QE 3 Is Coming - Which Stocks Will Benefit

Includes: BG, C, CF, HTS, MOS, NLY, NTR, TWO
by: Marc Courtenay

Cannot people realize how large an income is thrift? -- Marcus Cicero, Roman Orator and Politician (106-43 B.C.)

It's just a matter of days, weeks or a few months and the next round of Quantitative Easing, a.k.a. "QE3" will be upon us, opening the flood-gates for investors.

Yes, the jobs number today is uplifting, but that number is a "lagging indicator" and is backward looking. Fed Chairman Bernanke knows that, and he also knows that looking forward the job situation looks bleak.

Citigroup (NYSE:C) strategist Tobias Levkovich opined publicly that there's another leading economic indicator that bodes poorly for the nation's growing unemploymen -- now at least 3.5 million, not including those who have stopped looking for positions that don't exist.

Recently Mr. Levkovich spoke the details:

One of the best leading indicators has been the Federal Reserve Board Survey for Commercial and Industrial Lending Activity. It leads job trends by about 9 months, consistently.

And Levkovich says that activity report is deflationary:

What the data is telling us now is that the job growth that our economy has been enjoying will slow down. And that's without the impact of higher gas prices. That's only the (ripple) from a slow Europe filtering back. ... I'm worried about Europe - the bite from austerity programs is still to come. That will be a little bit of a drag.

This is the kind of scenario Dr. Bernanke and a number of dovish Fed governors are looking for as the ultimate excuse to implement another round of monetary easing and massive buying of Treasury debt and mortgage-backed securities. "QE3" is just a matter of time.

For the near-term, Levkovich told CNBC that he sees another negative catalyst, "the Citi Economic Surprise Index suggests aggressive areas of the market are due for a pullback, statistically." More reasons for QE3!

So, Investors, Get Ready for at least a 5% Market Correction

In the CNBC interview he didn't mince words, "We're looking for a short-term pullback," Levokovich says. (However, it's worth noting he has a 1425 price target on the S&P for year's end.) "Think about it this way - we're 4% away from our price target for year-end, and we could have a 5% pullback." Although Levokovich is eventually looking for more gains, he also says at these levels its important for investors to "be selective," especially when it comes to stocks that have already risen significantly.

Of course, Fed officials would find it easier to implement QE3 after an emotion-fraught stock market correction. Even though Dallas Fed Governor Richard Fisher recently said it's not the Fed's job to bail out Wall Street, everyone remembers Dr. Bernanke's comments last year at the National Press Club when he admitted that "the Fed keeps interest rates at zero to motivate investors towards "alternative investments."

Once QE3 is a foregone conclusion, commodity stocks will soar. Not just the precious metals stocks that I've written about lately, but also the main fertilizer giants whose stock prices have remained depressed. Companies like Mosaic (NYSE:MOS), Potash (POT), Agrium (AGU) and Bunge Ltd (NYSE:BG) should see some huge gains.

A lesser-known company in this sector, trading at around 9 times forward earnings, is CF Industries (NYSE:CF). It manufactures and distributes nitrogen and phosphate fertilizer products, serving agricultural and industrial customers worldwide. CF operates in two segments, Nitrogen and Phosphate. The company also owns 50% interests in the GrowHow UK Limited, a nitrogen products producer in the United Kingdom; Point Lisas Nitrogen Limited, an ammonia producer; and KEYTRADE AG, a global fertilizer trading company. Let their website be your guide for their potential.

Another surprising beneficiary of a coming QE3 will be the smaller, less famous REITs that focus on investing in, financing, and managing residential mortgage-backed securities (RMBS) and related investments. One of my favorites is Two Harbors Investment Corp (NYSE:TWO), led by the team of Steven Kuhn, that has a reputation for competence in this area.

Mr. Kuhn and a number of insiders have been accumulating shares of TWO, especially when the price is at $10.05 and lower. TWO currently yields over 15% in dividend payouts, and based on their $1.62 billion in total cash (most-recent-quarter) and their year-over-year incredible quarterly earnings growth of 213%, that pay-out rate looks sustainable!

So consider waiting for the circumstances and scary conditions necessary to make QE3 a "sure thing," and then back up the truck and load up on precious metals producers, agricultural-fertilizer companies, and REITs like TWO. Also consider the best-of-breed mortgage REITs like Annaly Capital (NYSE:NLY) and Hatteras Financial (NYSE:HTS). Buy low, sell high, and don't forget "thrift"!

Disclosure: I am long MOS, POT, NLY. I may initiate a long position in TWO over the next 72 hours, or when the price per share falls below $10.