How I'm Playing The Fed's Upcoming Cut

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 |  About: ProShares UltraShort Financials ETF (SKF)
by: Ryan Freund

On November 29th, Fed Chairman Ben Bernanke said that the worsening credit crunch and rising energy prices will keep the Fed policymakers “exceptionally alert and flexible.” Many on Wall Street, including myself, believe that his statements suggest that a rate cut on the December 11th meeting is almost assured. Further indication that a rate cut is probably came from the Fed’s No. 2, Donald Kohn, who suggested that the central bank is certainly inclined to cut rates again because of the turbulence seen on Wall Street. The Dow Jones Industrial Average was up nearly 5% last as a result of rate cut hopes.

Given the worsening credit crunch, rising energy prices (not to mention Venezuela’s recent threat to cut U.S. oil supply), the falling dollar (fallen, I guess you would say), and the tumbling housing market, I don’t think that a half of a percent will do much good. Consumer spending and job creation will slow and we could very well see a recession in the near future.

As I wrote in an earlier article, the average investor can profit from a recession. The best play for purchasing Proshares UltraShort Financials (NYSEARCA:SKF) is to wait until December 9th, a few days before the last Fed meeting of the year, and then pick up some shares. By December 9th the rate cut will already be built into the price of bank stocks and I don’t believe you will see a major jump on the day of the rate cut. If there is a sizable jump, take solace in the fact that a rate cut will not bail us out of the troubles we are facing. You might have to wait a bit and see some red ink in your portfolio, but once the irrational exuberance fades, you will likely back in the black and earned quite a return.

That is, of course, if the Fed actually decides to cut rates. If the Fed doesn’t cut rates, you can be sure that stocks will head south fast, with financials leading the charge. In this scenario, SKF will explode upwards quickly. Either way, I think it's a win-win proposition.

Invest carefully!

Disclosure: Long SKF