Turning Heads I Win, Tails You Lose Inside Out

Turning Heads I Win, Tails You Lose Inside Out

For much of the current expansion, cycle investors have been forced taught to believe in a Heads-I-Win-Tales-You-Lose investing environment in which good economic news was good for equities and bad economic news was also good for equities. Good news obviously indicates a positive environment, but bad news meant further central bank intervention, which would inevitably raise asset prices.

Those who didn’t buy-the-dip were severely punished. Many fund managers who dared to take fundamentals into consideration and were wary, or put on portfolio protection, saw their clients take their money and go elsewhere. An entire generation of market participants learned that it’s easy to make money, just buy the dip. That mode just may be changing as the past two weeks the major indices have taken some solid hits. Keep in mind that while the headlines keep talking up the equity markets, the total return in the S&P 500 has been less than 5% while the long bond has returned over 18%. Austria’s century bond has nearly doubled in price since it was first offered less than two years ago!

Earnings Season Summary

So far, we’ve heard from just under 2,000 companies with the unofficial close to earnings season coming next week as Wal Mart (WMT) reports on the 15th. The EPS beat rate has fallen precipitously over the past week down to 57.2%, which if it holds, will be the lowest beat rate since the March quarter of 2014. Conversely, the top line beat rate has risen over the past week to 57.4% which is slightly better than last quarter, but if it holds will be (excepting last quarter) the weakest in the past 10 quarters. The difference between the percent of companies raising guidance versus percentage lowering is down to -1.8% and has now been negative for the past four quarters and is below the long-term average.

With 456 of the 505 S&P 500 components having reported, the blended EPS growth estimate is now -0.72% year-over-year, with six of the eleven sectors experiencing declining EPS. This follows a -0.21% decline in EPS in Q1, giving us (if this holds) an earnings recession. The last time we experienced such a streak was the second quarter of 2016.

The Fed Disappoints

Last week Jerome Powell and the rest of his gang over at the Federal Reserve cut interest rates despite an economy (1) the President is calling the best ever, (2) an unemployment rate near the lowest level since the 1960s, at a (3) time when financial conditions are the loosest we’ve seen in over 16 years and (4) for the first time since the 1930s, the Fed stopped a tightening cycle at 2.5%. We have (5) never seen the Fed cut when conditions were this loose. They were looking to get some inflation going, Lord knows the growing piles of debt everywhere would love that, but instead, the dollar strengthened, and the yield curve flattened. Oops. That is not what the Fed wanted to see.

The President was not pleased. “What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world,” he said in a tweet. “As usual, Powell let us down.”

The dollar’s jump higher post-announcement means that the Fed in effect tightened policy by 20 basis points. Oops2. The takeaway here is that the market was not impressed. It expected more, it priced in more and it wants more. Now the question is, will the Fed give in and give the market what it wants? Keep in mind that both the European Central Bank and the Bank of England are turning decisively more dovish, which effectively strengthens the dollar even further.

Looking at past Fed commentary, the track record isn’t exactly inspirational for getting the all-important timing right.

But, we think the odds favor a continuation of positive growth, and we still do not yet see enough evidence to persuade us that we have entered, or are about to enter, a recession.” Alan Greenspan, July 1990

“The staff forecast prepared for this meeting suggested that, after a period of slow growth associated in part with an inventory correction, the economic expansion would gradually regain strength over the next two years and move toward a rate near the staff’s current estimate of the growth of the economy’s potential output.” FOMC Minutes March 20, 2001

“At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems to likely be contained.” Ben Bernanke, March 2007

“Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.” Janet Yellen, June 2017 (This one is going to be a real doozy)

This time around Fed Chairman Powell told us that what we are getting is a “mid-cycle policy adjustment.” Wait, what? We are now (1) in the longest expansion in history with (2) the lowest unemployment rate in over 50 years as (3) corporate leverage levels reaching record levels at a (4) time when more of it is rated at just above junk than ever before in history. This is mid-cycle? I’m pretty sure this one will be added to the above list as some serious Fed facepalming. Now I think these folks are incredibly bright, but they are just tasked with an impossible job and live in a world in which their peers believe they can and ought to finesse the economy. So far that theory hasn’t turned out all that well for anyone who doesn’t already have a good-sized pile of assets.

