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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.
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Frank Fahey: Market News for the Prepared Mind: 2.13-2.21.2017
February 13, 2017
“I love to talk about nothing. It’s the only thing I know anything about.”
― Oscar Wilde
“Imagination decides everything.” – Blaise Pascal
“The two most powerful warriors are patience and time.” – Leo Tolstoy
“Chance favors the Prepared Mind.” – Louis Pasteur
As of Fridays close, the S&P 500 had gone for 39 consecutive trading sessions without an intra-day move greater than 1%. This is the longest streak in history. The past few trading weeks summed up by the world’s oldest rock star, Tuli Kupferberg. in the Fug’s classic “Nothing.”
Monday, nothing
Tuesday, nothing
Wednesday and Thursday, nothing
Friday, for a change, a little more nothing
Saturday, once more, nothing
Sunday, nothing
Monday, nothing
Tuesday and Wednesday, nothing
Thursday, for a change, a little more nothing
Friday, once more, nothing.
The march of time may inexorable, but the market will not remain range bound. Patience is required by a trader waiting for something to occur in the markets. My first responsibility goal, as a trader, is to make sure I am not financially hurt by the next move in the market. Short term risk is the foundation for my position risk exposure. Success is not imperative on one’s ability to buy a bottom or sell a top.
Here is an overview of the US market behavior last week and for 2017:
| Index | 10-Feb | Change | % Weekly | 2016 YTD | Volatility of Index |
| Dow Jones Industrials (DJIA) | 20,269.27 | 197.81 | 0.99% | 2.56% | 10.98% (VXD) |
| S&P 500 (SPX) | 2,313.25 | 15.83 | 0.69% | 3.35% | 10.85% (VIX) |
| NASDAQ 100 (NDX) | 5,226.69 | 65.09 | 1.26% | 7.47% | 12.31% (VXN) |
| Russell 2000 (RUT) | 1,388.84 | 11.00 | 0.80% | 2.34% | 17.91% (RVX) |
| S&P 100 (OEX) | 1020.69 | 7.00 | 0.69% | 2.95% | 10.41% (VXO) |
| Crude Oil (CLH7) | 53.85 | 0.00 | 0.00% | -0.07% | 26.43%(OVX) |
| CBOE Volatility Index (VIX) | 10.85 | (0.12) | -1.09% | NA |
Data Source: OptionVue8
The VIX is, also, part of the nothing movement in the markets. The price of the VIX reflects a market which has been extraordinarily quiet. The VIX and associated products have shown minimally lower volatility levels as the SPX moved up this week. The VIX has closed under 12 for 16 days. The VIX is at a significant support level. The major topic of conversation among traders is the question Chubby Checker asked in Limbo Rock; “How low can you go?” I have seen at-the- money index implied volatility with an “8” handle and as high as the 170’s. It should be noted that I saw both of these levels in the same year – 1987.
Trading activity in the VIX options pit has been divided between trades providing portfolio insurance and speculative risk reversals. The risk reversals have seen the purchase of call verticals which are financed through the sale of out-of-the money puts. CBOE TV airs several daily reports from the VIX pit. These reports are valuable in getting a flavor of the daily VIX trade – options and futures.
