WEKLY ISSUE: Adding a safe harbor position amid resurfacing uncertainty at home and abroad
KEY POINTS FROM THIS ISSUE:
- We are issuing a Buy on and adding the iShares 20+ Year Treasury Bond ETF (TLT) June 2018 119.00 calls (TLT180615C00119000) that closed last night at 0.58 to the Tematica Options+ Select List. In tandem with this addition, we are setting a protective stop loss at 0.40.
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.
- We are issuing a Buy on and adding the iShares 20+ Year Treasury Bond ETF (TLT) June 2018 119.00 calls (TLT180615C00119000) that closed last night at 0.58 to the Tematica Options+ Select List. In tandem with this addition, we are setting a protective stop loss at 0.40.