Domestic Economy (in summary because it is August after all)

  • We are 3-year lows for the US ISM manufacturing and services PMIs.
  • We are seeing a shrinking workweek, contracting manufacturing hours and factory overtime is at an 8-year low.
  • Just saw a contraction in the American consumer’s gasoline consumption.
  • American households just cut their credit card balances, something that happens only about 10% of the time during an expansion. Keep in mind that Q2 consumer spending was primarily debt-fueled when looking towards Q3 GDP.
  • The Organization for Economic Co-operation and Development (OECD) Leading Economic Indicator for the US fell to a 10-year low in June, having declined for 18 consecutive months. A streak of this nature has in the past always been indicative of a recession. Interestingly that same indicator for China just hit a 9-month high.
  • The Haver Analytics adjusted New York Fed recession risk model has risen from 50% in early January to a 10-year high of 80%.

Global Economy

  • The IMF has cut world GDP forecasts for the fourth consecutive time.
  • We have 11 countries so far in 2019 experiencing at least one quarter of shrinking GDP and 17 central banks are in cutting mode with Peru the latest to cut, the Royal Bank of Australia hinting at further cuts and Mexico and Brazil likely next in line.
  • Some 30% of the world’s GDP is experiencing inverted yield curves.
  • Over half the world’s bond market is trading below the Fed funds rate.
  • Despite the sanctions on Iran and OPEC output cuts, WTI oil prices have fallen over 20% in the past year.


  • The Eurozone manufacturing PMI for July fell to 46.5, down from 47.6 in June and is now at the lowest level since the Greek debt crisis back in 2012 as employment declined to a six-year low with a decline in exports. Spain came in at 48.2, 48.5 for Italy and 49.7 for France.
  • Germany, long the economic anchor for the Eurozone and the world’s fourth-largest economy, has negative yields all the way out 30 years and about 40% of Europe’s investment-grade bonds have negative yields. The nation’s exports declined 8% year-over-year and imports fell 4.4% in June as global demand continues to weaken.
  • France had its industrial production contract -2.3% in June versus expectations for -1.6%.
  • Italy’s government is back in crisis mode as the two coalition ruling parties look to be calling it quits. Personally, I think Salvini (head of the League) has been waiting for an opportune time to dump his Five Star partners and their recent vote against European Infrastructure gave him that chance. The nation is likely heading back to the polls again at a time when Europe is facing a potential hard Brexit, so we’ve got that going for us.
  • The UK economy just saw real GDP in Q2 contract 0.2% quarter-over-quarter. Domestic demand contracted -3%. Capex fell -0.5% and has now been in contraction for five of the past six quarters. Manufacturing output also contracted -2.3% in the worst quarter since the Great Financial Crisis.


  • South Korean exports, a barometer for global trade, fell 11% year-over-year in July. The trade war between South Korea and Japan continues over Japan’s reparations for its brutal policy of “comfort women” during WWII.
  • The trade war with China has entered the second year and this past week it looks unlikely that we will get anything sorted out with China before the 2020 election. The day after Fed’s rate decision Trump announced that the US would be imposing 10% tariffs on $300 billion of Chinese goods starting September 1st. In response, China devalued its currency and word is getting out that the nation is preparing itself for a prolonged economic war with the US. The rising tension in Hong Kong are only making the battle between the US and China potentially even more volatile and risky. Investors need to keep a sharp eye on what is happening there.
  • Auto sales in China contracted 5.3% year-over-year in July for the 13th contraction in the past 14 months.
  • Tensions are rising between India and Pakistan thanks to India’s PM Modi’s decision to revoke Kashmir’s autonomy.

US Dollar

When we look at how far the dollar has strengthened is have effectively contracted the global monetary base by more than 6% year-over-year. This type of contraction preceded the five most recent recessions. While the headlines have been all about moves in the equity and bond markets, hardly anyone has been paying attention to what has been happening with the dollar, which looks to be poised the breakout to new all-time highs.

