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Selling my Schwab May 19 Puts on today’s 66% jump
I’m closing this position on Schwab (SCHW) in my Volatility Portion at a slight loss–I bought these Put Options on March 28 at $3.70 and they traded at $3.50 today May 2–that’s a 5.4% loss. But with the expiration date on these options approaching, I am concerned that the price of the option will fall with time decay.
Selling the KRE Put Options that I bought yesterday after today’s 70% jump
Yes, it’s a volatile market. Yesterday, May 1, the take from the Wall Street talking heads and JPMorgan Chase CEO Jamie Dimon was that the banking crisis (or at least this stage of it, to be fair to Dimon) was over. Today, May 2, the fear is that the crisis isn’t over. Regional bank stocks have plunged again with Western Alliance Bancorporation (WAL), for example, down 17.12% for the day as of 3 p.m. New York time. The regional bank ETF, the SPDR S&P Regional Banking ETF (KRE) is down 6.61%. That all means that the August 18 Put Options with a strike price of $41 that I bought yesterday at $2.55 are selling at 3 p.m. today at $4.72. Counting a slight gain from yesterday’s action after the buy, these Puts are up 85% in a day. I’m taking that gain today and selling this position out of my Volatility Portfolio
Special Report: My 5 Favorite Shorts for This Market–short #2 ahead of the Fed meeting (so 3 to come)
JPMorgan Chase’s (JPM) deal today, Monday, May 1, to acquire First Republic Bank (FRC) after the Federal Deposit Insurance Corporation (FDIC) regulators seized the bank certainly puts an end to the First Republic chapter of the banking crisis. But there are lots of chapters to go in this banking crisis. So my second short for this market is to buy Put Options on the SPDR S&P Regional Banking ETF (KRE).
Saturday Night Quarterback (on Sunday) says, For the week ahead expect…
The Federal Reserve’s meeting on Wednesday, May 3, is a big story but it’s not the only story. There will also be earnings from Apple, Ford, Qualcomm, and Starbucks. The Federal Reserve is very likely to raise interest rates another 25 basis points on Wednesday. The CME FedWatch Tool puts the odds at 83.9%. That’s down from 89.1% on April 21 but up from just 47.1% on March 29. Unless the Fed is playing games with the market–they are such jokesters, aren’t they–I think we’ll get that 25 basis point boost. After all, it’s not like inflation has waved the white flag lately, right? The key for stock market direction, however, isn’t what the Fed does at this meeting but what the Fed says about future interest rate increases, or the lack thereof. The Goldilocks scenario that is supporting stocks at current levels is built on a relatively quick end to rate increases and then a relatively rapid pivot to interest rate cuts–by the end of 2023. Wall Street will be listening for anything that hints at that scenario in the Fed’s post-meeting statement. And stocks will rally if Wall Street thinks it hears anything to confirm its hopes. On Friday, the CME FedWatch Tool put the odds for a June 14 interest rate increase at just 26.8% and the odds that the Fed will put interest rates on hold at 62.2%. There’s enough wiggle room in those odds to convince me that the market isn’t all that certain about the Fed ending interest rate increases at that meeting.The other story this week is earnings.
Omph, that wasn’t good inflation news today–but still, go figure, stocks climbed
The headline Personal Consumption Expenditures index, the Federal Reserve’s preferred inflation measure, climbed at 4.2% in the year through March. That was a big drop from the 5.1% year-over-year rate in February. (Although, I’d note, economists were expecting this all items number to drop to 4% before the actual report.) But the core inflation rate, after stripping out more volatile food and fuel prices, hardly budged in March at 4.6% year-over-year from the 4.7% year-over-year rate in February. And it’s the core PCE inflation rate that carries the most weight with the Federal Reserve. In other words, inflation remains elevated and very, very sticky.
Please Watch My New YouTube Video: Quick Pick Procter & Gamble
Today’s Quick Pick is Procter & Gamble (NYSE: PG). P&G’s first quarter earnings were good and a bit of a surprise. Reporting at $1.37 for the quarter, they beat Wall Street expectations ($1.32) by five cents and they were up 4 cents year over year. The company also raised guidance for revenue growth to 4% in 2023, higher than the prior 1%. While the report was good, it wasn’t that much better–it was a modest beat. What interests me is the market’s reaction to the report. The stock has been rallying since early March, but when P&G released the report, the stock jumped 3.7%. To me, this shows a hunger in the market for the (supposed) safety of blue chip stocks. As worries of a slowing economy and a possible recession grow, stocks that produce reliable, regular growth become more valuable. As I mentioned in my 10 Picks to prepare for a recession on JubakAM.com, P&G is a good place to be during a mild recession. Different story in a major downturn. Then everything falls.
Special Report: My 5 Favorite Shorts for This Market–Shorts #1, #2 , #3 and #4 (so 1 more to come.)
