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When the Fed Responds, These Stocks Will Correct

NEW YORK (TheStreet) -- The rumor mill is cranking out more rumors about what the Federal Reserve will do after its July 31 meeting.

In an article Wednesday in the Wall Street Journal it was strongly suggested that "...Federal Reserve officials, impatient with the economy's sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring."

Another big helping of what I call "massive quantitative easing," or MQE, is on its way, and recent news articles are suggesting it may come sooner rather than later.

MQE will not only be focused on buying mortgage-backed securities, but I believe it will include a directive to increase credit liquidity and accelerate the velocity of money to help ease the current stringent restrictions on business and personal borrowing.

Also, the central bank could deepen its commitment to keeping interest rates at zero beyond 2014 and directly offer credit to banks through the use of the discount rate to prompt lending, the WSJ reported.

Any way you slice it and dice it, MQE will be a surprisingly generous version of what Ben Bernanke reiterated on July 17 when he said the Fed "is prepared to take further action as appropriate to promote a stronger economic recovery."

Notice that the Fed Chairman said "stronger economic recovery". He chooses his words carefully, and in order to follow through the Fed will need to do more than they've done in the first two iterations of MQE.

When the Fed does pull the trigger, the first sector to correct after an initial bounce higher will be the mortgage REITS including Annaly Capital Management (NLY) and Hatteras Financial (HTS).

Yes, I love their generous (nearly 13%) dividend payouts. But what really concerns me is they're both trading at or near their 52-week highs and their payout ratios are frighteningly high.

Annaly Capital has a current payout ratio of 423%. Hatteras Financial has a 98% payout ratio. From past experience, and from the chart below, these two stocks have more downside risk than upside potential. NLY Payout Ratio TTM ChartNLY Payout Ratio TTM data by YCharts

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