Reaching for new all-time highs?

A strengthening dollar is a phenomenally deflationary force, something that would hit the European and Japanese banks hard. So far we are seeing the dollar strengthen significantly against Asian and emerging market currencies, against the New Zealand Kiwi and the Korean Won, against the Canadian dollar and the Pound Sterling (Brexit isn’t helping) and China has lowered its peg to the dollar in retaliation against new tariffs in the ongoing trade war. There is a mountain of US Dollar-denominated debt out there, which is basically a short position on the greenback and as the world’s reserve currency and the currency that utterly dominates global trade. As the USD strengthens it creates an enormous headwind to global growth.

The deflationary power of a strengthening US dollar strength in the midst of slowing global trade and trade wars just may overpower anything central banks try. This would turn the heads-I-win-tales-you-lose buy-the-dip strategy inside out and severely rattle the markets.

The bottom line is investors need to be watching the moves in the dollar closely, look for those companies with strong balance sheets and cash flows and consider increasing liquidity. The next few months (at least) are likely to be a bumpy ride.

TransUnion sees more consumer borrowing while delinquencies climb

TransUnion sees more consumer borrowing while delinquencies climb

It’s always somewhat interesting and somewhat perplexing to us here at Tematica when third parties point to rising consumer debt levels as a good thing. When we see modest wage growth mixed with a shrinking average workweek per the November Employment Report mixed with a Personal Savings Rate that has fallen since peaking this year in February, we see confirming signs for our Middle-Class Squeeze investing theme, which is not exactly a reason to get excited about the overall economy.

With TransUnion forecasting consumer credit to grow year over year in 2019, including subprime borrowers having more access to credit, we see very little to get excited about given that it is already forecasting credit card delinquency rates to move higher in 2019.


In TransUnion’s consumer credit forecast report for 2019, the company said an uptick in originations is good news for consumers and lenders. Lenders get to expand their book of business at a time when delinquency rates are low or at normal levels, and lenders have more confidence to take on added risk. For consumers, TransUnion said sub-prime and near-prime borrowers will have access to more credit, providing a mechanism to improve their credit scores. TransUnion noted that it expects the trend of managing risk exposure via loan amount and line management tactics for consumers with lower credit scores to continue next year.

There were a few outliers that TransUnion found pertaining to serious credit card delinquency rates and originations and mortgage originations. TransUnion is forecasting credit card delinquency rates to increase to 2.04 percent in the fourth quarter of 2019 compared to 1.94 percent in the fourth quarter of this year. That will likely be the result of a shift toward non-prime credit card holders, which will impact originations and result in an uptick of serious delinquencies. As for mortgage originations, TransUnion is forecasting a decline driven by an increase in interest rates and a low inventory of homes to purchase.

“Everything is relative in consumer credit, and an increase in sub-prime borrowers should not be worrisome at this time,” said Komos.

Source: Consumer Credit Orgs to See More Growth in 2019 | PYMNTS.com

Behind Powell’s comments and digital shopping reigns supreme

Behind Powell’s comments and digital shopping reigns supreme

Key points inside this issue:

Coming into this week with a clean slate following the pre-Thanksgiving stop out of our Consumer Staples Select Sector SPDR ETF (XLP) January 2019 58.00 (XLP190118C00058000) calls at 0.35.  Yesterday, the stock market put in its best one-day performance in months following the report that Fed Chairman Powell said aid interest rates are close to neutral, a change in tone from remarks the central bank chief made nearly two months ago. To be clear, “neutral” means neither speed up nor slowing down growth. This comment was warmly received by investors as they perceived it as removing one of their concerns – the number of interest rate hikes to be had over the coming 13 months, which as of last week totaled five.

Here’s the thing, over the last few months we’ve seen a number of data points suggesting a slowdown in both the global economy as well as the domestic one. Whether it’s the sharp drop in oil prices that suggest weak demand for crude, which is also helping mitigate some related inflation concerns, the continued weakness in the housing market due in part to higher interest rate or other economic indicators (Industrial Production, Durable Orders or the ISM manufacturing), the speed of the US economy is slowing. Moreover, consensus expectations point to that continuing over the coming quarters with sequential declines in GDP expected between now and the end of 2019.

