CPI, Retail, and An Outlook

No point wading through all the data first:  After all, most folks these days “…don’t let the facts get in the way of their opinions…”  We’re good with that.  Who needs facts when we have social?

Here’s what I think the market should do in simple 1-2-3 fashion (but if it doesn’t, don’t whine to me, this is an opinion, not advice):  1)The market should drop a bit today because ‘hot money’ likes to keep time-risk to a minimum.  2) Markets should rise next Monday and maybe carry into Tuesday.  Hot money hates weekends.

3) Is where we get to the fun. Last options expiration (September), the S&P 500 closed about 2,500.23.  This morning, before the data, the S&P was looking to open above 2,551.  That’s better than 2 percent higher.  Rather than pay off on all those 2,550 call options, though, we rather expect the market will “find some news to blame” in coming days before we get to next Thursday (when index options expire at the close) and the equity options expire Friday.

(Continues below)

 

Our opinion doesn’t mean this WILL happen, but for those willing to bet small money to make Big Money, there is a method worth considering in all this.  In involves looking at the number of options outstanding a few days before expiration.  When you see a big imbalance, you simply buy a pile of cheap options and wait.

I saw a friend of mine (Dhruv) back in the day do this a number of times and he made something like 20-times his starting investment in three months.

As he explained the strategy: “The market doesn’t like to “give away money” and so when you see imbalances, buying options toward the balance point early in options week makes sense. ”

Conveniently, the option quotes include the number of contracts outstanding each day and yes, we do run those numbers looking for the balance point, now and then.

You get a lot of spreadsheet exercise doing it, but the useful insight is usually expressed something like:

Value of all outstanding call options compared to value of all outstanding put options.

The main feature of this strategy is that you are essentially buying options with no time premium.

With “normal” option plays, you have to look at two factors in the analysis (Black-Scholes, etc.):  Price and Time.  Dhruv’s approach, by playing only the Friday BEFORE or the Monday OF Options expiration week reduces time premium dramatically.

Yes, I’ve made some money this way myself…but you have to be able to lose gracefully (lots) when it doesn’t work.  I don’t like losing, so my inclination is more toward “Heads I win, Tails I win” structures.

Even these can grab you, though, because most of those involve some kind of volatility.  If the markets are going slowly up – evenly – and the VIX (volatility index) is low, like it is right now (9.83 versus a 52 week high over 23), a person might get lucky.

Or broke.

Then there is the Dollar’s performance.  The headline Dollar heads for worst week in five as stocks cheer record streak sounds kind of scary, but it’s not.

It’s actually good gold and good for stocks.  Here’s why:

Let’s say I have a gold coin and I was selling it back in 2003.  You would have had to pay $275 to buy it.

Now amble off to the Minneapolis Fed Inflation Calculator and put in what inflation has done since 2003: The $275 back then would have to be at least $365.12 to buy the coin now.

But wait!  Gold is much, much higher – almost $2,000 an  ounce…not $365.12!”

That’s true.  But there’s a lot else going on.  You have to consider the rest of the G20.  Is there any doubt the rest of t he clown posse *(especially the EU) has gone crazy with the presses?

But there’s another factor, as well:  That is that the amount of financial “gearing” or “leverage” in the system has expanded dramatically.  M2 (a broad measure of money) was about $6 trillion in 2003.  Today?  Almost $13.7 trillion.

And since the velocity of money at M2 is at never-in-human-history seen levels, money piles on money and it ends up levering in order to make a lot of money in an otherwise turd-sandwich of a rate environment.

When money is almost free to borrow, you load up on cash and buy things you think will go up.  In other words, we’re in a long-term, huge bubble.

From the Fed Data last night, we see that M2 on a three month annualized basis was going up 4.9% through the end of August.  BUT through the week ending October 2, it was up only 4.7% annualized.  So, we conclude the Fed isn’t slamming on the brakes BUT they are ending the meteoric rise of markets for a while.

At some point, they need to “tap the brakes” to drive rates up.

To be sure, M1 in the short term through the end of August was puffing up 6.3% annualized, but through October 2 it was going up even faster: 7.7% annualized.

Normally, this would suggest the money creation was smoking along so more upside ahead.  This time, I don’t think so:  A lot of the newly created M1 will be used to clean up the Fed’s sacks of leftovers on their balance sheet from the last time the economy tanks (2009 on).  For now, we’re watching M2 a little more closely than M1.

Here kid, let me print you some money so’s you can bjuy stuff off my balance sheet, OK?”

Point is, everyone is making up money hand-over-fist and that “money” drives up prices of everything to unsustainable levels.  See Bitcoin ($5,630 this morning) as an example.  Pretty good for electrons, huh?

So much for the philosophical discussion.  Down to brass tacks:

Consumer Prices: 6.2% Annualized?

Hot off the press from the Labor Department:

The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.5 percent in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.2 percent.

The gasoline index increased 13.1 percent in September and accounted for about three-fourths of the seasonally adjusted all items increase. Other major energy component indexes were mixed, and the food index rose slightly.

The index for all items less food and energy increased 0.1 percent in September. The shelter index continued to increase, and the indexes for motor vehicle insurance, recreation, education, and wireless telephone services also rose. These increases more than offset declines in the indexes for new vehicles, household furnishings and operations, medical care, and used cars and trucks.

