Listen Live
M-F 6AM-8AM

Blog

Frank Fahey: Market News for the Prepared Mind: 2.27-3.6.2017

February 27, 2017


“Imagination decides everything.” – Blaise Pascal

“Chance favors the Prepared Mind.” – Louis Pasteur

“This awful catastrophe is not the end but the beginning. History does not end so. It is the way its chapters open.” – St. Augustine

“The market can remain irrational longer than you can remain solvent.” John Keynes

The Dow Jones Industrials were up for the 11th straight day. The string of gains is the product of a string of small daily gains. Treasury yields move to their lowest levels in over 5 weeks. The VIX remains at levels showing little investor concern. Most of the indicators are decidedly bullish, yet I am wary. Over 30 years as a professional options trader has left me permanently wary.

Here is an overview of the US market behavior last week and for 2017:

Index 24-Feb Change % Weekly 2016 YTD Volatility of Index
Dow Jones Industrials (DJIA) 20,821.76 197.71 0.96% 5.36% 11.34% (VXD)
S&P 500 (SPX) 2,367.34 16.18 0.69% 5.77% 11.47% (VIX)
NASDAQ 100 (NDX) 5,343.31 18.59 0.35% 9.86% 12.75% (VXN)
Russell 2000 (RUT) 1,394.52 (5.34) -0.38% 2.76% 16.90% (RVX)
S&P 100 (OEX) 1047.81 8.58 0.83% 5.69% 10.65% (VXO)
Crude Oil (CLJ7) 54.02 0.29 0.54% 0.24% 25.72%(OVX)
CBOE Volatility Index (VIX) 11.47 (0.02) -0.17% NA

Data Source: OptionVue8

THE VIX was down for the week. The March VIX future was down, while the April and May futures showed increases of over 6%. Russell Rhoads, CBOE VIX guru, pointed to the upcoming first round of the French presidential election as impetus for the strength of the April and May VIX futures. This strength was reflected in the VIX 3 month and 6 month Volatility Indexes. The VXV (CBOE 3 Month Volatility Index) was up 7.58%,

Here is an overview of last week for the VIX and related products:

Indexes Ticker 24-Feb 17-Feb Change % Change
CBOE Volatility Index VIX 11.47 11.49 (0.02) -0.17%
VIX March Future (3/22/2017) VXH7 13.325 13.125 0.20 1.52%
VIX April Future (4/19/2017) VXJ7 15.250 14.350 0.90 6.27%
VIX May Future (5/17/2017) VXK7 16.075 15.150 0.92 6.11%
CBOE Short-term Volatility Index VXST 9.41 9.03 0.38 4.21%
CBOE 3 Month Volatility Index VXV 14.76 13.72 1.04 7.58%
CBOE Mid-term Volatility Index (6 month) VXMT 16.68 15.79 0.89 5.64%
VIX of VIX VVIX 83.31 81.25 2.06 2.54%
CBOE SKEW Index SKEW 138.66 141.15 (2.49) -1.76%
Long VIX ETP’s
ProShares Ultra VIX Short Term Futures ETF UVXY 21.44 20.25 1.19 5.88%
iPath S&P 500 VIX Short Term Futures ETN VXX 18.09 17.54 0.55 3.14%
ProShares VIX Short Term Futures ETF VIXY 15.08 14.65 0.43 2.94%
iPath S&P 500 VIX Mid-Term Futures ETN VXZ 29.84 28.49 1.35 4.74%
Inverse VIX ETP’s
ProShares Short VIX Short Term Future ETF SVXY 125.25 129.05 (3.80) -2.94%
Daily Inverse VIX Short Term ETN XIV 64.52 66.54 (2.02) -3.04%

Data Source: OptionVue8

The first trading week of March does not end with the the employment situation report. Instead of the usual first Friday of the month, the Bureau of Labor Statistics won’t release employment figures for February until the following Friday, March 10.. The coming week includes reports on durable goods and the CoreLogic Case-Shiller Home Price Index. The absence of the monthly employment numbers will allow extra attention to other economic releases” Durable goods orders on Monday, the second estimate for fourth-quarter GDP will follow on Tuesday as will January trade data on goods, and Wednesday will see personal income & outlays. The week closes with the ISM non-manufacturing report.
The international focus is on Dutch Parliamentary elections on March 15 and the first round of the French presidential election on April 23. European investors are jittery.

The earnings season is starting to wind down. This is the second straight ho-hum earnings season. It has been my experience that the post earnings behavior of individual stocks and the associated options have shown a remarkable consistency in movement of the underlying and change in the implied volatility of the options. This consistency within individual stocks has not been apparent the past two earnings cycles. It is as if a “new normal” is being defined.

Earnings announcements are predictable volatility events providing trading opportunity. It is important to reduce the number of surprises which may occur in any trading campaign. Confirm the date and time of any company’s earnings announcement before trading any earnings announcement strategy. The most accurate source of this information is the company’s investor relations website.