What this more than likely means is the Fed is digesting this data and resetting its interest rate expectations. Great that they may not move as high in the coming 13 months, but the probable reason is the speed of the economy could not handle that degree – 5 additional rate hikes. Let’s remember that monetary policy is not a fixed formula, but is one that has to remain flexible to react to global economic and geopolitical events, and we have to focus on the reason behind that shift in monetary policy.  Later today, we’ll receive the Fed’s meeting minutes from its November monetary policy meeting, which should offer further insight into this shifting view inside the central bank.

While Powell’s comments may have offered some relief to investors, we have to remember that in addition to a slowing economy several other risks remain. These include the upcoming US-China trade conversations at this week’s G20 summit, Brexit and Italy-eurozone issues. Just this morning, Italian Deputy Prime Minister Matteo Salvini said the populist government is not considering cutting next year’s budget deficit target to below 2.2%.  In my view, once we clear the G20 meeting we’ll have a much better sense as to the playing field that will close out 2018 and be with us when we enter 2019. Despite the stock market ripping higher yesterday, caution and prudence remain the mantra in the very near term as we wait for these other shoes to drop and investors to recognize the reason behind the Fed’s shifting view on the speed of monetary policy.


Circling back to UPS calls following Thanksgiving-Cyber Monday shopping

On this week’s Cocktail Investing Podcast, Tematica’s Lenore Hawkins and I sift through all the data that was had coming out of the official kickoff to the 2018 holiday shopping season that span Thanksgiving to Cyber Monday, and in some cases “extended Tuesday.” The short version is consumers did open their wallets over those several days, but in keeping with our Digital Lifestyle investing theme, we saw a pronounced shift to online and mobile shopping this year, while brick & mortar traffic continued to suffer.

According to ShopperTrak, shopper visits were down 1% for the two-day period compared to last year, with a 1.7% decline in traffic on Black Friday and a versus 2017. Another firm, RetailNext, found traffic to U.S. stores fell between 5% and 9%  during Thanksgiving and Black Friday compared with the same days last year. For the Thanksgiving to Sunday 2018 period, RetailNext’s traffic tally fell 6.6% year over year.

Where were shoppers? Sitting at home or elsewhere as they shopped on their computers, tablets and increasingly their mobile devices. According to the National Retail Federation, 41.4 million people shopped only online from Thanksgiving Day to Cyber Monday. That’s 6.4 million more than the 34.7 million who shopped exclusively in stores.

Thanksgiving 2018 was also the first day in 2018 to see $1 billion in sales from smartphones, according to Adobe, with shoppers spending 8 percent more online on Thursday compared with a year ago. Per Adobe, Black Friday online sales hit $6.22 billion, an increase of 23.7% from 2017, of which roughly 33% were made on smartphones, up from 29% in 2017.

The most popular day to shop online was Cyber Monday, cited by 67.4 million shoppers, followed by Black Friday with 65.2 million shoppers. That day alone mobile transactions surged more than 55%, helping make the day the single largest online shopping day of all time in the United States at $7.9 billion, up 19% year over year. It also smashed the smartphone shopping record set on Thanksgiving as sales coming from smartphones hit $2 billion.

As I have long said, as consumers increasingly shift to digital shopping, a key tenant of our Digital Lifestyle investing theme, these goods will need to reach the intended recipient no matter who or where they are. That makes United Parcel Service (UPS) a prime beneficiary as more consumers and retailers embrace digital commerce. Given the data that has emerged over the last week, it is safe to say the speed of digital commerce adoption is accelerating. For that reason, we are adding back a UPS call option play for the holiday season, which candidly is at far better pricing levels following the market pain of the last few weeks. Between now and Christmas, I expect to see many a UPS truck traveling up and down the streets, and I strongly suspect you will see them as well.


Used-car sales poised to climb as new cars become even more expensive

Used-car sales poised to climb as new cars become even more expensive

Since the Great Recession, we’ve seen new auto sales rebound due in part to the attractive if not aggressive low to no interest financing. That’s helped mask the rising cost of buying a new car as original equipment manufacturers (OEMs) ranging from Ford and General Motors to Volkswagen and Honda have packed connective technology and features associated with our Digital Lifestyle investing theme their vehicles.

