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Frank Fahey: Market News for the Prepared Mind: 4.24-5.1.2017

April 24, 2017


“Chance favors the Prepared Mind.” – Louis Pasteur

“Diplomacy is the art of saying ‘Nice doggie’ until you can find a rock.” – Will Rogers

“I accept chaos, I’m not sure whether it accepts me.” – Bob Dylan

“For diplomacy to be effective, words must be credible – and no one can now doubt the word of America.”
George W. Bush

“You can’t overlook the volatility, but you don’t let it push you around in the market” – Boone Pickens

Concerns about the upcoming French election dominated market conversations this past week. Global unease, combined with a lack of movement in implementing Trump’s business friendly domestic agenda, have led to increased wariness among market participants. I am having difficulty balancing my overall bearishness with the fact that major US indices remain within a few percentage points of all-time closing highs.

Every single pull-back for the past 9 months has been a buying opportunity. Picking a market bottom runs contrary to my trading discipline. As options trader, I can construct neutral to bearish strategies which are relatively benign to the upside. I will continue with a trading style based on a discipline based on thirty years of trading experience.

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

Data Source: OptionVue8

The VXST, the CBOE Short-Term Volatility Index, closed showing classic price behavior before a defined volatility event. The volatility event appears to be the first stage of the French presidential election. The VXST rose 34% last week, while the VIX declined just over 8%, The difference between the VIX and the VXST is the options used by each to calculate the value of the respective indexes. The time period for the VXST is 9 days, while the time period for the VIX can range from 36 to 63 days

The VXST calculation uses the next two consecutive SPX option series that have at least one day remaining until expiration.  These two expiration series are combined to calculate a nine day expected volatility outlook.   VXST is the first volatility measure to use SPX Weeklys in the calculation. The value for VIX is determined by combining the next two monthly (third Friday) SPX option expiration series that have at least eight days remaining until expiration.  The result of this calculation is a thirty-day implied volatility measure.

The VXST is farm more susceptible to near term volatility events. Other near-term volatility events in addition to the French election include a budget deal needed to preclude a government shutdown, renewal of the effort s to repeal and replace the Affordable Healthcare Act, and the Wednesday release of President Trump’s tax cut plan.

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

Data Source: OptionVue8

The initial focus of the week will be the first round of the French presidential election. Corporate earnings announcements will be a constant for the next three weeks. The impact of the results should be quickly superseded by concerns about passage of a new US spending bill. The Wednesday announcement of President Trump’s new income tax plan has the ability to move the market. The last week of April brings reports on housing as well as durable goods, and finishes off with the first estimate of first-quarter U.S. GDP growth. The following week is employment week. Political fireworks will continue to be the wildcard in play.

First quarter earnings announcement will continue the next three weeks. Earnings announcements are predictable volatility events providing trading opportunity. It is important to reduce the number of surprise 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: Coca-Cola, Caterpillar, Corning Galss, Eli, Lilly, McDonald’s, 3M, US Steel, Procter Gamble, Pepsico, Amgen, PayPal, UPS, Amazon, Google, Starbucks, General Motors, and Exxon Mobil.

Advice to stimulate your imagination:

It’s a cruel and random world, but the chaos is all so beautiful.” – Hiromu Arakawa

“Man approaches the unattainable truth through a succession of errors.” – Aldous Huxley

““I will undoubtedly have to seek what is happily known as gainful employment,
which I am glad to say does not describe holding public office.” – Dean Acheson

“The world is still a weird place, despite my efforts to make clear and perfect sense of it.”
– Hunter S. Thompson

Monday, April 24:

Economic: Chicago Fed National Activity Index – 10:30, Dallas Fed Manufacturing Survey – 10:30.

International Economic: Results of the first part of the French presidential election.

Other: Minneapolis Federal Reserve Bank President Neel Kashkari to discuss “Opportunity and Inclusive Growth Institute, TBTF” at The 6th Annual Fink Investing Conference at UCLA Anderson in Los Angeles, California with audience Q&A – 11:30AM, Minneapolis Federal Reserve Bank President Neel Kashkari to discuss “Opportunity and Inclusive Growth Institute, TBTF” at Claremont McKenna College in Claremont, California with audience Q&A – 3:15PM.

Earnings:

Tuesday, April 25:

Economic: Redbook – 8:55, FHFA House Price Index – 9:00 AM, S&P Corelogic Case-Shiller HPI – 9:00, Eew Home Sales – 10:00, Consumer Confidence – 10:00, Richmond Fed Manufacturing Index – 10:00, State Street Investor Confidence Index – 10:00.
International Economic: No major Announcements.