I have added a scan of stocks with earnings announcements to the calendar for each day in the coming week. The scan criteria are: Closing price> $20, Implied Volatility > 25, Average daily option volume > 800 contracts. Liquidity, as determined by width of option markets and individual option contract volume, is a crucial component in successfully trading any option strategy. One of the most frustrating experiences is an inability to adjust or exit a strategy due to lack of liquidity in the market. The market uncertainty associated with the election has impacted liquidity. I found it difficult to enter earning trades last week. The bid/ask spreads seemed much larger than usual. Do not force trades in illiquid markets. Data Sources for earnings: Livevol Core and OptionVue8

Advice to stimulate your imagination:

“The fact that people are full of greed, fear, or folly is predictable. The sequence is not predictable.” Warren Buffett

“If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes” – Peter Lynch

“If you do not actively attack the risks, they will actively attack you.” – Tom Gib

Monday February 27:

Economic: Durable Goods Orders – 8:30, Pending Home Sales – 10:00, Dallas Fed Manufacturing Survey – 10:30

International Economic: Japan Industrial Production and Retail Trade – 6:50PM.

Other: Dallas Federal Reserve Bank President Robert Kaplan participates in a moderated discussion at the University of Oklahoma Price College of Business in Norman, Okla., with audience and media Q&A – 11:00AM.

Earnings:

Symbol Company Name Feb 24 Close IV30 B/A AVGOPTVOL
PRGO Perrigo Company PLC $84.07 40.82 BMO 2235
WUBA 58.com Inc (ADR) $32.68 53.75 BMO 3570
ALB Albemarle Corporation $92.41 34.07 AMC 1198
EOG EOG Resources Inc $97.57 28.39 AMC 7699
HAIN Hain Celestial Group Inc $34.84 35.57 AMC 3360
OKE ONEOK, Inc. $54.64 27.91 AMC 1057
PCLN Priceline Group Inc $1,637.26 25.03 AMC 15745
WDAY Workday Inc $88.19 43.69 AMC 3671
PBYI Puma Biotechnology Inc $34.70 174.27 1290

 

Tuesday February 28:

Economic: GDP – 8:30AM, International Trade in Goods – 8:30, Redbook – 8:55, S&P Corelogic Case-Shiller HPI 0 9:00, Chicago PMI – 9:45, Consumer Confidence – 10:00, Richmond Fed Manufacturing Index – 10:00, State Street Investor Confidence – 10:00, Farm Price – 3:00.

International Economic: Germany Retail Sales – 2:00AM, France GDP, CPI, PPI – 2:45AM.

Other: Kansas City Federal Reserve Bank President Esther George gives keynote speech about the U.S. Economy and Monetary Policy at Banking and the Economy: A Forum for Women in Banking in Midwest City, Okla., with audience Q&A – 12:45PM, San Francisco Federal Reserve Bank President John Williams gives outlook speech at the Santa Cruz Chamber of Commerce in Santa Cruz, Calif., with audience and media Q&A – 3:30PM, St. Louis Federal Reserve Bank President Bullard speaks about U.S. economy and monetary policy at Spring 2017 GWU Alumni Lecture in Economics at George Washington University in D.C., with audience and media Q&A – 6:30PM.

Earnings:

Symbol Company Name Feb 24 Close IV30 B/A AVGOPTVOL
ALR Alere Inc $40.37 64.40 BMO 2697
DPZ Domino’s Pizza, Inc. $186.30 34.62 BMO 1322
GLNG Golar LNG Limited (USA) $27.20 54.67 BMO 3694
IONS Ionis Pharmaceuticals Inc $44.35 67.63 BMO 1839
LNG Cheniere Energy, Inc. $47.35 34.07 BMO 9020
MDCO The Medicines Company $51.84 76.94 BMO 1453
NXST Nexstar Media Group Inc $69.50 35.00 BMO 889
PTLA Portola Pharmaceuticals Inc $32.16 70.13 BMO 916
ROST Ross Stores, Inc. $67.64 27.91 BMO 966
TASR TASER International, Inc. $25.47 47.03 BMO 1949
TGT Target Corporation $64.98 25.53 BMO 18152
TSRO TESARO Inc $185.94 62.60 BMO 2512
ACAD ACADIA Pharmaceuticals Inc. $39.56 65.98 AMC 5335
AMBA Ambarella Inc $57.03 45.56 AMC 5362
CBI Chicago Bridge & Iron Company $33.89 41.32 AMC 3728
CRM salesforce.com, inc. $82.07 31.72 AMC 25239
DXCM DexCom, Inc. $77.96 45.62 AMC 1172
PANW Palo Alto Networks Inc $152.74 41.60 AMC 7766
SRPT Sarepta Therapeutics Inc $30.15 81.60 AMC 6283
VEEV Veeva Systems Inc $43.58 40.11 AMC 1351
KITE Kite Pharma Inc $52.97 72.81 1497

 

Wednesday March 1:

Economic: Motor Vehicle Sales, MBA Mortgage Applications – 7:00, Personal Income and Outlays – 8:30, Gallup US Job Creation Index – 6:30, PMI Manufacturing Index – 9:45, ISM Manufacturing Index – 10:00, Construction – 10:00, EIA Petroleum Status Report – 10:30. Beige Book – 2:00.

International Economic: Germany Unemployment Rate – 3:55AM, Eurozone Manufacturing Index – 4:00AM, Germany CPI – 8:00Am.