Over the last few quarters, the Federal Reserve has hiked interest rates and is poised to do some four more times in the coming 15 months according to its most recent economic forecast. At the margin, that will boost the cost of buying a new car or truck, and likely increase the demand for used cars for consumers that are seeing their discretionary dollars shrink as those same interest rates drive their existing debt servicing costs higher. Good news for companies like Carmax that can cater to Middle-class Squeeze consumers, not so good for the auto manufacturers.


Demand for used cars was unusually strong this summer and will remain at elevated levels through the year’s end as higher interest rates and rising prices on new cars continue to stretch buyers’ wallets, industry analysts said.

Used-car buyers are finding a growing selection of low-mileage vehicles that are only a few years old.

While used-car values have also increased in recent years, the gap between the price of a new and preowned car has also widened and is now at one of its largest points in more than a decade, according to car-shopping website Edmunds.com.

New-car prices have steadily climbed in the years following the recession as companies packed vehicles with more expensive technology and buyers shifted away from lower-priced cars to bigger and more expensive sport-utility vehicles and trucks. The average price paid for a car hit an all-time high of $36,848 in December of 2017 and remains at near-record levels, according to Edmunds.com.

With nearly 40 million in sales last year, the used-car market is more than double the size of the new-car business.

The shift in demand is a troubling sign for auto makers, which will be under pressure to deepen discounts to keep customers from defecting to the used-car market. New-vehicle sales have started to cool this year following a seven-year growth streak.

As new car prices have climbed, auto lenders have kept monthly payments low by extending loan-repayment terms to five and six years and introducing 0% financing on loans that made buying new a more attractive deal.

But as interest rates rise and credit tightens, auto companies are pulling back on such sales incentives. The average monthly payment on a new car was $536 in August, up from $507 last year and $463 five years ago, according to Edmunds.com.

Source: Used-Car Sales Boom as New Cars Get Too Pricey for Many – WSJ

The growing intersection of the Aging Population and the Middle-Class Squeeze

The growing intersection of the Aging Population and the Middle-Class Squeeze

On their own, each of Tematica’s 10 investing themes is pretty powerful, but when two or more of them come together they form some pretty powerful tailwinds and formidable headwinds. Our Aging of the Population investing theme focuses on the demographic shift that we are undergoing and our Middle-Class Squeeze one addresses the economic pressure that many continue to feel due in part to rising debt levels, rising costs and still less than inflation growing wages. These same factors are pressuring older Americans that are living on fixed budgets, and now it seems even their Social Security payments will be hit by unpaid student debt.

Odds are we will see a growing number of older Americans trading down in what they buy and changing where they buy in order to stretch the spending dollars they do have.


The share of bankruptcy filers who are older than 65 is the highest it’s ever been.

As the cost of living outpaces incomes, health care costs rise and debt swells, there’s been more than a two-fold increase in the rate of older Americans filing for bankruptcy, according to a new study. “For an increasing number of older Americans, their golden years are fraught with economic risks,” it reads.

Debt among older Americans is rising fast. In 2016, the average debt in families in which the head of the household is age 75 or older was $36,757. That is up from $30,288 in 2010, according to a recent report by the nonprofit Employee Benefit Research Institute in Washington.

The average monthly Social Security check is $1,404, and more than 40 percent of single adults receive more than 90 percent of their income from that check, according to the government.

Older Americans’ debt can threaten this.

The number of Social Security recipients 65 and older who had their check reduced because of their student loans increased by more than 500 percent between 2002 and 2015, according to the Government Accountability Office.

Source: Debt growing for older Americans and so are bankruptcy filings

$1.5 trillion student loan debt, $1.1 trillion auto loan debt and ~$1 trillion in credit card debt -what could go wrong?

$1.5 trillion student loan debt, $1.1 trillion auto loan debt and ~$1 trillion in credit card debt -what could go wrong?