Here is an overview of last week for the VIX and related products:
| Indexes | Ticker | 10-Feb | 3-Feb | Change | % Change |
| CBOE Volatility Index | VIX | 10.85 | 10.97 | (0.12) | -1.09% |
| VIX February Future (2/15/2017) | VXG7 | 11.725 | 12.475 | (0.75) | -6.01% |
| VIX March Future (3/22/2017) | VXH7 | 13.375 | 13.925 | (0.55) | -3.95% |
| VIX April Future (4/19/2017) | VXJ7 | 15.125 | 15.225 | (0.10) | -0.66% |
| VIX May Future (5/17/2017) | VXK7 | 16.025 | 16.025 | 0.00 | 0.00% |
| CBOE Short-term Volatility Index | VXST | 9.02 | 9.19 | (0.17) | -1.85% |
| CBOE 3 Month Volatility Index | VXV | 13.91 | 14.05 | (0.14) | -1.00% |
| CBOE Mid-term Volatility Index (6 month) | VXMT | 16.17 | 16.27 | (0.10) | -0.61% |
| VIX of VIX | VVIX | 85.77 | 88.97 | (3.20) | -3.60% |
| CBOE SKEW Index | SKEW | 130.47 | 133.25 | (2.78) | -2.09% |
| Long VIX ETP’s | |||||
| ProShares Ultra VIX Short Term Futures ETF | UVXY | 21.91 | 23.53 | (1.62) | -6.88% |
| iPath S&P 500 VIX Short Term Futures ETN | VXX | 18.21 | 18.82 | (0.61) | -3.24% |
| ProShares VIX Short Term Futures ETF | VIXY | 15.16 | 15.69 | (0.53) | -3.38% |
| iPath S&P 500 VIX Mid-Tem Futures ETN | VXZ | 30.06 | 30.06 | 0.00 | 0.00% |
| Inverse VIX ETP’s | |||||
| ProShares Short VIX Short Term Future ETF | SVXY | 125.40 | 121.36 | 4.04 | 3.33% |
| Daily Inverse VIX Short Term ETN | XIV | 64.64 | 62.69 | 1.95 | 3.11% |
Data Source: OptionVue8
It will be a very heavy week for economic news. The week starts with Janet Yellen’s semi-annual testimony before the Senate Banking Committee followed on Wednesday by her testimony before the House Financial Services Committee. Yellen’s testimony has the potential to break the streak of no daily 1% moves in the SPX. Reports on retail sales, consumer prices and industrial production will be released on Wednesday. Thursday’s highlight will be release of Housing Starts and the Philadelphia Fed Business Outlook Survey. The number in this regional manufacturing survey will be correlated and compared against Wednesday’s Industrial Production report.
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 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 Teva Pharmaceutical, Noble Energy, Restaurants International, Scorpio Tankers, Rent-A-Center, and Flowers Foods.
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:
“A lot of my work is a matter of reacting to surprises in life.” – Alexander Wang
” Patience is necessary, and one cannot reap immediately where one has sown.” – Soren Kierkegaard
“To learn patience is not to rebel against every hardship.” – Henri Nouwen
Monday February 13:
Economic: No major Announcements.
International Economic: Japan GDP – 6:50PM Sunday, China CPI and PPI – 8:30PM.
Earnings:
| Symbol | Company Name | Feb 10 Close | IV30 | B/A | AVGOPTVOL |
| NBL | Noble Energy, Inc. | $38.39 | 26.97 | BMO | 1944 |
| TEVA | Teva Pharmaceutical | $32.25 | 36.73 | BMO | 28401 |
| CSOD | Cornerstone OnDemand, Inc. | $41.55 | 50.79 | AMC | 1627 |
Tuesday February 14:
Last day of Trading for February VIX Futures and Options.
Economic: NFIB Small Business Optimism Index – 6:00, PPI-FD – 8:30, Producer Price Index – 8:30, Redbook – 8:55
International Economic: Germany CPI – 2:00AM, Germany GDP Flash – 2:00AM, Great Britain CPI & PPI – 5:00AM, Eurozone GDP Flash – 5:00AM, Eurozone Industrial Production – 5:00AM.
Other: Richmond Federal Reserve Bank President Jeffrey Lacker speaks at the University of Delaware 2017 Economic Forecast conference in Newark, Del., with media & audience Q&A – 8:50AM, Federal Reserve Chair Janet Yellen will give her semiannual monetary policy testimony before the Senate Banking Committee – 10:00AM, Atlanta Federal Reserve Bank President Dennis Lockhart speaks at Huntsville Rotary Club regarding crisis, recession, and recovery in Huntsville, Ala., with media and audience Q&A – 12:50PM, Dallas Federal Reserve Bank President Robert Kaplan participates in a panel discussion at the Greater Houston Port Bureau luncheon in Houston, Texas, with audience and media Q&A – 1:00PM,.
