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Will Washington Make a Bad Situation Worse?

Tuesday, 12 Jul 2011 | 7:02 PM ET

Wednesday could be a volatile trading day as Wall Street gets a better understanding of the politics and outlook that’s rapidly evolving in our nation's capital.

First and foremost, traders will be listening to Ben Bernanke as he delivers his semi-annual report to Congress. Sometimes called the Humphrey-Hawkins testimony, pros will be parsing over every word looking for clues about the economy and monetary policy and the potential for more stimulus.

But, beyond that, they’ll also be listening to the questions asked by lawmakers looking for clues about the political psychology of DC and just how well lawmakers understand issues involving the debt ceiling.

Fed Signals QE3
Markets bounced on the Fed's hint of another round of stimulus, with the Fast Money team.

The Potential of QE3

Traders on the floor widely expect lawmakers to fire the Fed chief with questions about what can be done to further stimulate the economy. (On the Street that’s known as QE3, although it doesn’t necessarily have to take the same form as QE2, which was bond purchases.)

Considering many pros didn’t think QE3 was even a remote possibility – you may be wondering how the tide shifted, and so quickly.

Minutes taken during the FOMC’s two day meeting on June 21 and 22nd were just released and pros were stunned by some of the comments, especially the following:

”A few members noted that, depending on how economic conditions evolve, the Committee might have to consider providing additional monetary policy stimulus.”

Trader Stephen Weiss is among a growing contingent that think the Fed could have something up its sleeve. He reminds us that “the Fed has dual mandate of both inflation and employment.” And the latest jobs report showed unemployment ticking higher.

And although opponents of QE3 may argue the political will for the Fed to act may be diminishing Weiss doesn’t think it matters. Under these circumstances he thinks Bernanke may almost have an obligation to do something.

If we do hear Mr. Bernanke says anything about QE3, the usually bullish Joe Terranova thinks the results will be downright bearish. He says even a suggestion from Bernanke of QE3 would call the economy and recovery into questions and have a very negative impact on stocks.

Trader Karen Finerman agrees. “I don’t think a QE3 is a good thing at all.”

She reminds that one of the ripples generated by QE2 was the march higher in oil because the program made the dollar considerably weaker. And it also drove corn, wheat and other food prices higher - two serious drags on the economy.

Terranova agrees entirely and says, what would QE3 do to prices at the pump, now?

The Debt Ceiling

The other major issue that lawmakers are likely to press is the debt ceiling. And the Fast Money traders largely agree the issue is growing more serious by the day.

”It’s getting dangerous,” says trader Karen Finerman referring to growing chatter that lawmakers might not reach an agreement by the August 2nd deadline.

According to his Beltway sources, FBR analyst confirms that trouble may lie ahead. ”I’m hearing the debt ceiling will be raised and that a deal will include massive spending cuts but no one will guarantee to get it done by August 2nd,” Mills says in a live interview.

And if Congress does crash the deadline markets will likely react very negatively – in fact Mills says it might be a necessary evil to get the two parties to reach an agreement.

And how long could Congress remain at impasse? According to Mills, Treasury will make sure the US doesn’t technically default,“ but they won’t pay social security Medicare or Medicaid or defense spending.

If and when the public outcry becomes so great, that’s when Congress will have to act.



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Trader disclosure: On July 12 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Nathan Owns (BAC) November Calls; Nathan Owns (CSCO) August Calls ; Nathan Owns (C) July Puts; Nathan Owns S&P 500 July Puts; Adami Owns (AGU); Adami Owns (C); Adami Owns (GS); Adami Owns (INTC); Adami Owns (MSFT); Adami Owns (NUE); Adami Owns (BTU); Terranova owns (XOM); Terranova owns (HAS); Terranova owns (DIS); Terranova owns (WFM); Terranova owns (LULU); Terranova owns (MSFT); Terranova owns (TM); Terranova owns (JWN); Terranova owns (MCD); Terranova owns (PEP); Terranova owns (MA); Terranova owns (BX); Terranova owns (CAT); Terranova owns (VRTS); Terranova owns (AAPL); Terranova owns (F); Terranova owns (CVI); Terranova owns (IBM); Terranova owns (FCX); Finerman's Firm Is Short (IWM); Finerman's Firm Is Short (MDY); Finerman's Firm Is Short (SPY); Finerman's Firm Is Long S&P 500 Puts; Finerman's Firm Is Long Russell 2000 Puts; Finerman's Firm And Finerman Own (AAPL); Finerman's Firm owns (BAC) leaps and Finerman Owns (BAC); Finerman Owns (GOOG); Finerman's Firm owns (JPM) leaps and Finerman Owns (JPM)

For Mike Khouw
No Disclosures

For Joe Terranova:
Terranova is Chief Market Strategist of Virtus Investment Partners, LTD
Terranova is Chief Market Strategist of Virtus Investment Partners, LTD
Virtus Investment Partners Owns More Than 1% Of (ABAX)
Virtus Investment Partners Owns More Than 1% Of (AMKR)
Virtus Investment Partners Owns More Than 1% Of Building Materials Holdings
Virtus Investment Partners Owns More Than 1% Of (CASS)
Virtus Investment Partners Owns More Than 1% Of (CSVI)
Virtus Investment Partners Owns More Than 1% Of (EXR)
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Virtus Investment Partners Owns More Than 1% Of Sun Pharmaceutical Industries Ltd
Virtus Investment Partners Owns More Than 1% Of (DBV)
Virtus Investment Partners Owns More Than 1% Of (RLI)
Virtus Investment Partners Owns More Than 1% Of (XLB)
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Virtus Investment Partners Owns More Than 1% Of (XLK)
Virtus Investment Partners Owns More Than 1% Of (XLU)
Virtus Investment Partners Owns More Than 1% Of (SUBK)
Virtus Investment Partners Owns More Than 1% Of (WDFC)
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Virtus Investment Partners Owns More Than 1% Of Domino's Pizza UK & IRL PLC


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