It’s that time again, an update on the degree of consumer borrowing as tallied by Federal Reserve data. For those of us that have been watching other consumer spending, debt and savings metrics, the results come  as little surprise and serve to confirm not only our Cash-strapped or Middle-Class Squeeze investing theme. The data also lends support to the growing concern over the ability of the consumer to thrust the consumer spending led US economy ahead as the Federal Reserve continues to boost interest rates in the coming quarters.


Americans owe $1.5 trillion in student loans

We hit this milestone during the first quarter of 2018, according to Federal Reserve data.

Outstanding student debt currently exceeds auto loan debt ($1.1 trillion) and credit card debt ($977 billion).

42% of people who’ve gone to college took out debt

A majority of them took out student loans, but 30% had some other form of debt, like credit card debt or a home equity line of credit, according to a Federal Reserve report based on a 2017 survey.

Average new grad owes $28,400Among those who finished a bachelor’s degree in 2016 with debt, the average amount was $28,400, according to The College Board. That’s up from $22,100 in 2001 (reported in 2016 dollars).


Source: Student loan debt just hit $1.5 trillion. Women hold most of it

WEKLY ISSUE: Adding a safe harbor position amid resurfacing uncertainty at home and abroad

WEKLY ISSUE: Adding a safe harbor position amid resurfacing uncertainty at home and abroad


Over the last week since our last issue of Tematica Options+, the S&P 500 has bopped higher and slipped lower on the hopes and the dashing of them over trade conversation with China and North Korea. Even as China has softened its position on auto and auto parts imports, last night The Wall Street Journal reported that per the Commerce Department, “Trump administration is using national-security laws to consider imposing new tariffs on vehicle and auto-parts imports.”While this talk is bound to spook the stock market, I continue to see it as President Trump continuing to keep his negotiation adversaries off balance as the trade talks continue. Several weeks back I cautioned this would be the likely course, but that it would bring uncertainty back into the marketplace.

Over the last month, we’ve seen sharp moves in the CNN Money Fear & Greed Index from Fear to Greed and as of last night Neutral. Again, all in a month. These make for wide swings in investor sentiment, and as I shared in yesterday’s weekly issue of Tematica Investing, it has the stock market in an unforgiving mood even though expectations were extremely high coming into the March quarter earnings season. That along with the weaker than expected outlook from Applied Materials (AMAT), which looks will it like be a bump in the road when viewed with some hindsight, led to our being stopped out of the Applied Materials (AMAT) June 55.00 calls (AMAT180622C00055000) last week.

As I’ve shared both here and in Tematica Investing, the last four months have been far different than the prior 15 and that has made it far more challenging in the short-term. Fundamentally sound short positions have been stopped out by a snap higher in the market only to see call option positions be stopped out as the market contends with the latest policy by tweet coming out of Washington. In all my time with the stock market, some 25 years now, I am hard pressed to remember a time when the global landscape is as it is today – mixed economic growth globally, rising costs and other inputs that will likely call for four not three rate hikes, contentious trade negotiations and more trouble in the Eurozone rearing its head.

Developments in Italy are raising investor concerns

That last item I mentioned refers to developments in Italy, a country that has been in the grip of political gridlock over the last 11 months and now appears to be on the cusp of forming a new government. The concern is the potential governing agreement, which has been termed a “budget buster” for the country, which is currently swimming in debt – roughly 130% to GDP – and is one of the EU’s slowest growing economies. The newly formed government, which is a reflection of the populist movement in the country, has vowed to increase fiscal spending and cut taxes — moves that given the country’s debt and economic speed could throw it into disarray, potentially creating a new sovereign debt crisis.

Bad for investments such as iShares MSCI Italy ETF (EWI) and those like iShares MSCI Eurozone ETF (EZU) and WisdomTree Europe Local Recovery Fund (EDOM) that hold meaningful exposure to the country.

When we’ve seen situations like this on the global stage, investors look for safe ports, which in turn tends to drive demand for US-based equities, the dollar and Treasuries.