Earnings:
| Symbol | Company Name | Feb 10 Close | IV30 | B/A | AVGOPTVOL |
| A | Agilent Technologies Inc | $50.47 | 25.05 | BMO | 1215 |
| DISCA | Discovery Communications | $27.96 | 31.26 | BMO | 1173 |
| DVN | Devon Energy Corp | $44.75 | 32.70 | BMO | 11012 |
| INCY | Incyte Corporation | $122.96 | 43.99 | BMO | 1367 |
| MLM | Martin Marietta Materials, Inc. | $225.32 | 30.69 | BMO | 1108 |
| TMUS | T-Mobile Us Inc | $62.25 | 36.44 | BMO | 9410 |
| ESRX | Express Scripts Holding Co | $67.48 | 27.04 | AMC | 9698 |
Wednesday February 15:
Economic: MBA Mortgage Applications – 7:00, Consumer Price Index (CPI) – 8:30, Retail Sales – 8:30, Empire State Manufacturing Survey – 8:30, 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 Labour Report – 4:30AM, Eurozone Merchandise Trade – 5:00AM.
Other: Federal Reserve Chair Janet Yellen will give her semiannual monetary policy testimony before the House Financial Services Committee – 10:00, Boston Federal Reserve Bank President Eric Rosengren gives keynote speech at New York Association Economics Luncheon at the Harvard Club in NYC – 12:00PM, Philadelphia Federal Reserve President Patrick Harker speaks on the economic outlook at La Salle University 16th Annual Economic Outlook in Pa., with media and audience Q&A – 12:45PM.
Earnings:
| Symbol | Company Name | Feb 10 Close | IV30 | B/A | AVGOPTVOL |
| BG | Bunge Ltd | $68.57 | 31.32 | BMO | 1137 |
| CC | Chemours Co | $27.59 | 54.32 | BMO | 2459 |
| MDCO | The Medicines Company | $48.75 | 68.45 | BMO | 1663 |
| SHOP | Shopify Inc | $54.61 | 51.82 | BMO | 1088 |
| TRGP | Targa Resources Corp | $59.31 | 31.60 | BMO | 1486 |
| WMB | Williams Companies Inc | $28.67 | 30.04 | BMO | 6183 |
| WYN | Wyndham Worldwide | $81.65 | 27.07 | BMO | 1036 |
| ADI | Analog Devices, Inc. | $76.51 | 25.10 | AMC | 810 |
| AEM | Agnico Eagle Mines Ltd (USA) | $50.20 | 39.39 | AMC | 4020 |
| AMAT | Applied Materials, Inc. | $35.41 | 29.42 | AMC | 12083 |
| CAR | Avis Budget Group Inc. | $37.41 | 53.08 | AMC | 2641 |
| CF | CF Industries Holdings, Inc. | $34.49 | 42.68 | AMC | 11251 |
| LBTYA | Liberty Global PLC | $35.19 | 30.77 | AMC | 1276 |
| NTAP | NetApp Inc. | $39.31 | 37.47 | AMC | 3836 |
| NTES | NetEase Inc (ADR) | $257.56 | 37.91 | AMC | 3552 |
| TRIP | Tripadvisor Inc | $52.51 | 46.61 | AMC | 2967 |
Thursday February 16:
Economic: Housing Starts – 8:30, Weekly Jobless Claims – 8:30, Philadelphia Fed Business Outlook Survey – 8:30, Bloomberg Consumer Comfort Index – 9:45, EIA Natural Gas Report – 10:30, Money Supply – 4:30PM.
International Economic: No major announcements
Other: European Central Bank Minutes (ECB) – 7:30AM.
