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How QE3 Will Boost Bank Shares

|Includes: Bank of America Corporation (BAC), GS, JPM, MS

Today, the FOMC decided to purchase mortgage-backed securities. The Federal Reserve will purchase $40 billion worth of mortgage-backed securities.

First, when the FOMC decides to purchase assets it increases bank reserves. Banks then have more money to lend. As banks lend aggregate demand increases. As aggregate demand increases, the multiplier effect kicks in. People that benefited from increased aggregate demand, spend some of the money they made.

Then, prices rise because of the increased demand. That said, the FOMC is purchasing about $500 billion worth of assets. That is roughly 3 percent of GDP. We could be looking at a roughly 2 to 4 percent increase in GDP over the next year or two.

The increase in the Federal Reserve's balance sheet will boost equity prices and commodity prices. Notably missing from the statement is the purchasing of U.S. Treasury Securities. Bonds should sell off or increase in yield. Further, the dollar should decline in value.

Quantitative easing will boost bank reserves and induce banks to lend. Banks will make loans and increase risky loans. Some of the risky loans will pay off and banks will increase revenue. We are taking about home loans, car loans, business loans, etc...

Further, the increase in the money supply will increase commodity prices. As commodity prices increase commodities firms will look to look to sell debt and/or common shares. Investment banks will bring in fees.

Also, shares of corporations will trade at higher prices. As share prices increase the cost of equity declines. As the cost of equity declines companies sell shares. When companies sell shares investment banks increase revenue.

Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM), Goldman Sachs (NYSE:GS), and Morgan Stanley (NYSE:MS) are well positioned to benefit from the increases in investment banking revenue and investors should consider purchasing shares of these firms.

Of the four firms mentioned, I prefer Bank of America, Goldman Sachs and JPMorgan. Primarily based on valuation and the financial performance and positions. Bank of America is one of leading investment banking firms. I believe Morgan Stanley is one of the weaker financial firms because of exposure to Europe. Morgan Stanley should benefit from QE, but Europe risks linger.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.