In yesterday’s minutes from the Fed’s May FOMC meeting, we saw the following statement – “It would likely soon be appropriate for the Committee to take another step in removing policy accommodation.” I see that as a crystal-clear sign we will see a rate hike at the June meeting and Fed watchers are now pricing in a 94% probability of a third rate hike this year in September. Given the inflationary data and input price comments during this past earnings season, it seems increasingly likely that we will see a fourth rate hike late this year at either the November or December Fed meeting.

How to trade it in the short-term?

To sum up, we have uncertainty bubbling over in the Eurozone and interest rates poised to higher in the U.S. offering a safe haven of sorts for investors. The upward move in interest rates, at the margin, will curb investor appetite for dividend stocks, which is somewhat silly in my opinion given the excellent source of alternative income dividend dynamo and quality, high dividend yielding stocks represent. Recently posted Thematic Signals remind us the financial condition of many Americans. Not only is it not pretty, they could certainly use the extra income.

But I digress…. Back to the conversation at hand… the likelihood that Treasuries will see increased demand in the near-term. This has me adding a position in iShares 20+ Year Treasury Bond ETF (TLT) June 2018 119.00 (TLT180615C00119000) calls that closed last night at 0.58to the Tematica Options+ Select List. These just out of the money calls are among the most liquid, and the expiration date of June 15 is after the Fed’s next monetary policy meeting that concludes on June 13. It’s also worth noting that after that meeting the Fed will hold a press conference as well as issue an update to its economic outlook. As I add these to the Select List, I’ll also set a stop loss at 0.40 to limit potential losses on this position.



Fed Interest Rate Face-Off

Fed Interest Rate Face-Off

Before the Federal Reserve’s announcement this week concerning rates, Lenore Hawkins joined The Long and The Short on Cheddar TV to discuss how Wednesday’s decision will impact the market. While the current administration has been looking to keep this economic cycle going much longer and even accelerating, the Federal Reserve is concerned that the cycle may be getting overextended and overheated, putting the central bank in a tough spot as it attempts to apply some interest rate brakes while fiscal policy lays on the accelerator. Click below to watch the video.


Tematica’s take on the Fed’s monetary policy statement today

Tematica’s take on the Fed’s monetary policy statement today

As expected the Federal Reserve boosted interest rates by one-quarter point putting the target range for the Fed Funds rate to 1-1/2 to 1-3/4 percent. As expected the focus was the Fed’s updated economic projections, and what we saw was a step up in growth expectations this year and in 2019, a step down in the Unemployment Rate this year and next, and no major changes in the Fed’s inflation expectations. Alongside those changes, the Fed also boosted its interest rate hike expectations in 2019 and 2020, by a

Putting all of this into the Fed decoder ring, this suggests the Fed sees the economy on stronger footing than it did in December, which is interesting given the recent rollover in the Citibank Economic Surprise Index (CESI) that is offset by initial March economic data. Even the Fed noted, “Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings.”

Stepping back and look at the changes in the Fed’s economic forecast – better growth, employment and no prick up in inflation – it seems pretty Goldilocks on its face if you ask me, but the prize goes to Lenore, who called for the Fed to be more hawkish than dovish exiting today’s FOMC meeting. We’ll see in the coming months if forecast becomes fact. As we get more economic data in the coming months, we can expect hawkish viewers to bang the 4thrate hike drum and that means we’ll be back in Fed watching Groundhog Day mode before too long.

While the Fed and the OECD are predicting a synchronized global economic acceleration in 2018, the ECRI, (which accurately forecast the 2017 acceleration) is calling for a synchronized deceleration. We suspect that too much is expected of the impact of the tax cuts and too little is being accounted for from potential trade wars and the shifts in monetary policy.

The Fed has at least 2 more rate hikes planned, which will give us a 200 bps increase in total, the consequence of which will only be felt with a significant lag. We are also getting a roughly 100 basis point equivalent tightening from the Fed’s tapering program, which brings us to 300 basis points of tightening. That is twice the magnitude of tightening pre-1987 market collapse, equivalent to the 1994 tightening that broke Orange County and Mexico and more than what preceded the 1998 Asian crisis and the 2001 dot-com bust.

Now for Fed Chairman Powell’s first Fed news conference…