Earnings:

Wednesday, April 26:

Economic: MBA Mortgage Applications – 7:00, EIA Petroleum Status Report – 10:30.

International Economic: Bank of Japan Announcement, Japan All Industry Index – 12:30 Index – 12:30. China Industrial Profits – 9:30PM.

Earnings:

Thursday, April 27:

Economic: Weekly Jobless Claims – 8:30, Durable Goods Orders – 8:30, International Trade in Goods – 8:30, Bloomberg Consumer Confidence – 9:45, Pending Home Sales Index – 10:00, EIA Natural Gas Report – 10:30, Kansas City Fed Manufacturing Index – 11:00, Money Supply – 4:30.

International Economic: Eurozone Economic Sentiment – 6:00AM, Germany CPI – 9:00AM, Japan CPI, Household Spending and Unemployment Rate – 7:30, Japan Industrial Production and Retail Sales – 7:50PM

Other: European Central Bank Announcement – 7:45AM.

Earnings:

Friday, April 28:

Economic: GDP – 8:30, Employment Cost index – 830, Chicago PMI – 9:45, Consumer Sentiment – 10:00, Baker Hughes Rig Count – 1:00.

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

Other: Federal Reserve Board of Governor Lael Brainard to discuss “Fintech and the Future of Finance” at the Kellogg School of Management at Northwestern University conference in Evanston, Illinois with audience Q&A 1:15PM, Philadelphia Federal Reserve Bank President Patrick Harker gives a speech on “How STEM Can Get You Anywhere” at the X-STEM Symposium in Washington, D.C., with audience Q&A – 2:00PM.

Earnings:

Monday, May 1:

Economic: Personal Income and Outlays – 8:30, Gallup Consumer Spending Measure – 8:30, PMI Manufacturing Index – 9:45, ISM Manufacturing Index – 10:00, Construction Spending – 10:00.

International Economic: Bank of Japan – Minutes 8:50.

Earnings:

 

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Hal Snarr: The Road to Serfdom is Paved with Equity Interventions

April 19, 2017


Equity interventions promise to help the poor acquire goods and services that they currently cannot afford. Although a heartfelt case can be made for these interventions in the short run, the period where contracts fix wages and construction of buildings and roads is ongoing, F.A. Hayek’s The Road to Serfdom explains why they eventually trap our posterity in poverty.

In a free society, the government does not interfere in the voluntary transactions and contracts between consumers and producers, or between workers and employees. In this system of free enterprise, or free market capitalism, the forces of supply and demand efficiently allocate goods and services.

The figure below illustrates how markets efficiently allocate products. The price is determined at point A, where consumer demand (the blue line) intersects firm supply (the red line). The blue triangle is called consumer surplus since each unit sells for just $4, but the maximum prices consumers are willing to pay for the first unit purchased to 3500th declines along demand from $7.50 on the left to $4 at point A. The pink triangle is called firm surplus since each unit sells for $4, but the minimum prices firms are willing to accept for the first unit produced to 3500th rises along supply from $0.50 on the left to $4 at point A. The sum of consumer surplus and firm surplus is total surplus. It is a measure of social welfare, which reaches its maximum at competitive equilibrium point A.

If the above diagram represents a labor market, the price is the hourly wage rate, the red line is the labor supply of workers, and the blue line is the labor demand of firms. In a free market system, social welfare, as measured by the sum of worker surplus (the pink area) and firm surplus (the blue area), is at its highest level at the competitive equilibrium.

The economists in the equity-efficiency debate use positive or normative arguments to make their cases. Normative economics says the government should intervene to help the poor, limit pollution, or provide consumers with more information. Positive economics opposes intervention because the accompanying consequences tend to harm those the policy was supposed to help. Normative statements are difficult to oppose because they tug on our heartstrings and are easily made in the few seconds one is given in today’s news media.

The ongoing political discussion regarding the minimum wage is a great example of an equity-efficiency debate. In the figure below, the minimum wage (the horizontal black line) succeeds in raising the hourly wage from $4 to $5. Workers who continue to work 40 hours a week have a higher standard of living. Their weekly pay rises from $160 to $200. Over a year, their pay rises from $8,000 to $10,000, assuming employees work 40 hours per week, 50 weeks a year. The minimum wage is an easy sell for normative economics. Anyone who opposes it comes off as being heartless.