The all items index rose 2.2 percent for the 12 months ending September; the 12-month change has been accelerating since it was 1.6 percent in June. The
12-month change in the index for all items less food and energy remained at 1.7 percent for the fifth month in a row. The energy index rose 10.1 percent over the past 12 months, its largest 12-month increase since the period ending March 2017. The food index increased 1.2 percent over the last year.

Bottom line:  Eat, freeze, and don’t go anywhere.  Say, wasn’t that the implication of the LV shooting case?

Retail Sales

Gee, what fun.  Now let’s teleport over to the Census Bureau to see what’s up with Retail:

“Advance estimates of U.S. retail and food services sales for September 2017, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $483.9 billion, an increase of 1.6 percent (±0.5 percent) from the previous month, and 4.4 percent (±0.7 percent) above September 2016.

Total sales for the July 2017 through September 2017 period were up 3.9 percent (±0.5 percent) from the same period a year ago. The July 2017 to August 2017 percent change was revised from down 0.2 percent (±0.5 percent)* to down 0.1 percent (±0.1 percent)*.

Retail trade sales were up 1.7 percent (±0.5 percent) from August 2017, and up 4.7 percent (±0.7 percent) from last year. Gasoline Stations were up 11.4 percent (±1.4 percent) from September 2016, while Building Materials and Garden Equipment and Supplies Dealers were up 10.7 percent (±2.1 percent) from last year.

For those who like to look rather than read, try:

Once again, Auto Sales have saved the world.  Almost makes one thing someone knew something in advance when we bailed out the auto industry, doesn’t it?

Short Snips

Trump to end Obamacare subsidies amid strong criticism.

President Trump Tells Democrats to ‘Call Me’ to Fix Obamacare.

Waiting for Details

New Orleans police officer shot and killed while on patrol.

Las Vegas security guard Jesus Campos disappears moments before TV interviews.

And If You Didn’t Know?

Why is Friday 13th considered bad luck?

OK, off to calculate options imbalances…with futures pointing to a +40 open on the Dow…

Peoplenomics for subscribers tomorrow and more here Monday unless there’s a breaking earthquake story….the mid-California uptick is worth watching.

Comments

CPI, Retail, and An Outlook — 11 Comments

  1. “but if it doesn’t, don’t whine to me,”

    Lol lol lol.. This brings up a cute story..
    My little grand daughter just about four.. One day a week the kids had to work part time jobs and daycare wasn’t available so grandma and grandpa were daycare assistants.
    On my way between jobs she would ride in with me for my overnight shift..
    I didn’t realize I had a specific routine of stopping at the gas station before our journey till one night I was bringing her home when all of a sudden she says.. Grandpa.. I said yes hunny she said aren’t you forgetting something.
    I said I don’t think so what did I forget.. She then said gas you didn’t get gas.. Don’t you come crying to me if you run out… Lol lol lol..the other cute story was why do teeth get yellow instead of being bright white.. Well as you age and the things you eat and drink like coffee tea smoke etc your teeth naturally turn colors and dim in brilliance.. She then said smile grandpa.. I did and she said yup..your getting older lol lol lol

  2. Dahling,

    How are you? Lovely to hear Mrs. Ure is keeping you out of mischief trimming undergrowth on the back 40. Oliver has taken my little porkchop, Arnold, for a ride on the tractor so I can write this. The pair of them are absolute gems! Do remember when in London to pop in and see the rellies’ Crown Jewels. MH says The Sword of Mercy will take your breath away.

    We must express befuddlement over the sudden assignment of our tragic Mr. W. to Beverley Hillbilly status. We’d be hard pressed to imagine Mrs. W. being eyes wide shut on affairs of state being a Marlborough woman. It’s a sterling time indeed for Marlborough College alumnae: wives of the chancellor, the speaker, the governor of The Bank of England, and the prior British prime minister, as well as a collegial dalliance through Google Glass to its namesake’s co-founder. Of course, let us not overlook the Duchess at Kensington Palace shaping a future King of England.

    Dahling, as we always said, “men love with their eyes, women love with their ears”.

  3. Campos. The story stinks. No wonder he’s not available.

    200 shots? Where are the pictures of the door, or walls? Where did those high powered rifle bullets go? Why did the shooter spend nearly seven 30 round magazines shooting through a door at someone? Why did Campos change his story? Why did it take 40 minutes to stop something that they responded to “immediately”. Who is this maintenance worker and why have we not heard of him before.

    This story stinks of lies.

    • The story just keeps getting stranger and more mysterious the farther you dig into it.
      There was a story like that last year to. The deeper you dug into it the more sinister and stranger it got to.
      Now..will this one vanish as quickly as that one did?

  4. “Value of all outstanding call options compared to value of all outstanding put options.” I was trying to figure out “what $ values would qualify as an imbalance & how do you determine if to buy Puts or Calls?” I was not successful in figuring it out.

    • Well the only way I can figure it out is when someone comes calling stay put and don’t call out that’s the safe way
      I’m sure George has got some better axioms than that

  5. George, so nice, and so refreshing, to see someone actually speak for the importance and necessity of real, vetted facts. Thank you. Mike.

    • I am puzzled why the “freemasonry” paragraph was deleted today from the linked page, Master Sun.

    • A perfect example of why having too much power and/or too much money can lead to disastrous consequences . . .