Earnings:
| Symbol | Company Name | Feb 10 Close | IV30 | B/A | AVGOPTVOL |
| ALXN | Alexion Pharmaceuticals, Inc. | $127.08 | 39.38 | BMO | 5807 |
| CAB | Cabelas Inc | $50.24 | 39.61 | BMO | 1058 |
| CHTR | Charter Communications Inc | $325.07 | 28.39 | BMO | 2991 |
| MGM | MGM Resorts International | $28.62 | 28.32 | BMO | 19619 |
| PRGO | Perrigo Company PLC | $79.44 | 42.08 | BMO | 2179 |
| REGN | Regeneron Pharmaceuticals | $360.00 | 30.85 | BMO | 4194 |
| SHPG | Shire PLC (ADR) | $171.82 | 26.95 | BMO | 997 |
| ANET | Arista Networks Inc | $97.81 | 38.54 | AMC | 1095 |
| TPX | Tempur Sealy International Inc | $45.75 | 55.02 | AMC | 3115 |
| TRN | Trinity Industries Inc | $27.85 | 41.51 | AMC | 1430 |
| WBMD | WebMD Health Corp. | $50.65 | 34.24 | AMC | 4529 |
Friday February 17:
Economic: E-Commerce Retail Sales, Leading Indicators – 10:00, Baker-Hughes Rig count – 1:00PM.
International Economic: Great Britain Retail Sales – 4:30AM
Earnings:
| Symbol | Company Name | Feb 10 Close | IV30 | B/A | AVGOPTVOL |
| VFC | VF Corp | $49.47 | 30.89 | BMO | 3438 |
| FLR | Fluor Corporation (NEW) | $55.37 | 27.55 | AMC | 1149 |
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: France CPI – 2:45AM, Germany PMI Composite Flash – 4:00AM, Eurozone PMI Composite Flash,
Earnings:
| Symbol | Company Name | Feb 10 Close | IV30 | B/A | AVGOPTVOL |
| AER | AerCap Holdings N.V. | $45.94 | 26.12 | BMO | 925 |
| DDS | Dillard’s, Inc. | $57.29 | 44.79 | BMO | 941 |
| DISH | DISH Network Corp | $61.07 | 36.54 | BMO | 4076 |
| M | Macy’s Inc | $32.37 | 49.23 | BMO | 23821 |
| NEM | Newmont Mining Corp | $37.20 | 36.02 | BMO | 21471 |
| XPO | XPO Logistics Inc | $45.43 | 45.69 | BMO | 2225 |
| AAP | Advance Auto Parts, Inc. | $164.83 | 31.32 | AMC | 2077 |
| CXO | Concho Resources Inc | $139.86 | 29.44 | AMC | 906 |
| NFX | Newfield Exploration Co. | $40.91 | 37.08 | AMC | 2023 |
| TEX | Terex Corporation | $31.32 | 39.66 | AMC | 1327 |
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Hal Snarr: Mainstream Monetary Malpractice
February 8, 2017
In remarks last fall to the Hayek Group of Reno, Nevada, San Francisco Federal Reserve Bank President John Williams said, “that an economy that runs too hot for too long can generate imbalances, potentially leading to excessive inflation, asset market bubbles, and ultimately… recession… [The economy is] at full employment, and inflation is well within sight of and on track to reach our target… it makes sense to get back to a pace of gradual rate increases.”
The above remarks reflect the mainstream view that low and high unemployment are curable illnesses. When unemployment is high (or above the natural unemployment rate), mainstream economists prescribe low interest rates and excessive money growth. Just the opposite (high interest rates and slow money growth) are prescribed when unemployment is low (or below the natural unemployment rate). These “cures” to low and high unemployment are called expansionary and contractionary monetary policy, respectively.
In an economy not distorted by government interventions, unemployed workers lower their reservations wages to land positions to feed their families and pay the rent. This results in wages being bid down. This is not a winning political scenario. Whether the pro-labor party is in power or not, it and its media allies have “persuaded” the pro-business party into supporting equity interventions like food assistance for the poor, government health insurance, unemployment insurance, housing subsidies, the minimum wage, and price controls on food and energy. Even though these interventions are intended to lesson inequalities that worsen during recession, they distort labor markets and have unintended consequences.