The positivist economics argument against a minimum wage is much harder to make because much time is needed to demonstrate the many harms from the intervention’s unintended consequences. In the figure above, notice that the minimum wage reduces employment from 3500 at point A to 2500 at point E. It separates workers into 2500 winners and 1000 losers. The winners keep their jobs that now pay $5 per hour. The losers were making $8000 a year, lost their jobs and incomes, and continue to look for work.

The minimum wage also increases the labor force by 1000, from 3500 at point A to 4500 at point L. Adding this value to the 1000 workers who lost their jobs results in 2000 unemployed workers. Dividing this sum by the size of the labor force yields an unemployment rate of 44%, which was 0% prior to the minimum wage.

The minimum wage harms the people it was supposed to help the most. To see this, place all workers in a queue according to the value of their job skills. The worker with the most valuable job skills is on the left, while the one with the least valuable job skills is on the right. Since the wage reflects the value of one’s labor, this queue traces out labor demand. It says firms are willing to pay the worker with the most valuable skill-set $7.50 per hour. It also says that firms are willing to pay the 3500th worker just $4 per hour. In this light, the minimum wage harms the people with the least valuable job skills, the 1000 displaced workers.

The minimum wage reduces social welfare by the small green triangle in the above figure. It also benefits workers who kept their jobs at the expense of firms, as measured by the increase in worker surplus (the shaded pink area got larger) and the decrease in firm surplus (the blue triangle got smaller).

If production levels are maintained after the minimum wage is implemented, firms that rely on low-skilled labor may eliminate perks (e.g., free coffee, meals, tickets to various events and parking) or move some of their operations to overseas facilities. Some firms may decide to replace low-skilled labor with automation. Examples of this include the self-checkout lanes that have replaced cashiers or the robots that will eventually replace janitors and hamburger cooks. The workers who are displaced by automation remain jobless or must invest much time and money into acquiring valuable new job skills.

Suppose government compensates the 1000 displaced workers and the 1000 people who unsuccessfully entered the labor force with transfer payments equal to the income they would have earned had they been able to find or keep minimum wage jobs. In the above figure, the rectangle formed by the minimum wage line, the horizontal axis, and the two dashed lines implies that this program costs $10,000 per hour. This translates to $400,000 per week or $20,000,000 per year.

The above compensation program approximates reality well. In 35 states, the monetary value of receiving public assistance exceeds the pay from a minimum-wage job. This encourages the unemployed to stop looking for work. It may also discourage many of them from acquiring new job skills. Either way, the average length of joblessness is higher than it would have otherwise been. Unless public assistance payments are curtailed, the costs of these programs will accelerate over the long run as increasingly more people learn that work does not pay.

Public assistance is not free. The money paid out to program participants comes from somewhere. Government raises this money by imposing taxes on others.

In the diagram below, government levies a $2 tax on firms. This tax reduces product supply from the dark red line to the pink line. The vertical distance between these two lines is the $2 tax. The tax reduces output from 3500 at point A to 2500 at point B. It raises tax revenue by $5000, the area of the green rectangle. The tax punishes firms and consumers, as measured by the reductions in consumer surplus (the blue triangle) and firm surplus (the pink triangle). It also reduces social welfare by $1000, the area of the white triangle that points from the left toward point A.

If the $2 tax is also levied on consumers, product demand shifts inward to the light blue line below. At point F, it intersects the supply curve that resulted from firms being taxed (the pink line). Although the tax on consumers increases the green tax revenue box’s height from $2 (in the above diagram) to $4 (in the below diagram), the width of this box falls to 1500. The smaller width results from the equilibrium quantity falling from 3500 at point A to just 1500 at point C. Together, the two taxes generate $6000 in tax revenue (the area of the green rectangle below) but lower social welfare by $4000 (the area of the white triangle that points toward point A).

The minimum wage’s unintended consequences does much harm. This is why politicians, like former President Clinton, argue for modest incremental increases to it. Economists who support raising the minimum wage point out that past increases have not been associated with a higher unemployment. This argument, however, skirts the fact that these small incremental increases occurred during economic expansions. This suggests that the minimum wage is rarely set above market wages. This would delay the unemployment effect of a minimum wage increase years into the future. Since economic variables are recorded as the economy enters a recession at the higher minimum wage, it is difficult to determine what portion of the resulting rise in unemployment is attributable to a higher minimum wage.

Equity interventions distort markets, raise prices, and fail to accomplish policy makers’ goals. This is precisely why Eugen Böhm-Bawerk and other Austrian economists consider equity interventions to be an attack on freedom that ultimately puts our posterity on the road to serfdom.