Other: Dallas Federal Reserve Bank President Robert Kaplan discuss local and national issues with Paul Quinn College President Michael Sorrell in Dallas, Texas – 12:00PM.

Earnings:

Symbol Company Name Feb 24 Close IV30 B/A AVGOPTVOL
BBY Best Buy Co Inc $44.31 48.03 BMO 12114
DLTR Dollar Tree, Inc. $77.57 44.73 BMO 7573
MYL Mylan NV $42.33 33.26 BMO 11743
PCRX Pacira Pharmaceuticals Inc $43.90 108.69 BMO 1091
AVGO Broadcom Ltd $210.58 29.52 AMC 9588
MNST Monster Beverage Corp $43.91 34.50 AMC 2474
SHAK Shake Shack Inc $36.61 41.64 AMC 1501

 

Thursday March 2:

Economic: Chain Store Sales, Weekly Jobless Claims – 8:30, Bloomberg Consumer Comfort Index – 9:45, PMI Services Flash – 9:45, EIA Natural Gas Report – 10:30, Money Supply – 4:30PM.

International Economic: Eurozone Unemployment Rate – 5:00AM, Eurozone PPI – 5:00AM, Global Composite PMI – 11:00AM.

Other: Federal Reserve Bank of Cleveland President Loretta Mester participates in a Power Talk event at Barnard College in New York, N.Y., with audience Q&A – 7:00PM

Earnings:

Symbol Company Name Feb 24 Close IV30 B/A AVGOPTVOL
BURL Burlington Stores Inc $85.39 38.82 BMO 1202
CNQ Canadian Natural Resource Ltd $29.40 31.48 BMO 3559
JD JD.Com Inc(ADR) $30.61 35.65 BMO 22659
KR Kroger Co $32.99 27.51 BMO 6572
ADSK Autodesk, Inc. $87.10 42.30 AMC 5291
NTNX Nutanix Inc $30.15 77.50 AMC 1812

 

Friday March 3:

Economic: PMI Service Index – 9:45, ISM Non-Manufacturing Index – 10:00, Baker-Hughes Rig Count – 1:00PM.

International Economic: Eurozone Retail Sales – 5:00AM, Global Composite PMI – 11:00AM.

Other: Vice Chairman Stanley Fischer of the Board of Governors of the Federal Reserve System gives keynote speech on this year’s report on inflation expectations and dynamics at Chicago Booth’s 2017 US Monetary Policy Forum in New York City, Chicago Federal Reserve Bank President Charles Evans and Richmond Federal Reserve Bank President Jeffrey Lacker discuss this year’s report on inflation expectations and dynamics at Chicago Booth’s 2017 US Monetary Policy Forum in New York City, with audience Q&A – 10:15AM, Federal Reserve Chair Janet Yellen speaks at the Executives’ Club of Chicago – 1:00PM.

Earnings:

Symbol Company Name Feb 24 Close IV30 B/A AVGOPTVOL
BIG Big Lots, Inc. $51.35 45.82 BMO 959

 

Monday March 6:

Economic: Gallup US spending Measure – 8:30, Factory Orders – 10:00, TD-Ameritrade IMX – 12:30PM, Durable Goods Orders – 8:30, Dallas Fed Manufacturing Survey – 10:30.

International Economic: No major announcements.

Orders: Minneapolis Federal Reserve Bank President Neel Kashkari speaks at NABE conference in panel titled “A View from the FRB Minneapolis,” in Washington, D.C – 3:00PM.

Earnings:

Symbol Company Name Feb 24 Close IV30 B/A AVGOPTVOL
CASY Casey’s General Stores Inc $116.60 30.08 AMC 958
THO Thor Industries, Inc. $110.16 36.21 AMC 848

 


Hal Snarr: More on Fiscal and Monetary Folly

February 24, 2017


You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time. – Abraham Lincoln

 

Economists have long understood the effects of rational expectations on the economy and policy-making. Irving Fisher recognized that current spending depends on current and expected future income. Although John Maynard Keynes’ consumption function implies that spending depends on today’s disposable income, he acknowledged that “waves of optimism and pessimism” could affect economic activity. Milton Friedman’s permanent income hypothesis implies that current consumption depends on the present value of expected future incomes.

After Milton Friedman and Edmund Phelps pointed out that monetary stimulus does not affect unemployment over the long run, because workers can only be fooled into accepting employment at inflated wages in the short run, Robert Lucas took and ran with this idea all the way to the 1995 Nobel Prize. After adapting microeconomics’ rational expectations to macroeconomics, he concluded that monetary policy could only work over the long run—if money grows at a rate that was more than expected.

Rational expectations theory implies that you can fool most of the people in the short run, but you cannot fool most of the people over the long run. If it is ignored, mainstream macroeconomics says fiscal stimulus can boost aggregate demand. In the hypothetical situation modeled in the figure below, aggregate demand shifts from the black line labeled AD to the gray line. As aggregate demand increases (from point A to point B), high unemployment declines toward its natural rate.