In the absence of the above interventions, wages would fall more quickly during recession than they do now. This would lower production costs, which would raise product supply relative to demand. When this happens, prices fall and production levels rise. As firms increase output, GDP rises up toward its full-employment level. As more laborers are hired, unemployment drifts back down to its natural rate. This process is known as recessionary self-correction. Because the interventions mentioned above inhibit wages from falling during recession, recessionary self-correction stalls out. The result is persistently high unemployment. To cure it, the Fed and its media allies prescribe monetary stimulus to fix the problem that well-intentioned equity interventions created.
When unemployment is low, GDP exceeds its full-employment level, and firms find it difficult to keep up with rising product demand. Firms add second and third shifts to support this. Tight labor markets pressure a firm to pay its workers overtime wages, or seduce workers away from its competitors with better benefits and higher pay. This can push costs up, which would reduce the supply of products. As prices rise and outputs fall, GDP declines to its potential level and the price level rises. This process is called inflationary self-correction. To head it off, the Fed and its media allies prescribe contractionary monetary policy.
Since the fiscal stimulus (tax cuts and higher government spending) that Congress passes during recessions is politically popular, and contractionary fiscal policy (temporary hikes in taxes and cuts in government spending) is never enacted when unemployment gets too low, the Federal Reserve (Fed) is expected to head off inflationary self-correction with contractionary monetary.
The chart below shows just how much the Fed fears inflationary self-correction. After unemployment dipped to 5.7% in February 1988, which was 42% lower than average unemployment of the first six years of the 1980s, between then and March 1989 it hiked the federal funds rate 50%. After unemployment dropped to 4.3% in January 1999, by June 2000 it had increased the federal funds rate 41%. When unemployment dipped to 5.6% in May 2004, it raised the rate 430% from 1% to 5.3% in August 2006.
The Fed typically goes too far when it implements contractionary monetary policy. This is due impart to macroeconomic data being dated and imperfect. Its overreactions are evident when the federal funds rate in Figure 1 (the black line) is analyzed with Figure 2, which shows GDP (the red line), full-employment output (the black line), and the length of U.S. recessions (the widths of the grey bars) over time. When the Fed hiked the federal funds rate by 50% between February 1988 and March 1989, and by 41% between January 1999 and June 2000, mild recessions followed about a year later. However, when it hiked the rate by 430% from May 2004 to August 2006, the deepest recession since the Great Depression ensued a few months later.
After contractionary monetary policy triggers recession, the Fed immediately follows that action with expansionary monetary policy. When it does this, it tends to hold interest rates too low for too long. This is apparent in Figure 1. Since 1985, the length of the valleys in the federal funds rate are generally longer than its plateaus. The stimulus that Congress rolls out during recessions and prolonged expansionary monetary policy overstimulate the economy. When the TIPS spread starts rising, investors get increasingly certain that the Fed is getting ready to head off inflationary self-correction with contractionary monetary policy. Given the definition of insanity, the constant back and forth in monetary policy makes the Fed look insane.
The latest period of prolonged low interest rates is unprecedented. Since 2008, the Fed has set the federal funds rate near zero. This has coincided with the Great Recession becoming a near decade-long recessionary gap (the situation where GDP is less than full-employment output). Not only does it appear that the Fed’s historic monetary stimulus has kept the economy in a stubborn recessionary gap, it has slowed full-employment growth. Prior to the Great Recession, GDP cycled around full-employment. Figure 2 shows full-employment output being pulled downward toward sluggishly growing GDP. This suggests that historic monetary stimulus has extinguished entrepreneurism that would have occurred otherwise.
To unemployed workers, bankrupt business owners, underwater homeowners who bought homes that were beyond their means, lenders who made too many bad mortgages, and brokers who sold housing shorts, the Fed’s historic monetary stimulus was a sellable cure during the Great Recession. It, however, has debilitating side effects. In addition to the Fed’s back and forth monetary policy causing the business cycle (or at best magnifying it), the printed money from its historic monetary stimulus purchased morale hazard from most Americans. Those who received government bailouts learned that one does not need to learn from failures and bad decisions.
Given that prices fall and quality rises in markets that are relatively free of government management, ownership, or subsidization, the Fed and its partners in crime in Congress should outsource their price fixing to the millions of consumers and entrepreneurs who populate our markets.