I’m expecting modestly positive economic news in the next few days. Which will, in my opinion, create a low-risk opportunity to make big gains by going short this market in order to profit as stock prices fall. I’m looking to put the first of those shorts in place right now. With the rest to go into place in the days after the Federal Reserve meets on Wednesday, May 3. In this Special Report, I’ll explain this perhaps initially counter-intuitive call on short-term market direction and give you the details on five of my favorite shorts for profiting in this market. With the first short pick today
GDP growth slowed in the first quarter by more than expected
Gross domestic product rose at a 1.1% annualized rate in the first quarter of 2023, the Commerce Department reported this morning. Consumers, again, kept the economy going with s 3.7% increase in consumer spending. Business investment in equipment posted the biggest drop since the start of the pandemic and inventories subtracted 2.26 percentage points from GDP in the quarter, the biggest negative impact on GDP in two years. The GDP data showed services spending rose at a 2.3% annualized rate, led by health care and restaurants and hotels. Outlays on goods increased at a 6.5% rate, the most in nearly two years. The results put even more pressure on continued job growth and increases in wages to keep consumer spending growing.
The median projection in a Bloomberg survey of economists called for a 1.9% GDP growth rate in the quarter.
Please Watch My New YouTube Video: Look Out Below! Central Banks to Take Away $1 Trillion in Cash
Today’s topic is Look Out Below! Central Banks to Take Away $1 Trillion in Cash. Citigroup recently reported that central banks pumped about $1 trillion into the financial markets during the recent bank-collapse crisis. While investors are currently focused on interest rates and inflation and how that affects the price of money, they may be overlooking this important liquidity story. Citigroup projects that this much liquidity injected into the financial system is equal to a rate cut of 50 basis points. The market indeed has received the rate cut it was looking for, just not where it was expected. We’ve now seen peak liquidity. Central banks will not keep putting this kind of liquidity into the market, and in fact, will try to take some of it back. Citigroup says we’ve gone through a risk-on rally fueled by extra cash from central banks, making junk bonds and high-risk investments very attractive. We also had a rally in corporate debt, as investors felt they could take on more risk with more cash in the market. Taking all this out of the market will make risk less attractive.
Microsoft soars on earnings, so I’m selling the shares I bought for my Volatility Portfolio
Back on March 24, I added shares of Microsoft (MSFT) to my Volatility Portfolio on the thinking that in a quarter when earnings were projected to be down for the Standard & Poor's 500 as a whole, reliable technology growth stocks such as Microsoft would outperform....
Financial markets begin, and I stress “begin,” to price in a debt ceiling default
You’d only notice if you’re paying very close attention to yields at the short end of the Treasury market. But bond traders are seeing what looks like the very beginning of a move to price in the possibility of a default by the U.S. government on its debt if the debt ceiling isn’t raised sometime between now and September. Analysts at JPMorgan Chase noted last week that yields on a three-month Treasury bill have spiked, while one-month yields have plummeted, a gap they noted is the “widest in over 20 years.” The gap may reflect investors’ fear of a default over the summer.
Look out below! Central banks to claw back $1 trillion in liquidity provided during banking crisis
Global central banks injected $1 trillion into financial markets during the first quarter, according to calculations by Citigroup as they sought to limit the damage from a banking crisis that claimed Silicon Valley Bank and Credit Suisse. That cash injection was equivalent, Citigroup says, to a 50 basis point cut to global investment-grade risk premium. Which goes a way to explaining the huge risk-on rally in the first months of 2023. And now, Citigroup warns, central banks will be looking to claw back some of that cash.
Please Watch My New YouTube Video: Trend of the Week Consumers Are Falling Behind on Their Debt Payments
This week’s Trend of the Week is Consumers Are Falling Behind on Debt Payments. Although the economy has been slowing for some time, there’s been a lag in consumers falling behind on debt payments. Until recently, consumers seem to have been relying on funds saved during the Covid crisis, but we’re now starting to see that life raft disappear as consumers start to sink underwater on debt payments. This isn’t a good sign for banks that may already be struggling with unrealized losses from the banking crisis. Wells Fargo recently put aside $1.2 billion for potential loan losses and other banks are following suit. About 20% of consumers are using “buy now, pay later” credit card features for things like groceries, showing that the slowing economy and slowing wage growth are finally catching up with consumers. Watch those delinquency rates going forward.
Intuitive Surgical reports a surprisingly strong first quarter
Last week Intuitive Surgical (ISRG) surprised everybody, including, apparently, management. Intuitive Surgical’s first-quarter revenue grew 14% year-over-year to $1.7 billion. (Wall Street was expecting $1.6 billion.) Surgical procedures performed using the company’s da Vinci system, rose 26% year-over-year, well above expectations for 15% growth. And the company raised guidance for global procedure growth to 18% to 21% from the prior guidance of 12% to 16%.
The stock market is trading in narrower and narrower bands
Important observation out of Morningstar on Friday. While the Morningstar U.S. Market Index is up 15.4% from its bear-market low on October 14, the market is only 1.4% higher than it was at the end of November. AND in recent months, the stock market has been moving in tighter and tighter bands. So far in April, the Morningstar U.S. Market Index has only moved up 0.9%. That puts the month on track to show one of the flattest monthly returns since May 2022.
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