The loanable funds market above shows why fiscal policy is fiscal folly. When Treasury supplies more bonds to finance fiscal stimulus, it demands more loanable funds. This shifts loanable funds demand from the black line labeled DLF to the gray line. This results in a higher interest rate—assuming the Federal Reserve does not intervene. Higher interest rates reduce private investment and increase foreign purchases of U.S. securities. U.S. exports fall as foreign investors demand more dollars. These effects combine to push aggregate demand back down to point A.

Under rational expectations theory, households anticipate that government will raise taxes in the future to retire bonds it used to finance today’s fiscal stimulus. Because this will reduce future economic activity and disposable incomes, people will save the money they receive from today’s fiscal stimulus to pay tomorrow’s higher taxes. The resulting increase in savings means consumption and investment do not rise by what government had expected when it enacted fiscal stimulus. Instead of aggregate demand shifting outward, it remains at point A, and unemployment remains high.

The increase in savings also raises loanable funds supply from the black line labeled SLF to the blue line passing through point E. Since financing fiscal stimulus pushed demand from the black line labeled DLF to the gray line that also passes through point E, the loanable funds market equilibrates at point E. At the new equilibrium, private investment remains unchanged at $10 trillion, and the $500-billion fiscal stimulus, which had raised loanable funds to $10.5 trillion, is financed at the same rate as private investment, 2.5%.

Thus, fiscal stimulus is impotent in rational expectations theory because it has no effect on private investment, exports, GDP, interest rates, and unemployment. Recent experience with tax cuts and rebates supports this conclusion. According to Gary Shilling, “consumers saved 80% of the tax rebates they received in the summer of 2008. And they initially saved 100% of 2009’s tax cuts and special payments [to each] Social Security beneficiary” (“The Chances of a Double Dip,” BusinessInsider.com, 9/20/2010)

Since 2008, the Congress, President and Federal Reserve have enacted historic fiscal and monetary stimulus. The Fed paid banks interest on reserves, kept interest rates near zero, and digitized trillions of dollars in new money. Congress and the President temporarily cut taxes, spent billions on shovel-ready projects that were not shovel-ready, and raised government debt to $20 trillion. The doubling of government debt, the trillions of idle new dollars that are waiting to become inflation, and the growth of onerous regulation are infringing on our personal and economic liberty. This lose in liberty is reflected in our country’s economic freedom ranking dropping 12 spots from fifth in 2008 to 17th today (see www.heritage.org/index/download).

The solution to the near decade-long recessionary gap is more personal and economic freedom, not more fiscal and monetary policy. In our heart of hearts, we know this to be true. We buy products and services from businesses that are relatively free of government intervention, and from enterprises that are heavily regulated, managed, or owned by the government. In the former, prices generally fall and quality tends to rise (e.g., Lasik eye surgery, cellular phones, tablets, electronics, software, and computers). In the latter, there is inflation, stagnant quality, inefficiency, or moral hazard (e.g., health care and insurance, telephones prior to the Bell System breakup, banking, public education, and U.S. Postal Service).

With all the economic stimulus that was thrown at a near decade-long recessionary gap, it is time to seriously consider ending monetary and fiscal folly.


Frank Fahey: Market News for the Prepared Mind: 2.20-2.27.2017

February 21, 2017


“Imagination decides everything.” – Blaise Pascal

“Chance favors the Prepared Mind.” – Louis Pasteur

“By definition, risk-takers often fail. So do morons. In practice it’s difficult to sort them out.” – Scott Adams

 

The trend continues.  It was another new week of closing highs.  Decent earnings, no major PR explosions from the White House, and optimism about potential tax reform are fueling the rise.  I have been fighting a bronchial malaise, so I will keep it short this week.

Here is an overview of the US market behavior last week and for 2017:

Index 17-Feb Change % Weekly  2016 YTD Volatility of  Index
Dow Jones Industrials (DJIA) 20,624.05 354.78 1.75% 4.36% 11.33% (VXD)
S&P 500 (SPX) 2,351.16 37.91 1.64% 5.04% 11.49% (VIX)
NASDAQ 100 (NDX) 5,324.72 98.03 1.88% 9.48% NA (VXN)
Russell 2000 (RUT) 1,399.86 11.02 0.79% 3.15% 16.17% (RVX)
S&P 100 (OEX) 1039.23 18.54 1.82% 4.82% 11.27% (VXO)
Crude Oil (CLH7) 53.40 (0.45) -0.84% -0.91% 27.49%(OVX)
CBOE Volatility Index (VIX) 11.49 0.64 5.90% NA

Data Source: OptionVue8

The VIX up this week while the various month VIX futures moved down.   There is an intraday push and pull between SPX at all-time highs and the VIX futures and other short-term volatility indicators.  The difference between the VIX and the RVX (RUT volatility index) collapsed last week.  The previous week the difference was as high as 7.50.  The difference closed last week at 3.68.

Starting February 13, the CBOE is not computing the VXN – the volatility index on the NDX or NASDAQ 100.  The CBOE said it would start calculating the values at a future, as of yet, unannounced, date.  No reasons were given.