 

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Kevin O’Neill: Are You Prepared?

April 17, 2017


A situation

You have a small business, an electrical contractor doing residential and small business work. Three electricians work for you. You have three trucks, and all are on the road moving from job to job every workday.

One day your electrician gets into a traffic accident with a hothead. The hothead becomes aggressive. He pushes your employee, and your guy decks him. The police are called, and they in turn call paramedics to treat the hothead for a broken cheekbone and likely concussion.

Bystanders with smartphones start recording the incident as it escalates and post the video on social media. It has been tweeted and re-tweeted thousands of times with the simple title “Electrician sends man to hospital.” There is no context explaining who started the altercation, and your truck is prominent in the video.

You first hear about the situation comes when your phone rings and reporter from the local television station is asking for your comment. By then the video has gone viral, and your business is taking thousands of verbal beatings.

How about this one…

Your company sells its products online. One day, a hacker penetrates your cyber-defense; and the hacker is bragging about it… with a cartoon caricature of your logo saying, “Noob, you’ve been hacked!” on your website’s home page.

It would have been nice if visitors to your website had contacted you, but they didn’t. Instead, someone shared the altered home page via Facebook and Twitter; and the news is halfway to viral before you have your first inkling that there is a problem. Local news organizations have re-tweeted the news and posted it on their Facebook sites; and their reporters are calling to ask for comment.

One more…

You’re CEO of a major airline, and there is an incident on one of your airplanes. I’ll spare you the details other than to say that a 69 year old doctor has been forcibly removed from his seat, dragged down the aisle of the plane, and taken back to the concourse because your employees wanted to be on the flight.

Before you hear word one about the incident, other passengers have posted recordings on social media; and the video was viral in 25 minutes.

Your comment, please!

Are you prepared to comment? If not, maybe you will be lucky. Maybe you won’t say something you will regret.  Maybe you won’t make yourself the subject of ridicule.

Or maybe you will take a lesson from the United Airlines. Maybe you will prepare yourself to comment intelligently so that people will respect you and your business because of the way you deal with a bad situation.

What could go wrong?

The first step is practice. Of course it isn’t possible to imagine everything that could go wrong; but the more you exercise your crisis management thought process, the better you will be at responding on the fly.

Read case studies. Invent your own scenarios – big disaster scenarios and smaller nuisance situations. Outline your responses, and ask people you trust to critique them.

If you practice, you have a good chance to comment intelligently in real time. If you don’t practice, your chances are greatly diminished.

The principles of a good response

Before you’re ready to utter word one, take yourself through this thought process.

  1. Who needs to hear from you? One or more of a public statement, a message to employees, and a statement to customers might be appropriate; and while the content of each communiqué might be different, you can count on all of them becoming public. Be consistent.
  2. What media are appropriate for your statements? Social media? News conference? Press release? Letter? Email? Try not to overreact, but be sure you don’t underreact.
  3. What are your values? Be sure your statements reflect them; and if people (employees and customers) aren’t at the top of the list, revise your values.
  4. Say what you know, and say what you don’t know. Don’t fill in the blanks with speculation.
  5. Don’t be a weasel. Using words like United’s “re-accommodate” and “politely asked” engendered as much criticism as the situation itself.
  6. Consider possible litigation. You can express concern for those adversely affected by a situation without admitting fault even if that proves to be the case as you learn the facts.
  7. Support your employees. Employees need to know that management has their backs. That doesn’t mean that anything one does is condoned; but it does mean that the employee’s side will be heard, and it does mean that employees will get the policy and procedural support to deal with situations that will arise in the future.
  8. Promise follow-up. Then follow up. Few people expect problems to be resolved immediately, but most expect good faith efforts to resolve them quickly.

Great communicators aren’t born. They’re just more prepared than everyone else.

 

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Frank Fahey: Market News for the Prepared Mind: 4.3-4.10.2017

April 3, 2017


“Chance favors the Prepared Mind.” – Louis Pasteur

“I accept chaos, I’m not sure whether it accepts me.” – Bob Dylan

“Chaos is the score upon which reality is written.” – Henry Miller

“You can’t overlook the volatility, but you don’t let it push you around in the market” – Boone Pickens

Major indexes had a stellar first quarter in 2017. Financial news for the past week is dominated by articles rife with superlatives. The S&P 500 (SPX) had its best performance since the fourth quarter of 2013 with gains of 5.56%. (The quarterly gains are under the heading “2016 YTD” in the accompanying table.) The Dow Jones Industrials (DJIA) gained 4.56% ,while registering its sixth consecutive quarterly gain. This string of quarterly gains is the best in 11 years. Both the DJIA and the SPX saw only one daily decline of 1% or more during the first quarter. This decline took place on March 21.

