Trade The Journey

Trade The Journey

Tough times ahead!

Top of the Morning! I hope everyone enjoyed their weekend. With prices continually rising albeit, at a slightly slower pace, consumers are feeling the pinch. Consumers aren’t the only ones feeling the pain of higher prices, companies are also feeling the effects of higher input costs. Companies are freezing their hiring or in some cases laying off workers to help control costs. A large portion of companies issued cautious forward-looking statements as supply chains remained strained, high input costs remain, and skilled positions remain difficult to fill.

Elon Musk is calling for a ten percent reduction in staff and has stated that he has a bad feeling about the economy moving forward. Musk isn’t the only person voicing concern. Jamie Dimon, Chief Executive Officer of JP Morgan, has warned the public about an incoming economic hurricane. He cited two concerns: The historic Quantitive Tightening the Fed is undertaking and the conflict in Ukraine’s effect on commodities including food and fuel. It isn’t hard to see that the economy is on shaky ground.

The Fed is committed to bringing inflation to a more manageable level. The labor market continues to show strength as the Fed raised rates at the latest June meeting. The Fed has stated that the next meetings will most likely include rate hikes. There were reports that the Fed may pause the rate hikes in September, however, a Fed member said that isn’t feasible now.

The Fed has also begun its balance sheet runoff but as mentioned in the last post, the Fed is unsure of how the markets will respond to the runoff. Will there be continued liquidity in the Bond and Mortgage-Backed securities Market?

With whispers of a coming recession growing louder, how will consumers respond? In the latest GDP report, consumer spending propped the economy up. Consumers are still spending even if their funds are coming from credit and savings accounts. Consumers are also shifting their purchasing power from goods to services like traveling.

As China prepares to reopen after declaring a victory against the latest Covid surge in Shanghai, worries abound about increased demand for oil. Opec in its latest meeting pledged to raise oil output but not nearly enough to compensate for the rising demand. In the coming months, gasoline prices increase further as crude inventories remain tight.

Another interesting development is the number of countries limiting or halting their exports of food like sugar, palm oil, and chicken to name a few. Here’s a complete list below from CNBC:

These developments are forecasting turbulent times ahead in commodities, resources, and ultimately the markets.

Employment Situation

Total nonfarm payrolls employment rose by 390,000, however, it is below employment added in the last two months. Manufacturing added a total of 18,000 payrolls in May, compared to 61,000 in April. Within the manufacturing sector, durable goods added only 11,000 jobs and motor vehicles fell by 3,500 jobs.  Retail trade employment declined in the following industries: general merchandise, clothing and clothing accessories, food, and beverage, building material and garden supply, and personal & health care stores.

The unemployment rate remains at historically low levels. Leisure and hospitality added the most jobs this past month, followed by professional and business services, transportation and warehousing, and construction.

Average hourly earnings rose slightly, and average weekly hours held steady.

Revised Productivity report

Released on Thursday the revised Nonfarm business sector labor productivity decreased a little over seven percent this past quarter. Labor productivity is the output per hour. Unit labor costs in the sector increased by 12.6 underscoring the high input costs facing companies moving ahead. “Increases in hourly compensation tend to increase unit labor costs and increases in productivity tend to reduce them.” An interesting tidbit from the revised report is that productivity is returning to levels before the Pandemic.

Consumer Confidence

Consumer Confidence fell from April as did the present situation index and the expectations index. The present situation index assesses consumers’ view of the current business and labor market index. The expectations index assesses consumers’ short-term outlook on income, business, and the labor market. Consumers still view the labor market as strong and business conditions as somewhat good based on the present situation index.

The expectations index showed that the short-term outlook for business conditions weakening rose. The labor market in the expectations index remain unchanged while the short-term financial prospects were mixed.

Total construction rose 0.2% from the previous month. Nonresidential and public construction both fell from the previous month. Nonresidential construction continues to weaken while residential spending for public and private remains strong.

The Manufacturing sector rose for its 23rd straight month although the growth is noticeably slowing. Supply chain and pricing pressures remain manufacturers’ top concerns. Demand is thought to remain strong for the foreseeable future. Supplier deliveries, inventories, and imports are seen as the top reasons for constraining production.

Machinery, computer & electronic products, food, beverage & tobacco, transportation equipment, and chemical products showed moderate to strong growth according to the report.

Top Concerns for respondents:

·        Shutdown in Shanghai

·        Supply Chains still constrained

·        Business conditions are still strong as the backlog continues to grow.

·        Price pressures

·        Increasing fuel and freight costs

The manufacturing report also showed that the pace of growth is slowing in new orders, production, employment, inventories, backlog of orders, new export orders, and imports. Prices are seen to be increasing slower while supplier deliveries are increasing at a slower pace. Productivity is still facing challenges due to high employee turnover although conditions are somewhat improving. Manufactures also cited challenges in getting orders to customers. Capital expenditures lead times have increased most of the last twelve months.

Mortgage applications continue to decline amid rising rates and housing prices. The refinance index and purchase index also declined.  The weekly mortgage report shows that there is a continued shift to adjustable-rate mortgages by borrowers. Prospective buyers continue to have their hopes of owning a home dashed as they are priced out of the market with fewer homes for sale.

Market participants moved out bonds across maturities as rates rose across maturities. The indices bounced from their lows and briefly paused from the short bullish run that occurred two weeks ago. Cryptocurrency has remained in a sideways trend around the 28,000 level after falling at the beginning of the month. The strength in the crypto seems to have faded and analysts suspect that crypto might have further fall.

If you believe in cryptocurrency, now might be the time to start buying.

The key theme for investors and traders to remember is that markets will see continued volatility for the foreseeable future. In my opinion, participants should brace themselves for a slowdown in economic activity as high prices begin to choke spending for the consumer which will in turn affect companies’ profit margins.

Options Trade: AMC put Debit Spread



Looking at the charts, I thought AMC would drift lower in the coming weeks.



 I included the analyst tab for this option position so that you can get a sense of how the Greeks move as the position moves in and out of the money. Notice how the vega changes to a negative number as the position moves in the money, meaning that the spread doesn’t respond well to a rise in volatility. The gamma also changes to a negative number.

The theta increases the more out of the money this spread becomes but this position also earns money as the position moves into the money, evidenced by the positive theta. The delta seems to reach a peak around $12.04 at -20.22 when the gamma turns negative and as time passes the negative gamma increases.

The best way to play this position is to close this position as theta is given time to work its magic once the spread has moved into the money. To make the most money in this position, AMC needs to be close to the $10 level close to expiration.

Past week cash flow report:

This past week went well as I received secondary income from various sources. Moving ahead, I will continue to cut unnecessary purchases and continue to pay off my credit accounts. The current administration has signaled they will cancel an undetermined amount of student debt but it is still unclear how much they will actually cancel. Any amount will help.

Grade: C-

Reason: I made some stupid purchases.

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