Here is an overview of last week for the VIX and related products:

Indexes Ticker 17-Feb 10-Feb Change % Change
CBOE Volatility Index VIX 11.49 10.85 0.64 5.90%
VIX March Future (3/22/2017) VXH7 13.125 13.375 (0.25) -1.87%
VIX April Future (4/19/2017) VXJ7 14.350 15.125 (0.78) -5.12%
VIX May Future (5/17/2017) VXK7 15.150 16.025 (0.87) -5.46%
CBOE Short-term Volatility Index VXST 9.03 9.02 0.01 0.11%
CBOE 3 Month Volatility Index VXV 13.72 13.91 (0.19) -1.37%
CBOE Mid-term Volatility Index (6 month) VXMT 15.79 16.17 (0.38) -2.35%
VIX of VIX VVIX 81.25 85.77 (4.52) -5.27%
CBOE SKEW Index SKEW 141.13 130.47 10.66 8.17%
Long VIX ETP’s
ProShares Ultra VIX Short Term Futures ETF UVXY 20.25 21.91 (1.66) -7.58%
iPath S&P 500  VIX Short Term Futures ETN VXX 17.54 18.21 (0.67) -3.68%
ProShares VIX Short Term Futures ETF VIXY 14.65 15.16 (0.51) -3.36%
iPath S&P 500  VIX Mid-Tem Futures ETN VXZ 28.49 30.06 (1.57) -5.22%
Inverse VIX ETP’s
ProShares Short VIX Short Term Future ETF SVXY 129.05 125.40 3.65 2.91%
Daily Inverse VIX Short Term ETN XIV 66.54 64.64 1.90 2.94%

Data Source: OptionVue8

The week of February 20 will be a shortened trading week due to President’s Day. Reports will be relased on existing and new home sales, along with the minutes of the Fed’s January meeting.  The week winds up with the final consumer sentiment score for February, one that dipped back noticeably in early February.

The earnings season is starting to wind down. Earnings announcements are predictable volatility events providing trading opportunity.  It is important to reduce the number of surprises which may occur in any trading campaign.    Confirm the date and time of any company’s earnings announcement before trading any earnings announcement strategy.  The most accurate source of this information is the company’s investor relations website.   The earnings highlights this week, for widely held and actively traded stocks, are Tesla, Fitbit, Jack in the Box, HP, Cheesecake Factory, Trans Ocean, Public Storage, Popeyes, Toll Brothers. Ctrip, Hormel Foods, Baidu, Monster Beverage, Nordstrom, Foot Locker, and Priceline.

I have added a scan of stocks with earnings announcements to the calendar for each day in the coming week.  The scan criteria are:  Closing price> $20, Implied Volatility > 25, Average daily option volume > 800 contracts.    Liquidity, as determined by width of option markets and individual option contract volume, is a crucial component in successfully trading any option strategy.  One of the most frustrating experiences is an inability to adjust or exit a strategy due to lack of liquidity in the market.  The market uncertainty associated with the election has impacted liquidity.  I found it difficult to enter earning trades last week.   The bid/ask spreads seemed much larger than usual.    Do not force trades in illiquid markets.  Data Sources for earnings: Livevol Core and OptionVue8 

 

Advice to stimulate your imagination:

“By definition, risk-takers often fail. So do morons. In practice it’s difficult to sort them out.” – Scott Adams

“In theory there is no difference between theory and practice. In practice there is.” – Yogi Berra

“To make a mistake is only human; to persist in a mistake is idiotic.” -Roman Cicero

“To learn patience is not to rebel against every hardship.” -Henri Nouwen

 

 

Monday February 20: 

US Markets Closed: Holiday – Presidents Day

International Economic:   Germany PPI – 2:00AM, Great Britain Industrial Trends Survery- 600AM, Japan Consumer Confidence Flash – 7:30PM.

 

Tuesday February 21: 

Economic:   PMI Manufacturing Index Flash – 9:45.

International Economic:  China Merchandise Trade – 2:00AM, France CPI – 2:45AM, Germany PMI Composite Flash – 4:00AM, Eurozone PMI Composite Flash.

Other:  Minneapolis Federal Reserve Bank President Neel Kashkari participates in a fireside chat on the economy and the role of the Federal Reserve hosted by the Financial Planning Association of Minnesota in Golden Valley, Minn., with audience Q&A – 8:50AM, Philadelphia Federal Reserve Bank President Patrick Harker speaks on the economic outlook at the University of Pennsylvania in Philadelphia, with audience and media Q&A – 12:00PM, San Francisco Federal Reserve Bank President John Williams speaks to students of Boise State University on “Getting to Know the Fed,” in Boise, Id. with audience Q&A – 3:30PM.

Earnings:

Symbol Company Name Feb 17 Close IV30 B/A AVGOPTVOL
BHP BHP Billiton Limited (ADR) $40.99 30.30 BMO 4211
HAIN Hain Celestial Group Inc $34.46 35.75 AMC 4064

 

Wednesday February 22:

Economic:  MBA Mortgage Applications – 7:00, Redbook – 8:55, Existing Home Sales – 10:00., Industrial Production – 9:15, Atlanta Fed Business Inflation Expectations = 10:00, Housing Market Index – 10:00, EIA Petroleum Status Report – 10:30.

International Economic:  Great Britain GDP – 4:30AM, Eurozone HICP – 5:00AM.