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Frank Fahey: Market News for the Prepared Mind: 2.6-2.13.2017
February 6, 2017
‘A Scout is never taken by surprise; he knows exactly what to do when anything unexpected happens.” Robert Baden-Powell
“Imagination decides everything.” – Blaise Pascal
“Every noble acquisition is attended with its risks; he who fears to encounter the one must not expect to obtain the other.” – Pietro Metastasio
“Chance favors the Prepared Mind.” – Louis Pasteur
Major indexes hovered around unchanged at the end of Friday’s trade. The closing prices for the week did not reflect the market’s defensive posture prior to Friday. The indexes responded negatively to President Trump’s bellicose trade talk, while showing no response to Wednesday’s FOMC announcement. The percentage change for the major indexes from the Friday recovery are as follows: DJIA + 0.94%, SPX +0.58%, NDX +0.27%, RUT +1.50%, and the OEX + 0.75%.
Friday’s rally was the result of stronger than expected job growth and President Trump’s announcement he was going to investigate a roll back of Dodd-Frank regulations. The market is starting to show interday and intraday movement. The movement is generally in response to unscheduled Presidential Executive Orders, ruminations, and tweets. These responses to President Trump’s declaration are viewed by many of increased future market volatility.
Here is an overview of the US market behavior last week and for 2017:
| Index | 3-Feb | Change | % Weekly | 2016 YTD | Volatility of Index |
| Dow Jones Industrials (DJIA) | 20,071.46 | (22.32) | -0.11% | 1.56% | 11.36% (VXD) |
| S&P 500 (SPX) | 2,297.42 | 2.73 | 0.12% | 2.64% | 10.97% (VIX) |
| NASDAQ 100 (NDX) | 5,161.60 | (6.40) | -0.12% | 6.13% | 12.78% (VXN) |
| Russell 2000 (RUT) | 1,377.84 | 7.14 | 0.52% | 1.53% | 17.06% (RVX) |
| S&P 100 (OEX) | 1013.69 | 0.76 | 0.08% | 2.25% | 10.14% (VXO) |
| Crude Oil (CLH7) | 53.85 | 0.65 | 1.22% | -0.07% | 28.11%(OVX) |
| CBOE Volatility Index (VIX) | 10.97 | 0.39 | 3.69% | NA |
Data Source: OptionVue8
The VIX remains under pressure. The VIX and associated products showed minimally lower volatility levels for the week. The volatility levels were significantly higher before Friday’s market rally. On Friday, the VIX was down 0.96 or just over 8%, The VIX still appears to be planted in a new. lower trading range. Puts in the S&P 500 continue to trade at historically low levels.
A review of Livevol Pro time and sales uncovered a large VIX calendar spread trading at the end of day on Thursday. The spread was 135,000 contracts. The diagonal calendar spread included the purchase of one monthly March 17C against the sale of one monthly April 21C. The price of the trade for the initiator was a 0.08 debit – March purchased @ 1.14 and April sold @ 1.06.
Two different future contracts are the underlyings for these contracts. At the time of the trade, the spread between the March future (VXH7) and the April futures contract (VXJ7) was approximately 1.30 points. This trade benefits in a run up in the price of the VIX.