The technology laden NASDAQ 100 was the star for the quarter. It gained over 10%.. The NDX has registered over 20 all-time closing highs in 2017 and 30 record closes since the November election. Apple, Microsoft, Amazon.com, Facebook, and Alphabet comprise over 39% of the weighting of the NDX. The stellar performance of this index reflects the amazing performance of 4 impressive companies.

These performances have revived talk among market professionals about the likelihood of a market correction. Contrarians are pointing to recent consumer confidence levels as the harbinger of a market downturn. The Conference Board’s consumer confidence index reading was 125.6 in March – up from 116.1 in February. This number for consumer confidence in March was the highest level in more than 16 years.

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

Index 31-Mar Change % Weekly 2016 YTD Volatility of Index
Dow Jones Industrials (DJIA) 20,663.32 66.60 0.32% 4.56% 11.44% (VXD)
S&P 500 (SPX) 2,362.72 18.74 0.80% 5.56% 12.37% (VIX)
NASDAQ 100 (NDX) 5,436.23 72.24 1.35% 11.77% 11.75% (VXN)
Russell 2000 (RUT) 1,385.92 31.28 2.31% 2.12% 16.16.% (RVX)
S&P 100 (OEX) 1046.06 6.98 0.67% 5.51% 10.47% (VXO)
Crude Oil (CLK7) 50.85 2.71 5.63% -5.64% 27.59%(OVX)
CBOE Volatility Index (VIX) 12.37 (0.59) -4.55% NA

Data Source: OptionVue8

The VIX had the second lowest quarterly average daily close of all-time. The lowest average closing price was in the 4th quarter of 2006.The VIX exhibited the tightest low to high range of all-time for the Q12017. The first quarter range was 2.54. According to Russell Rhoads, CBOE VIX guru, the average range of VIX closing prices for a quarter is 10.54. The rubber band of volatility is wound very tight.

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

Indexes Ticker 31-Mar 24-Mar Change % Change
CBOE Volatility Index VIX 12.37 12.96 (0.59) -4.55%
VIX April Future (4/19/2017) VXJ7 13.275 13.925 (0.65) -4.67%
VIX May Future (5/17/2017) VXK7 13.575 14.400 (0.83) -5.73%
VIX June Future (6/21/2017) VXM7 14.250 15.125 (0.88) -5.79%
CBOE Short-term Volatility Index VXST 9.66 13.43 (3.77) -28.07%
CBOE 3 Month Volatility Index VXV 13.60 14.55 (0.95) -6.53%
CBOE Mid-term Volatility Index (6 month) VXMT 15.25 16.28 (1.03) -6.33%
VIX of VIX VVIX 78.31 89.74 (11.43) -12.74%
CBOE SKEW Index SKEW 138.31 136.62 1.69 1.24%
Long VIX ETP’s
ProShares Ultra VIX Short Term Futures ETF UVXY 16.17 18.22 (2.05) -11.25%
iPath S&P 500 VIX Short Term Futures ETN VXX 15.79 16.77 (0.98) -5.84%
ProShares VIX Short Term Futures ETF VIXY 13.17 13.97 (0.80) -5.73%
iPath S&P 500 VIX Mid-Term Futures ETN VXZ 26.30 27.90 (1.60) -5.73%
Inverse VIX ETP’s
ProShares Short VIX Short Term Future ETF SVXY 141.15 133.82 7.33 5.48%
Daily Inverse VIX Short Term ETN XIV 73.03 69.16 3.87 5.60%

Data Source: OptionVue8

It is first and foremost employment week. In addition to employment, the first week of April also includes a report on factory orders and the minutes of the last Fed meeting. The focus of the majority of domestic market participants will be focused on the Employment Situation report on Friday. The ADP Employment Report on Wednesday is viewed by many analysts as an accurate predictor of Friday’s release of the Employment Situation data.. The release on Wednesday afternoon of the minutes of the most recent FOMC meeting will be closely watched as attempts are made to divine the size and timing of future interest rate hikes. Political fireworks will continue to be the wildcard in play.

The first glimmer of the new earning season start this week. Earnings announcements are predictable volatility events providing trading opportunity. It is important to reduce the number of surprise 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: International Speedway, Acuity Brands, Walgreen’s Boots Alliance, Monsanto, Greenbrier, Bed Bath and Beyond, CarMax, Fred’s Ruby Tuesday, Constellation Brands and RPM International.