Other:  FOMC minutes – 2:00.

Earnings:

Symbol Company Name Feb 17 Close IV30 B/A AVGOPTVOL
BHP BHP Billiton Limited (ADR) $40.99 30.30 BMO 4211
HAIN Hain Celestial Group Inc $34.46 35.75 AMC 4064

 

Thursday February 23:

Economic:  Weekly Jobless Claims – 8:30, Chicago Fed National Activity Index – 8:30, FHFA House Price Index – 9:00, Bloomberg Consumer Comfort Index – 9:45, PMI Services Flash – 9:45, EIA Natural Gas Report – 10:30, Kansas City Fed Manufacturing Index – 11:00, EIA Petroleum Status Report – 11:00, Money Supply – 4:30PM.

International Economic:  Germany GDP 2:00AM, Great Britain CBI Distributive Trades – 6:00AM.

Other:  Atlanta Federal Reserve Bank President Dennis Lockhart speaks on the past 10 years at the Atlanta Federal Reserve in Atlanta, GA – 8:35AM.

Earnings:

Symbol Company Name Feb 17 Close IV30 B/A AVGOPTVOL
CLR Continental Resources, Inc. $46.01 37.67 BMO 4162
CLVS Clovis Oncology Inc $61.37 71.23 BMO 2927
DISH DISH Network Corp $62.72 36.49 BMO 4082
ETP Energy Transfer Partners LP $38.38 31.48 BMO 5623
GRMN Garmin Ltd. $50.95 32.25 BMO 1234
HFC HollyFrontier Corp $30.00 36.21 BMO 2206
MBLY Mobileye NV $44.97 43.63 BMO 11285
MDCO The Medicines Company $52.80 76.55 BMO 1504
SBGI Sinclair Broadcast Group Inc $36.30 34.05 BMO 1005
SLCA U.S. Silica Holdings Inc $57.36 48.47 BMO 1758
SXL Sunoco Logistics Partners L.P. $25.81 30.48 BMO 1864
TOL Toll Brothers Inc $31.43 28.49 BMO 3168
WB Weibo Corp (ADR) $55.26 51.04 BMO 2422
BLUE bluebird bio Inc $76.55 63.39 AMC 1120
CTRP Ctrip.Com International Ltd $45.51 34.94 AMC 6431
JACK Jack in the Box Inc. $109.30 35.94 AMC 834
LB L Brands Inc $57.48 29.80 AMC 3446
MTDR Matador Resources Co $26.86 45.28 AMC 1749
RH RH $27.18 60.99 AMC 7408
RRC Range Resources Corp. $31.24 42.61 AMC 5549
SINA SINA Corp $76.38 46.03 AMC 1099
SM SM Energy Co $27.11 57.20 AMC 1669
SUN Sunoco LP $28.51 41.24 AMC 3082
TSLA Tesla Inc $268.95 42.38 AMC 91894

 

Friday February 24:

Economic:  New Home Sales – 10:00, Consumer Sentiment – 10:00, Baker-Hughes Rig count – 1:00PM.

International Economic:  No major announcements

Earnings:

Symbol Company Name Feb 17 Close IV30 B/A AVGOPTVOL
APA Apache Corporation $55.25 27.74 BMO 9813
CRZO Carrizo Oil & Gas Inc $33.37 40.34 BMO 892
HRL Hormel Foods Corp $37.24 27.43 BMO 997
KSS Kohl’s Corporation $41.53 46.96 BMO 4982
PTLA Portola Pharmaceuticals Inc $30.27 63.84 BMO 815
WUBA 58.com Inc (ADR) $33.70 52.41 BMO 3973
ACIA Acacia Communications, Inc. $64.19 72.17 AMC 3165
BIDU Baidu Inc (ADR) $184.94 30.50 AMC 14476
BMRN BioMarin Pharmaceutical Inc. $90.53 35.40 AMC 916
CBI Chicago Bridge & Iron Company N. $35.77 39.97 AMC 3511
HLF Herbalife Ltd. $61.06 44.82 AMC 10874
ICPT Intercept Pharmaceuticals Inc $129.85 57.64 AMC 1059
IDCC InterDigital, Inc. $99.95 39.83 AMC 965
JWN Nordstrom, Inc. $44.18 52.00 AMC 7240
MNST Monster Beverage Corp $43.45 33.22 AMC 2598
OLED Universal Display Corporation $71.30 58.10 AMC 1027
PE Parsley Energy Inc $31.86 38.03 AMC 886
SEMG SemGroup Corp $39.90 37.75 AMC 1410
SPLK Splunk Inc $62.86 43.26 AMC 3003
W Wayfair Inc $40.17 64.16 AMC 1266
SAGE SAGE Therapeutics Inc $62.75 94.51 915

 

Monday February 27:

Economic:  Durable Goods Orders – 8:30, Dallas Fed Manufacturing Survey – 10:30

International Economic:  Japan Industrial Production and Retail Trade – 6:50PM.