Here is an overview of last week for the VIX and related products:
| Indexes | Ticker | 3-Feb | 27-Jan | Change | % Change |
| CBOE Volatility Index | VIX | 10.97 | 10.58 | 0.39 | 3.69% |
| VIX February Future (2/15/2017) | VXG7 | 12.475 | 12.525 | (0.05) | -0.40% |
| VIX March Future (3/22/2017) | VXH7 | 13.925 | 14.125 | (0.20) | -1.42% |
| VIX April Future (4/19/2017) | VXJ7 | 15.225 | 15.425 | (0.20) | -1.30% |
| CBOE Short-term Volatility Index | VXST | 9.19 | 9.36 | (0.17) | -1.82% |
| CBOE 3 Month Volatility Index | VXV | 14.05 | 13.68 | 0.37 | 2.70% |
| CBOE Mid-term Volatility Index (6 month) | VXMT | 16.27 | 16.21 | 0.06 | 0.37% |
| VIX of VIX | VVIX | 88.97 | 83.63 | 5.34 | 6.39% |
| CBOE SKEW Index | SKEW | 133.25 | 129.95 | 3.30 | 2.54% |
| Long VIX ETP’s | |||||
| ProShares Ultra VIX Short Term Futures ETF | UVXY | 23.53 | 23.83 | (0.30) | -1.26% |
| iPath S&P 500 VIX Short Term Futures ETN | VXX | 18.82 | 18.97 | (0.15) | -0.79% |
| ProShares VIX Short Term Futures ETF | VIXY | 15.69 | 15.83 | (0.14) | -0.88% |
| iPath S&P 500 VIX Mid-Tem Futures ETN | VXZ | 30.06 | 30.56 | (0.50) | -1.64% |
| Inverse VIX ETP’s | |||||
| ProShares Short VIX Short Term Future ETF | SVXY | 121.36 | 120.74 | 0.62 | 0.51% |
| Daily Inverse VIX Short Term ETN | XIV | 62.69 | 62.33 | 0.36 | 0.58% |
Data Source: OptionVue8
The impact of potential executive orders will continue to overshadow a soft week for economic reports. The major reports being released is International Trade before Tuesday’s market open. The other domestic reports released this week elicit yawns for most market observers. Economic reports from Asia and Europe will focus on merchandise trade and industrial production.
The earnings season continues in full force despite earnings announcements from over 67% of S&P 500 companies. 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 Hasbro, Randgold Resources, Tyson Foods, Michael Kors, General Motors, Buffalo Wild Wings, Panera Bread, Zillow, Humana, Prudential Financial, Whole Foods Market, Cummins, Kellogg, Dunkin Brands, Regeneron, Expedia, NVIDIA, Verisign and Yelp.
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:
“A lot of my work is a matter of reacting to surprises in life.” – Alexander Wang
“A life spent making mistakes is not only more honorable but more useful than a life spent in doing nothing.” – George Bernard Shaw “It is an endless procession of surprises. The expected rarely occurs and never in the expected manner.” – Vernon A. Walters
Monday, February 6:
Economic: Gallup US Consumer Spending Measure – 8:30, Labor Market Conditions Index – 10:00, TD Ameritrade IMX – 12:30.
International Economic: Germany Manufacturers’ Orders – 2:00AM.
Other: Philadelphia Federal Reserve Bank President Patrick T. Harker discusses Fintech opportunities at Kona Kai Resort in San Diego, Calif – 4:30PM.
Earnings:
| Symbol | Company Name | Feb 3 Close | IV30 | B/A | AVGOPTVOL |
| GOLD | Randgold Resources Ltd. | $85.73 | 38.89 | BMO | 1587 |
| HAS | Hasbro, Inc. | $82.44 | 30.90 | BMO | 1116 |
| NOV | National-Oilwell Varco, Inc. | $37.80 | 35.70 | BMO | 3257 |
| NWL | Newell Brands Inc | $47.81 | 32.26 | BMO | 1830 |
| SYY | SYSCO Corporation | $52.38 | 25.94 | BMO | 1850 |
| TSN | Tyson Foods, Inc. | $65.18 | 31.90 | BMO | 4462 |
| FOXA | Twenty-First Century Fox Inc | $31.46 | 26.49 | AMC | 3097 |
| HAIN | Hain Celestial Group Inc | $39.35 | 38.55 | AMC | 4279 |
| TSO | Tesoro Corporation | $82.51 | 31.00 | AMC | 8506 |
Tuesday, February 7:
Economic: International Trade – 8:30, Gallup US ECI – 8:30, Redbook – 8:55, JOLTS – 10:00.
International Economic: Germany Industrial Production – 2:00AM, French Merchandise Trade – 2:00.
