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Prepare Yourself For the Worst From the Fed

An update on quantitative easing will guide the markets


Before you do anything else today, I want you to mark May 23, this Wednesday, on your calendar. That’s because at 2:00 PM EDT, the Federal Open Market Committee (FOMC) — this country’s principle organ of monetary policy — releases the minutes from its latest meeting. If you have any money in the stock market, you’ll want to take note of what the FOMC has to say.

That’s because Wall Street remains obsessed with just how long the Fed will keep its money pump on. Last month, the Dow rallied over a hundred points following the latest FOMC minutes. And each time the Federal Reserve has announced plans to ramp up its stimulus policies—like when it instated a fresh round of Quantitative Easing last Septemberand when it introduced Operation Twist last June—the major indices have soared.

Essentially, the current Fed policy gives Corporate America the green light to rush to the bond market and borrow at ultra-low rates and put the cash towards aggressive stock buyback programs or dividend increases. This corporate buyback frenzy will likely persist as long as the Fed continues with its $85 billion per month in Quantitative Easing. So many investors are banking on the continuation of the Fed’s zero-interest rate policy.

There’s no doubt that this accommodative central bank policy propels the stock market higher. Even so, I have been doing this for a long time and know that it is important to stack the odds in our favor. Especially now that just last Thursday, San Francisco Fed President John Williams indicated that Quantitative Easing may be reduced soon. Williams pointed out that the pace of job growth has picked up, so the Fed may tap the brakes. This is significant because Williams is the first “dove” on the board to openly admit that a slowdown may be coming.

I suspect the Fed will have an official statement soon, clarifying when and if it might reduce its bond buying. So with the FOMC minutes coming up, we need to prepare ourselves for however Wall Street may react. A good place to start is by reviewing the 46 big blue chips that have been upgraded and downgraded this weekend. After taking a close look at the latest data on institutional buying pressure and each company’s fundamental health, I decided to revise my Portfolio Grader recommendations for each of the stocks listed below.


Last Week’s Holds, Now Buys

Symbol Company Name Quantitative Grade Fundamental Grade
DAL Delta Air Lines B C
DG Dollar General B B
DOV Dover B B
EMN Eastman Chemical B B
GPC Genuine Parts B C
KMI Kinder Morgan B C
KYO Kyocera Corp. B C
MA MasterCard B B
MTB M&T Bank B B
ORLY O’Reilly Automotive B B
ROP Roper Industries B B
SPG Simon Property Group B C
UAL United Continental B C
UTX United Technologies B B
WDC Western Digital B B

Last Week’s Sells, Now Holds

Symbol Company Name Quantitative Grade Fundamental Grade
AGU Agrium D C
APD Air Products & Chemicals D C
CF CF Industries Holdings D C
CHU China Unicom (Hong Kong) Ltd. D B
LVS Las Vegas Sands D B
MET MetLife D B
MFC Manulife Financial C C
RDS.B Royal Dutch Shell D C
RL Ralph Lauren D B
TTM Tata Motors Ltd. D C
VIV Telefonica Brasil SA D C


Last Week’s Buys, Now Holds

Symbol Company Name Quantitative Grade Fundamental Grade
ABT Abbott C B
BAC Bank of America B C
ENB Enbridge C C
GM General Motors C C
HES Hess C B
MO Altria C B
NKE Nike C B
RAI Reynolds American C B
VRSK Verisk Analytics C B
XEL Xcel Energy C C

Last Week’s Holds, Now Sells

Symbol Company Name Quantitative Grade Fundamental Grade
AMTD TD Ameritrade D C
CCL Carnival D C
NSC Norfolk Southern D C
SO Southern D C
TOT Total S.A. D C
XRX Xerox D B

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