Earnings:

Symbol Company Name Feb 17 Close IV30 B/A AVGOPTVOL
FL Foot Locker, Inc. $70.50 31.99 AMC 2143

Kevin O’Neill: The Fine-Tuned Machine

February 21, 2017


“I turn on the TV, open the newspapers, and I see stories of chaos … Chaos,” Donald Trump said with a grimace last week. Trump was speaking at his now infamous press conference last Thursday.

“Yet it is the exact opposite,” he continued. “This administration is running like a fine-tuned machine despite the fact that I can’t get my cabinet approved.”

If the Trump Administration is indeed running like a fine-tuned machine, it’s doing so in defiance of Bruce Tuckman’s timeless principles of team development.

Professor Tuckman, a research psychologist who specialized in group dynamics, identified a model for the stages of team development that every team experiences. Developed in the 1960’s and still taught in leadership studies today, the stages are universal truth; and they have the extra benefit of rhyming. Work teams, sports teams, volunteer groups, bands … It doesn’t matter. All teams go through these stages:

  1. Forming
  2. Storming
  3. Norming
  4. Performing

The forming stage is, as its title suggests, the time when the team is assembled and those involved get to know each other. It’s a time to set objectives. Uncertainty prevails. Most team members tend to go along with the leader, sometimes at the risk of the kind of group think that allowed the Bay of Pigs invasion to proceed early in the Kennedy Administration.

Formal roles might be assigned in the forming stage, but real roles like influence and power are decided in the storming stage. People have different yet legitimate views on how things will get done, limits of each other’s authority, and even the agenda itself not to mention the often unhealthy political activities that are part of assembling a team.

One might look at those two stages and wonder why anyone would want to lead a team if the associated behaviors are inevitable. The norming stage, when cohesiveness develops, and the performing stage, when the team really does become a fine-tuned machine, are the reasons. There are specific leader tactics for moving the team through the first two stages as quickly as possible. It starts with embracing each stage as normal, not cause for concern.

Storming was normal early in the Reagan Administration when the Californians whom the president brought to Washington clashed with the cabinet members from the political establishment as they jockeyed for influence. It was normal, perhaps a bit beyond normal, when chaos reigned early in the Clinton Administration thanks to infighting between the staffs of the president and the first lady while, as Bob Woodward wrote in his book The Agenda: Inside the Clinton White House, Bill Clinton alternated between rages and dithering. It was normal in the Obama White House as the Rahm Emanuel faction vied with the Valerie Jarrett faction for the president’s ear.

Storming is inevitable in the Trump Administration as well. Does anyone doubt that there is friction between the campaign holdovers and the Republican regulars in the administration? Does Reince Priebus believe he is running the White House like every other Chief of Staff, or does he find Kellyanne Conway and Steve Bannon insinuating themselves into his duties? These are politicians, strong personalities one and all. Of course they are butting heads. Of course they are storming.

It only complicates matters when, as President Trump noted, he can’t get his cabinet approved. As each new team member comes on board, the team reverts to some elements of the forming stage followed by their unique inputs to the storming stage.

I don’t doubt that there are some very good people in the Trump Administration doing very good things on a daily basis; but unless Mr. Trump is the best leader of all time, the administration is months away from being a fine-tuned machine. In fact, the team will never be less productive than it is now.

Trump’s challenge is to lead his team through the messy times so it can become what he has described. Ever the presumptuous one, I have a few suggestions for him.

  1. Focus on your team. Clarify objectives, assign tasks, and let people show what they can do.
  2. Do not allow infighting to go unchecked. Understand that discord is inevitable. Set the ground rules for disagreeing and reaching consensus, and oversee the process until the group meets your standards on its own.
  3. Do not pick unnecessary fights outside of your team. The internal battles are more than enough for you to manage.
  4. Do not lose message discipline. Tell the American people what you’re doing for them, not what others are doing for you. Half of the people don’t care about your problems, and the other half are glad you have them.
  5. Pick the two or three most important agenda items and work them incessantly. Success in those areas will set the table for broadening your agenda.

One more suggestion … Stop saying your administration is a fine-tuned machine. It isn’t possible. It isn’t true.


Hal Snarr: Economic Stimulus Follies

February 14, 2017


When the U.S. enters a recession, politicians, their appointees, and their media allies begin banging their economic stimulus drums. The pro-business party beats the tax-cut drum, the pro-labor party beats the raise-government-spending drum, and they and the Federal Reserve (Fed) beat the reduce-interest-rate drum. These drums get beat because macroeconomic theory says these “solutions” boost aggregate demand.

Economic stimulus is an easy sell when unemployment is rising and asset prices are collapsing. Cutting taxes, mailing out government checks, and lowering interest rates puts money in the pockets of Americans. More money in the hands of consumers, workers, firms, and government agencies means they buy more goods and services. More goods and services sold means more is produced. More production means more jobs. Since this means more people have more money to spend, the spending cycle repeats itself, over and over.

When the above narrative is explained using elegant Keynesian equations, it is even more convincing. However, analysis from the only graph that John Maynard Keynes put in The General Theory of Employment Interest and Money (1936), the loanable funds market, reveals the folly of economic stimulus.

