Trade The Journey

Trade The Journey

Rates higher for longer!

Top of the Morning! What a stressful week this has been, and I’m not speaking of the markets. This past week I took another loss in a call AT&T option which seemed to be doomed from the start. I chose this options position thinking that AT&T would break out of its sideways trend to the upside. Markets crumbled after Powell took the microphone to address reporters and answer questions.

Analysts seemed to be mostly bullish in their stock and I thought that the Fed’s release of its rate announcement might excite markets to the upside.

Most thought that a fifty-basis point increase was on the table for the next announcement, as a seventy-basis point increase had a low probability of occurring to the market. The pace of the rate hikes has been extraordinary, as the Fed took the overnight borrowing rate to a targeted range between 4.25-4.5%.

Although the fed has slowed the size of its rate hikes after four consecutive increases of seventy-five basis points, the Fed remains committed to keeping rates higher for longer. The thought of keeping rates higher for longer concerned the market, as the sell-off commenced. The sell-off the most recent gains.

Members of the Fed also raised the terminal rate to an equivalent target range of 5-5.25%. The probability of a recession rose considerably. The latest CPI report showed that inflation has slowed down from its peak made in June-July. According to Powell’s speech, inflation is proving to be more resilient than initially anticipated, as services inflation and the job market remain strong. It sounds like the Fed’s hope to rein in wage growth may prove more challenging than they thought as companies remain reluctant to scale back their hiring efforts.

We also shouldn’t forget that the Fed has also begun its quantitative tightening initiative, allowing bonds, agency, and mortgage-backed securities to mature without reinvesting the funds thus shrinking the money supply. While the Fed somewhat understands how quantitative easing will affect the economy, the results of tightening are still unknown. By reducing the amount of bonds, it holds on its balance sheet it decreases the reserves of banks, decreasing the amount available to loan, as banks need a certain amount of reserves on hand to lend.

According to a paper by the Federal Reserve, a “$2.2 trillion drop in the balance sheet over three years is the equivalent of roughly 30 basis points of rate hike in a normal (non-crisis) scenario.”

As you can see, we are entering uncharted territory and as central banks continue to tighten at a face pace, the global economy risks a sustained slowdown grow. All of this weighs on the mind of market participants and now looks less likely like the FED will shift from its hawkish stance anytime soon.

Towards the end of the week, AT&T fell through its multi-week sideways trend, abruptly ending my hopes that it would reach $20 at the end of the week. Before the announcement, I had already lost over 40% of the options’ value, and the Fed announcement & press conference confirmed that I was in a losing position. While investing in AT&T in the longer term seems to be a good decision, in the short term there’s more affecting its movement than bullish analyst future earnings and stock price.

Let’s take a look at the Financial Futures’ net positions, it looks like asset managers are decreasing the size of their bullish bets on the dollar. They remain heavily long in bonds, especially the 5- and 10-year bonds, and short the 30-day fed funds. They also remain long the S&P 500 E-mini, more so than the other indices. As a reminder, the Commitment of traders measures the amount of open interest, as it is updated on Friday afternoon from the previous Tuesday.

Bonds have responded to the recent announcement and the slowing inflation picture, as bond-buying has risen, especially in the long-dated 30-year bonds. The yield curve remains inverted, as yields on the longer-term bonds have fallen from their highs a month ago. The fall in yields has helped mortgage-rates ease from their highs a month ago.

The latest MBA weekly survey showed that the refinance index rose 3% from the previous week as did the mortgage loan application volume to the tune of 3.2%. The purchase index fell 1% from a week ago. As homebuilders slow their pace and prices & rates come down, that might be enough to encourage buyers to re-enter the housing market. The average contract interest rate for 30-year fixed mortgages rose 0.01% to 6.42% for conforming loans and rose 6.14% (0.06% increase) for jumbo loans of the same maturity.

Small businesses remain concerned about inflation as the small business optimist remains below its 49-year average. Owners are still finding it challenging to fill positions, especially skilled positions. According to the monthly report, 44% of all owners reported having trouble filling positions, particularly in the transportation, wholesale, and construction sectors. A small percentage reported that their current inventory stocks were too low. Capital spending improved by one point as owners remained concerned about the economy.

Here is a quote from the commentary section I found interesting:

Consumer spending has been solid, most recently led by spending on new cars, now more available with the chip shortage fading, and supported by a declining saving rate out of an improving income, plus more credit use.

The consumer price index showed a rise of 0.1%, and the index for all items less food and energy rose by 0.2%. The shelter and food index led the increase as the energy index fell by 1.6%. The food at home and food away from home came in at 0.5%, moderating by 0.1% for food at home and rising by 0.1% for food away from home. The shelter index fell by 0.2% but remains at the 0.6% level from previous periods. The energy index showed price decreases in gasoline, natural gas, and electricity.

Retail sales fell 0.6% from the previous month. Retail sales fell across industries except for food & beverage stores, food service & drinking places, health & personal care stores and miscellaneous store retailers to a lesser degree. Retail sales do not account for inflation, so it’s important to look at other reports to fully gauge the strength of the consumer and to monitor the trend of sales. Being that the holiday season is usually a spending season for companies, the retail sales report does not seem to confirm that this holiday spending season will be strong.

Business inventories rose 0.3% in October as did trade sales and manufacturer’s shipments. The inventories to sales ratio rose 0.01 points to 1.32. Retailers’ inventories declined slightly, while merchant wholesalers’ inventories rose sharply. Manufacturers’ inventories rose slightly. Retail trade sales rose in October, led by Motor vehicle & parts dealers.

Industrial production fell 0.2% in November, declining in manufacturing and mining. Production rose by 3.6% in Utilities. Production rose for energy products, energy materials, and defense and space equipment. Capacity Utilization fell by 0.2% to 79.7%, which was 0.1% below its long-run average. Industrial production fell in final products, nonindustrial supplies, and materials.

Initial claims fell by 20,000 to 211,000, which according to reports is the lowest level of initial claims since September signaling a still-strong job market. Continuing claims increased slightly from the previous week.

Crypto continues to deal with the fallout from FTX, as investors pull funds from exchanges. Investors and lawmakers alike are eager for crypto exchanges to prove that they have the necessary funds on hand by showing their books. While crypto is desperately in need of regulation, I don’t think regulation will prevent bad actors from trying in the future. Financial scams will always exist as proved in the regulated markets, we just need to be more diligent in assessing the companies, or exchanges we choose.

This past week’s cash flow:

This past week went okay, definitely a lot better than the previous week. It’s been challenging these past few weeks. One positive change I made in the last month is, I stopped eating after 7 pm although I did slip last night. I used to buy a lot of sushi and eat it late at night but now that I have stopped eating after 7 pm, I have been purchasing as much recently. I am hopeful that I can continue to moderate some of my discretionary spending habits by changing my behavior.

Grade: C

Reason: Some improvement

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