3, but as we have seen before, it will be short lived. Tech, ags, commodities, they will all move.

• Consider names like Apple AAPL, Baidu BIDU, ARM Holdings ARMH, Potash POT and CF Industries CF as some names that will move on QE3.

Bearish:
Traders who believe that QE3 is not coming may consider alternate positions:

• Should the Fed stay put, stocks will drop sharply as concerns of a recession will lead to an overshoot on the downside. Short everything at will.
  
  

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