Advice to stimulate your imagination:

 

It’s a cruel and random world, but the chaos is all so beautiful.” – Hiromu Arakawa

“Man approaches the unattainable truth through a succession of errors.” – Aldous Huxley

“The sky is falling” – Chicken little

“The world is still a weird place, despite my efforts to make clear and perfect sense of it.”
– Hunter S. Thompson

Monday, April 3: 

Economic: PMI Manufacturing Index – 9:45, ISM Manufacturing Index – 10:00, Construction Spending – 10:00, Gallup US Consumer Spending Measure – 8:30,

International Economic: France PMI Manufacturing Index – 3:50AM, Germany PMI manufacturing Index, Eurozone PMI Manufacturing Index – 4:00Am, Great Britain CIPS/PMI Manufacturing Index – 4:30AM, Eurozone – Unemployment Rate – 5:00AM,

Other: New York Federal Reserve Bank President William Dudley hosts a press briefing on household borrowing, student debt trends and the impact of student debt and educational attainment on homeownership, followed by Q&A, in New York, N.Y. – 10:30AM,Richmond Federal Reserve Bank President Jeffrey Lacker gives speech entitled “From ‘Real Bills’ to ‘Too Big to Fail’: H.Parker Willis and the Federal Reserve’s First Century”, followed by media Q&A, at Washington & Lee University, in Lexington, Virginia – 5:00PM.

 

Tuesday, April 4: 

Economic: Motor Vehicle Sales, International Trade – 8:30, Gallup US ECI – 8:30, Redbook – 8:55, Factory Orders – 10:00.

International Economic: Eurozone Employment Rate – 5:00AM, Japan PMI Composite – 8:30PM.

Other: On his next to the last day in office as Federal Reserve Governor, Daniel Tarullo addresses Princeton University in Princeton, N.J., with audience Q&A – 4:30PM.

 

Wednesday, April 5:

Economic: MBA Mortgage Applications – 7:00, ADP Employment Report – 8:15, Gallup US Job Creation Index – 8:30, PMI Services Index – 9:45, ISM Non-Manufacturing Index – 10:00, EIA Petroleum Status Report – 10:30.

International Economic: France PMI Composite – 3:66, Eurozone PMI Composite – 4:00AM.

Other: FOMC Minutes – 2:00PM.

 

Thursday, April 6:

Economic: Chain Store Sales, Weekly Jobless Claims – 8:30, Gallup Good Jobs Rate – 8:30, – 8:30, Bloomberg Consumer Comfort Index – 9:45, EIA Natural Gas Report – 10:30, Money Supply – 4;30.

International Economic: Germany Manufacturers’ Orders – 2:00AM.

Other: European Central Bank Minutes – 7:30AM.

 

Friday, April 7:

Economic: March Employment Situation, Wholesale Trade 0 10:00, Consumer Sentiment – 10:00. Baker-Hughes Rig Count – 1:00PM.

International Economic: Germany Industrial Production – 2:00AM, Germany Merchandise Trade – 2:00, France Industrial Production – 2:45AM, Great Britain Industrial Production – 4:30AM.

Other: New York Federal Reserve Bank President William Dudley speaks about the State of Financial Regulation and the Potential for Reform at Princeton University’s Griswold Center for Economic Policy Studies event held at the Princeton Club of New York, with moderated Q&A, in New York, N.Y. – 12:15PM.

 

Monday, April 10:

Economic: Labour Market Conditions Index – 10:00.

International Economic: No major announcements.

 

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Frank Fahey: Market News for the Prepared Mind: 3.20–3.27.2017

March 20, 2017


“Chance favors the Prepared Mind.” – Louis Pasteur

All generalizations are dangerous, even this one.” – Alexandre Dumas fils

“If you must hold yourself up to your children as an object lesson,
hold yourself up as a warning and not as an example.” – George Bernard Shaw

“History is a vast early warning system.” – Norman Cousins

Stocks finished higher for the week. The specter of a correction – major or minor -has been a constant topic of discussion in the financial media. Market participants are presented with a litany of reason the market is “due” for a correction – Fibonacci numbers, CBOE Skew Index, low VIX, consecutive days without a 1% move in the SPX, number of days between 5% corrections, the French election in April, and Korean nuclear intentions. Listening to these admonitions can be daunting.