The loanable funds market is made up of savers and borrowers. Savers supply loanable funds whenever a bond is purchased, money is deposited into savings accounts or banks lend money to consumers and firms. Borrowers like the firm that sells its corporate bonds to investors, the consumer that gets a loan to buy a home or car, the bank that accepts a savings deposit, and the government that auctions securities to finance fiscal stimulus (tax cuts and increased government spending) are demanders of loanable funds. The size of this market, as measured by our national debt, is around $60 trillion.

The price of loanable funds is the interest rate. At 0% interest, borrowers demand a lot of loanable funds, but savers will not supply them since zero interest is being paid. This shortage of loanable funds declines as the interest rate rises. Savers are induced into supplying increasingly more money as the interest rate rises. Borrowers demand fewer and fewer funds as credit gets increasingly expensive. The shortage disappears at the equilibrium, which occurs when funds demanded equals funds supplied.

The realistic hypothetical of the U.S. loanable funds market depicted in the figure below assumes government is required to balance its annual fiscal budget. With demand and supply crossing at point O, the interest rate is 1% and the quantity of loanable funds is $50 trillion. If government is permitted to spend more than it collects in taxes, it must sell bonds to finance it. Holding the interest rate constant at 1%, the $20 trillion in accumulated government debt shifts loanable funds demand from the black line labeled D to the gray line labeled Dʹ. With supply held constant at the black line labeled S, loanable funds demanded is $70 trillion at point M and loanable funds supplied is $50 trillion at point O. Economists call the difference in these values a shortage. It causes demanders to bid the interest rate up to 1.6% at point F.

At the new equilibrium, the interest rate equals 1.6%, which is roughly equal to the 10-year Treasury bond yield, and supply and demand equilibrate at $60 trillion. Subtracting the $20 trillion in government debt from this amount gives private investment of $40 trillion. As government borrowing raises the interest rate from 1% at point O to 1.6% at point C, private sector borrowing declines from $50 trillion at point O to $40 trillion at point C. This process suggests that government borrowing crowds out $10 trillion in profitable domestic projects.

Fiscal stimulus has other consequences, both foreign and domestic. Higher rates in the U.S. induce foreign investors to buy more U.S. securities and shelve profitable projects that they would have otherwise undertaken in their home countries. The dollar appreciates when this happens because foreigners need dollars to buy U.S. securities. This pushes up the prices of U.S. goods, which reduces American exports. Although fiscal stimulus is supposed to push the economy out of recession, it’s intended effects (boosted aggregated demand from greater business, consumer and government spending) are offset by its unintended consequences (higher interest rates, crowding out, and reduced exports). Since wars were and are financed by government bonds, government debt also results in wars that may not have occurred otherwise.

Monetary stimulus has unintended consequences as well, which are explained using the realistic hypothetical above. Suppose the increase in bond demand from the black line labeled D to the gray line labeled Dʹ was instead caused by economic growth. Now, imagine that firms are considering a myriad of profitable projects that cost a total of $20 trillion dollars. If these projects are placed in a risk queue from least risky (at point O) to most risky (at point M), all projects are undertaken—provided the interest rate remains at 1%. Borrowers, however, bid the interest rate up to 1.6% (point F) because there is a $20 trillion shortage of loanable funds at 1%. At the higher interest rate, demand and supply equilibrate at $60 trillion, the riskiest projects are abandoned, and only the least risky projects are financed.

Suppose the Fed had set the interest rate at 1%. To enforce this price ceiling, it must print money to paper over the $20 trillion shortage at 1%. At this artificially low interest rate, all projects in the $20-trillion risk queue are undertaken. Austrian economists refer to the risky projects, which would have been canceled had the Fed not intervened, as malinvestment. Similarly, the consumption that would have otherwise not occurred at 1.6% occurs at 1%. Austrian economists refer to this as over-consumption. It and malinvestment represent an unhealthy competition for resources that are fixed in the short-run. This mal-competition, if you will, inflates asset prices and pushes the economy beyond its short-run capacity.
Everyone enjoys a Fed-induced boom… until it busts. Investors do well following the mantra: “Don’t fight the Fed.” Consumers convert home equity into cash to remodel their homes, buy new cars, or take fabulous Caribbean cruises. However, as inflation expectations begin to creep up, the Fed withdraws monetary stimulus. This causes prices to crest and fall, returns on leveraged assets to turn negative, loan defaults to rise, and the boom to bust.

Economic stimulus follies will continue to damage our economy unless we stop viewing the Fed, the President, and their media allies as some kind of all-knowing oracle. Even if we assume they genuinely want to do good, their actions represent a cage. If we are not released from it, we will become institutionalized like Brooks, the parolee who committed suicide after a 49-year incarceration in Shawshank Prison (Stephen King’s fictional New England prison). Shawshank was unable to take Andy, but it almost got Red.

Do we want to be Brooks, or that neighbor’s dog that has been locked in a backyard kennel for 10 years? If the political oligarchy set us free from their do-goodery, we may sit in our open cages for a few days wondering where the food and water is. This short-run pain will pass when we tire of waiting to be watered and fed. At that moment, when we stick our heads out of our cages of moral hazard, which government has financed with decades of debt, we will take a step toward freedom. The air will be fresher. The grass will be greener. We will get excited again because we will realize that we are finally free to pursue our passions. It will be the start of a long uncertain journey.