Skip to main content

Morning Update

Spanish unemployment hits a new high of 24.6%. The silver lining is that job losses totaled only 15,000 versus 870,000 last quarter.

Today the Bundsbank reiterated its opposition of ECB bond purchases to reduce stuggling countries cost of borrowing. This came in response to comments from Mario Draghi yesterday suggesting the ECB was prepared to buy Spanish and Italian debt in order to force their cost of borrowing down. Draghi will be put to the test on August 2nd, the ECB’s next scheduled meeting. Markets will now be expecting bold and decisive action from him. If he disappoints markets are likely to sell off hard; if he follows through on his promises he is likely to alienate the ECB from the Bundsbank. As Carsten Rrzeski, senior economiust at ING Group in Brussels said, “Draghi is damned if he does and damned if he doesn’t.”

On top of high expectations for stimulus from the ECB next week, markets will also be hopefull of talk of QE3 from Ben Bernanke next Tuesday following the FOMC meeting. The Non-farm payrolls report on Friday will also be highly anticipated as another poor reading will drastically increase the likelyhood if more easing from the Fed.

One indicator of trader’s expectations of quantitative easing is gold (GLD). Gold has historically rallied during times of easy money and quantitative easing. Since March the metal has traded down, but in recent days has looked like it could be breaking out of its recent trading range to the upside. This buying pressure is likely in anticipation of Fed action next week.

The third estimate of US Q1 GDP was released this morning, coming in at 1.5% Q/Q versus 1.2% expected. Economy-wide inflation, as measured by the GDP price index, was revised to 2.0% from the prior estimate of 1.7% (Bloomberg). This report, while modestly better than expected, confirms that US economic growth is slowing.

Last night Facebook, Amazon, and Starbucks missed their earnings estimates. Facebook delivered earnings largely in line with expectations, though reported slowing revenue growth and did not provide any guidance going forward. This has sent the shares sharply down to all time lows. Amazon said that they are spending a lot on investments because of the opportunities they see. Amazon’s investment spending has focused around video technology and cloud computing. Investors are hopeful that this spending will begin to pay dividends in the fourth quarter’s holiday season. Starbucks not only missed earnings and revenue expectations but also guided down, stating “We’re dealing with significant global economic and consumer challenges.” The chain showed growth rates higher than its peers, however, suggesting that the problem is a macro one, not Starbucks specific. Starbuck’s management has also been known to be conservative in their guidance.


Popular posts from this blog

Wake Me Up When September Ends

The fiscal year for the U.S. Government ends September 30th, 2017. Which is something market participants could care less about if not for, sometime near that date, Congress needs to raise the debt ceiling. Missing that deadline would result in a self-inflicted financial wound that would send shock-waves throughout global markets.  The U.S. Government has been paying off debt since the Andrew Jackson administration without missing a single payment. Raising the debt ceiling is a routine vote.

In fact, with the polarized Washington we have seen in recent years, it is happening a lot more frequently, as Congress has only once passed a budget in the past eight years. In lieu of a budget, Congress passes what is known as a continuing resolution.  A continuing resolution is a type of legislation in which Congress decides to let last year’s budget continue as this year’s budget. Nevertheless, a continuing resolution is incomplete, as it does not allow for the government to spend the money a…

I would like to bet ten tens on the tenth horse in the tenth race, please.

"I would like to bet ten tens on the tenth horse in the tenth race, please."

Last summer, on a warm cloudy day June 11, 2016 in Elmont New York, a good friend of mine (Rob) confidently walked up to the cashier at Belmont and spoke those famous words.  Ten Tens on Ten in the Tenth Race.  In fact, it had been decided it months earlier. We had been discussing hosting his bachelor party in New York, go to the Belmont Stakes, and watch a Yankees vs Tigers game and Rob convinced the group to go to New York by proudly proclaimed his prophecy.  I had almost forgotten about this bold prediction when I witnessed him at the register, but when I looked up, and saw Flintshire, the 10th horse in the race upcoming race was the favorite.  “What could possibly go wrong?”  I thought to myself (an options trader who bought a racing program attempting to handicap and gain an ‘edge’ in the previous nine races unsuccessfully).  I went to a pretzel vendor and changed 5 twenties into ten tens, wal…

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. 
Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). 
So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. As the summer hit, FANG has slowed with GOOGL and AMZN hitting…