I acknowledge the outlier risks. These risks are a small part of the risk/reward equation. One of the most important factor in successful trading is knowing one’s response to emergency trading situations will be. I constantly ask myself “What if, what if, what if.” I always know how and where I can shut down risk. I am my own emergency first responder.

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

Index 17-Mar Change % Weekly 2016 YTD Volatility of Index
Dow Jones Industrials (DJIA) 20,914.62 11.64 0.06% 5.83% 10.33% (VXD)
S&P 500 (SPX) 2,378.25 7.00 0.30% 6.25% 11.28% (VIX)
NASDAQ 100 (NDX) 5,408.76 35.28 0.66% 11.21% 10.57% (VXN)
Russell 2000 (RUT) 1,391.50 25.86 1.89% 2.53% 14.14% (RVX)
S&P 100 (OEX) 1055.34 0.10 0.01% 6.45% 9.15% (VXO)
Crude Oil (CLK7) 49.26 0.35 0.72% -8.59% 27.45%(OVX)
CBOE Volatility Index (VIX) 11.28 (0.38) -3.26% NA

Data Source: OptionVue8

The CBOE Skew Index closed on Friday at 154.34. This is the highest closing level for the SKEW in the history of the index. The CBOE Skew Index has hit closing all time high a number of times during the current bull market run. In a nut shell, the SKEW measures the implied volatility/market pricing of deep out-of-the-money options on the S&P 500. A SKEW level of 100 in an indicator of a normal distribution of index implied volatilities. A “high” SKEW value is a shows market pricing of a large market move to the downside. In other words, the probability of outlier returns increases as the SKEW reaches higher prices.

Russell Rhoads, CBOE VIX guru sums the calculation as follows: “SKEW is calculated starting with a ratio. This ratio consists of the numerator being lower strike SPX puts and the denominator being higher strike SPX puts. For instances if the IV of the lower strike puts is 30% and the higher strike puts is 20% then the first part of the calculation is 30/20 = 1.33. This figure is then multiplied by 100 to give us the SKEW index or 1.33 x 100 results in a SKEW of 133. There are two ways for SKEW to rise, either through a higher numerator or a lower denominator. High SKEW does indicate that out of the money puts are relatively expensive, but in a low volatility environment we may get excited about an all-time high, but keep that number in a bit of context.”

SKEW monthly chart for 2011 – 2017. (Chart courtesy of Thinkorswim).

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

Indexes Ticker 17-Mar 10-Mar Change % Change
CBOE Volatility Index VIX 11.28 11.66 (0.38) -3.26%
VIX March Future (3/22/2017) VXH7 11.775 12.525 (0.75) -5.99%
VIX April Future (4/19/2017) VXJ7 13.270 14.200 (0.93) -6.55%
VIX May Future (5/17/2017) VXK7 14.225 15.125 (0.90) -5.95%
CBOE Short-term Volatility Index VXST 9.87 10.68 (0.81) -7.58%
CBOE 3 Month Volatility Index VXV 13.92 14.38 (0.46) -3.20%
CBOE Mid-term Volatility Index (6 month) VXMT 15.85 16.33 (0.48) -2.94%
VIX of VIX VVIX 78.66 80.27 (1.61) -2.01%
CBOE SKEW Index SKEW 154.34 138.99 15.35 11.04%
Long VIX ETP’s
ProShares Ultra VIX Short Term Futures ETF UVXY 16.32 18.90 (2.58) -13.65%
iPath S&P 500 VIX Short Term Futures ETN VXX 15.81 17.01 (1.20) -7.05%
ProShares VIX Short Term Futures ETF VIXY 13.19 14.18 (0.99) -6.98%
iPath S&P 500 VIX Mid-Term Futures ETN VXZ 27.53 28.45 (0.92) -3.23%
Inverse VIX ETP’s
ProShares Short VIX Short Term Future ETF SVXY 142.15 132.58 9.57 7.22%
Daily Inverse VIX Short Term ETN XIV 73.58 68.42 5.16 7.54%

Data Source: OptionVue8

The week opens with FBI Director James Comey testifying before a House committee investigating Russian activities during the 2016 presidential election. In addition, he is expected he will provide long-awaited answers and evidence on that issue and whether President Trump was indeed wiretapped. Other highlights for the week will be a litany of speeches – 12 in all – given by members of the Fed. Any of these talks have the potential to provide a market moving slip of the tongue. The House of Representatives is scheduled to vote on Thursday on an ACA replacement.

