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From Bonds to Equities: Great Rotation, Great Dilemma

NEW YORK ( TheStreet) -- As an unintended consequence of the Federal Reserve's evolving into the world's largest activist hedge fund, Ben Bernanke is being squeezed out of his bond purchasing program before the ideal time.

I listened to hedge fund legend Leon Cooperman's CNBC interview yesterday and agreed with 80% of what he said. He's spot on when he says the Fed has become data dependent with transparent targets at 6.5% unemployment, 3% GDP and 2%-3% inflation.

My disagreement can be summarized by this question: What happens if Bernanke is squeezed out of QE before those benchmarks are reached?

This particular iteration of QE cannot go on forever, the Fed cannot purchase $85 billion each month because the supply of treasuries and mortgage-backed securities is constrained, as David Tepper mentioned last month; the taper needs to happen in order to avoid a bond bubble caused by this artificial demand. Hence this QE exit strategy is poised to become treacherous for all asset classes as a recalibration takes place. Markets will go through a withdrawal phase as they are weaned off the Fed's medicine.

With Bernanke set to be replaced in January, he does not want to leave this mess for his replacement to deal with. The correction needs to happen now, and he seems perfectly willing to take one for the team. Otherwise, he would not have been so forthcoming regarding a QE exit strategy in Wednesday's press conference. Bernanke knows exactly what he's doing.

During this recalibration period, equities will drop, bonds will drop, gold should drop and interest rates will rise. So far so good in the portfolio.

Gold puts have been the most profitable of all.

The really good news is that this market correction is setting up generational buy (if Jim Cramer can use that phrase to describe the earnings-starved Netflix (NFLX), then I think I can use the phrase to describe a company with better video streaming profits than Netflix) in Apple (AAPL - Get Report).

August and September have the potential of being the best two months of performance in Apple options history. Having the portfolio positioned in cash and opportunistic puts until the Fed dust settles will create an ideal entry scenario into Apple as we approach the July earnings report.
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