Skip to main content

Morning Update

After selling off on Apple’s earnings miss in the overnight session, the S&P 500 futures are back to unchanged on a better than expected Q3 GDP report. The top line number in the report was a 2.02% annualized Y/Y increase in GDP, which beat expectations of a 1.80% increase. However, digging into the report shows that this was driven by a much larger than expected increase in government spending which offset lower than expected personal consumption. Below is a graphic detailing the components of GDP growth over the past few years, and as you can see today’s report has the largest increase in government spending of all of them. For a government running a $1 trillion budget deficit every year we would like to see personal consumption driving the economy, not government spending.

The SPDR Gold Trust (GLD) looks poised to post a fourth down week in a row, which has prompted some option traders to begin picking a bottom. Yesterday the largest GLD trade was the sale of 20,500 Nov. 162 puts for $0.77. Selling a put allows you to pick a level you are willing to buy the stock at and collect premium while you wait for the stock to come to your entry. This option trade allows you to effectively buy GLD at 161.23, which coincides with the 200-day moving average at 161.44.

The recent sell off in gold can be attributed to moderate strength in the dollar and risk asset selling. Since the beginning of October Gold, Crude Oil, the S&P 500, and the 10-year bond are all lower while the US dollar index is higher. In the short term I would not be surprised to see gold continue to trade a bit lower. However, once the Fed’s QE-infinity has run for a few months the monetary base will be much higher and increasing inflation expectations are likely to take GLD higher. Picking a bottom in a market is always tough but for a long-term investor buying GLD around the 200-day moving average is likely to look like a brilliant trade a few years. Worldwide central bank liquidity programs mean that the fundamentals driving gold’s rally over the past few years are still very much in place; it is only a matter of time before the effects of quantitative easing are seen in the economic data and send gold higher.


Popular posts from this blog

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…

The market should take Trump seriously this time.

Kim Jung-Un gave the U.S. an unwelcome birthday present as he test launched an ICBM capable of reaching Alaska.  North Korea has made it very clear that their intention is to grow their nuclear capability to be able to reach the Continental United States.  This would destabilize the region, and world overnight.
Now I don’t expect the war drum beating will spill over into mortar shells raining down on Seoul anytime soon.  There has been a choreographed diplomatic dance going on for the past 40 years with North Korea that is likely to continue as follows; North Korea acts out, U.S. gets upset, U.S. sanctions them (with help from China).  North Korea gives up their acting out activity (promises they won’t do it again), a North Korean South Korean gesture of goodwill takes place, such as joint Olympic teams, joint economic projects, North Korea gets to declare victory.
However, this go around seems slightly different.  Now we have a President who has made it very clear in his campaign tha…