The coming week brings reports on new home sales, existing home sales, durable goods orders. The week’s highlight will be Friday’s durable goods report, offering the latest on the factory sector. Flash PMIs for the Eurozone and Japan will give a first look at data for March. Price data and all important retail sales will be released for February in the UK.

Fedex and Lennar are the only stocks announcing earnings this week which meet my criteria. For trading the announcement. This was the second straight ho-hum earnings season. It has been my experience that the post earnings behavior of individual stocks and the associated options usually show a remarkable consistency between individual earnings announcements 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.

 

Advice to stimulate your imagination:

“I took a speed-reading course and read War and Peace in twenty minutes. It involves Russia.” – Woody Allen

“Man approaches the unattainable truth through a succession of errors.” – Aldous Huxley

“The sky is falling” – Chicken little

“Buy the ticket, take the ride.” – Hunter S. Thompson

 

Monday, March 20:

Economic: Chicago Fed National Activity Index – 8:30.

International Economic: Germany PPI – 3:00AM.

Other: Chicago Federal Reserve Bank President Charles Evans speaks about current economic conditions or monetary policy in live TV interview with Fox Business News’ Maria Bartiromo during “Mornings with Maria.” – 8:30AM, Chicago Federal Reserve Bank President Charles Evans will speak at New York National Association for Business Economics Luncheon followed by audience and then media Q&A in New York – 1:10PM.

 

Tuesday, March 21:

Economic: NFIB Small Business Optimism Index – 6:00, PPI – FD – 8:30, Redbook – 8:55.

International Economic: Great Britain CPI & PPI – 5:30AM, Great Britain CBI Industrial Trends Survey – 7:00, AM, Japan – Merchandise Trade – 7:50PM.

Other: Kansas City Federal Reserve Bank President Esther George speaks on the U.S. economy and the Fed at a Women in Housing and Finance event in Washington, D.C., with audience Q&A – 12:00PM, Federal Reserve Bank of Cleveland President Loretta Mester speaks on outlook and communications at the University of Richmond in Richmond, Va., with audience and media Q&A – 6:00PM, Bank of Japan Minutes – 7:50PM, Boston Federal Reserve Bank President Eric Rosengren addresses the Twelfth Asia-Pacific High Level Meeting on Banking Supervision in Bali, Indonesia –9:45PM.

 

Wednesday, March 22:

Economic: MBA Mortgage Applications – 7:00, FHFA House Price Index – 9:00, Existing Home Sales – 10:00, EIA Petroleum Status Report – 10:30.

International Economic: Japan All Industry Index – 12:30AM.

 

Thursday, March 23:

Economic: Jobless Claims – 8:30, Bloomberg Consumer Comfort Index – 9:45, New home Sales – 10:00, EIA Natural Gas Report – 10:30, Money Supply – 4;30.

International Economic: Great Britain Retail Sales – 5:30, Great Britain CBI Distributive Trades – 7:00AM.

Other: Federal Reserve Chairman Janet Yellen gives opening keynote at Federal Reserve System Community Development Research Conference in Washington – 8:00AM, Minneapolis Federal Reserve Bank President Neel Kashkari gives afternoon remarks at Federal Reserve System Community Development Research Conference in Washington – 12:00PM, Dallas Federal Reserve Bank President Robert Kaplan participates in a discussion on the economic outlook and monetary policy at the Chicago Council on Global Affairs in Chicago, with audience and media Q&A -7:00PM.

 

Friday, March 24:

Economic: Durable Goods Orders – 8:30, PMI Composite Flash – 9:45, Baker-Hughes Rig Count – 1:00PM.

International Economic: France GDP – 3:45AM, Eurozone PMI Composite Flash – 5:00AM.

Other: Federal Reserve Bank of Chicago President Charles Evans gives opening remarks at Federal Reserve System Community Development Research Conference in Washington – 8:00AM, St. Louis Federal Reserve Bank President James Bullard speaks at a Economic Club of Memphis Economic Briefing in Memphis, Tenn., with audience and media Q&A – 8:05AM, San Francisco Federal Reserve Bank President John Williams discusses a paper titled “Safety, Liquidity, and the Natural Rate of Interest” at the Brookings Institution’s Papers on Economic Activity spring conference – 8:30AM.

 

Monday, March 27:

Economic: Dallas Fed Manufacturing Survey

International Economic: Eurozone M3 Money Supply – 5:00AM.

Other: San Francisco Federal Reserve Bank President John Williams discusses a paper titled “Safety, Liquidity, and the Natural Rate of Interest” at the Brookings Institution’s Papers on Economic Activity spring conference – 1:15PM.

 

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