|TheStreet.com, Summer, 2012. This article was written with Oliver Pursche, the Co-Portfolio Manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.|
NEW YORK (TheStreet) — In spite of this week’s positive home sales and housing price data, overall economic data can at best be described as mixed.
Manufacturing activity has slowed, employment gains have dropped off and the impact of the European debt crisis is beginning to be felt everywhere around the globe. In response to all the data, the Federal Reserve and the Commerce Department have downgraded GDP estimates for the rest of the year, and revised the first quarter reading to a modest 1.9% growth rate.
Given the tepid GDP forecasts, and when taking into account weak commodity prices, a strong dollar and continued debt issues in Europe, get ready for “Helicopter Ben” Bernanke and the Fed to unleash Quantitative Easing (QE) 3, probably sometime in July or August.
Although it may be tempting to simply look back and see how markets behaved after QE 1 and QE 2 were implemented as a guide as to what to do, I believe the global environment is sufficiently different this time that investor need to be extra careful.
First of all, the impact of quantitative easing is lessened as it is repeated. Second, for earlier rounds, China was still propelling the global economy. Today there are stories about a deepening slowdown and provincial governments distorting reports to hide the actual depth of the slowdown. Meanwhile, in Europe the question has turned from “if” to “when” Greece exits the euro zone.
Finally, in the United States, too, the economy has deteriorated — perhaps not on the surface, but certainly within its bowels. Just look at what the credit markets are telling us — a 1.6% 10-year Treasury yield is not a sign of a healthy economy.
This doesn’t mean that investors should short the market; rather, a more calculated approach is likely necessary.
If QE 3 is deployed in combination with other policy steps, such as delaying the implementation of the capital rules of Basel III — focused primarily on bank capital requirements — financials should be big winners.
Specifically, I like J.P. Morgan Chase (JPM), Wells Fargo (WFC) and troubled Morgan Stanley (MS) in this event.
Losers in this environment are likely to be the regional banks that still heavily rely on deposits and lending as their primary source of revenue.