Other: St. Louis Federal Reserve Bank President Bullard speaks about U.S. economy and monetary policy at financial forum at Washington University in St. Louis, MO., with audience and media Q&A – 9:10AM,
Earnings:
| Symbol | Company Name | Feb 3 Close | IV30 | B/A | AVGOPTVOL |
| AGCO | AGCO Corporation | $62.40 | 28.71 | BMO | 825 |
| ALR | Alere Inc | $38.23 | 45.14 | BMO | 3562 |
| CAH | Cardinal Health Inc | $74.44 | 26.21 | BMO | 1114 |
| CNC | Centene Corp | $64.01 | 37.48 | BMO | 1028 |
| GM | General Motors Company | $35.73 | 27.19 | BMO | 57589 |
| GWPH | GW Pharmaceuticals PLC | $115.30 | 40.00 | BMO | 1899 |
| KORS | Michael Kors Holdings Ltd | $40.89 | 45.67 | BMO | 7437 |
| MNK | Mallinckrodt PLC | $49.70 | 56.88 | BMO | 4159 |
| TDG | TransDigm Group | $221.77 | 38.80 | BMO | 908 |
| AKAM | Akamai Technologies, Inc. | $69.40 | 47.98 | AMC | 3573 |
| BWLD | Buffalo Wild Wings | $149.25 | 42.71 | AMC | 910 |
| GILD | Gilead Sciences, Inc. | $72.25 | 26.34 | AMC | 45533 |
| LITE | Lumentum Holdings Inc | $37.85 | 53.28 | AMC | 994 |
| MCHP | Microchip Technology Inc. | $68.78 | 28.71 | AMC | 802 |
| MDLZ | Mondelez International Inc | $44.01 | 28.96 | AMC | 22849 |
| MOS | Mosaic Co | $31.45 | 35.95 | AMC | 9676 |
| PAA | Plains All American Pipeline | $31.98 | 31.62 | AMC | 5313 |
| PNRA | Panera Bread Co | $211.22 | 30.34 | AMC | 1288 |
| PXD | Pioneer Natural Resources | $183.46 | 28.19 | AMC | 3248 |
| TTWO | Take Two Interactive Software | $54.80 | 40.09 | AMC | 926 |
| TWLO | Twilio Inc | $30.10 | 65.38 | AMC | 12220 |
| VMC | Vulcan Materials Company | $128.01 | 31.16 | AMC | 1314 |
| Z | Zillow Group, Inc. Class C | $35.35 | 44.16 | AMC | 3116 |
Economic: MBA Mortgage Applications – 7:00, EIA Petroleum Status Report – 10:30.
International Economic: Japan Machine Orders – 6:50PM.
Earnings:
| Symbol | Company Name | Feb 3 Close | IV30 | B/A | AVGOPTVOL |
| AGN | Allergan plc | $229.52 | 29.89 | BMO | 18985 |
| ALK | Alaska Air Group, Inc. | $94.53 | 30.65 | BMO | 1022 |
| CTL | Centurylink Inc | $25.26 | 30.11 | BMO | 5346 |
| GT | Goodyear Tire & Rubber Co | $32.07 | 32.60 | BMO | 2001 |
| HUM | Humana Inc | $199.39 | 28.16 | BMO | 12121 |
| ALNY | Alnylam Pharmaceuticals, Inc. | $41.46 | 60.76 | AMC | 1038 |
| CXW | Corecivic Inc | $29.27 | 41.39 | AMC | 2483 |
| GRUB | GrubHub Inc | $41.38 | 57.22 | AMC | 1265 |
| PRU | Prudential Financial Inc | $104.43 | 31.78 | AMC | 4589 |
| RIO | Rio Tinto plc (ADR) | $44.61 | 37.43 | AMC | 5472 |
| WFM | Whole Foods Market, Inc. | $29.66 | 32.24 | AMC | 12019 |
Thursday, February 9:
Economic: Weekly Jobless Claims – 8:30, Bloomberg Consumer Comfort Index – 9:45, Wholesale Trade 10:00, EIA Natural Gas Report – 10:30, Money Supply – 4:30PM.
International Economic: China Merchandise Trade Balance, Germany Merchandise Trade – 2:00AM, Japan PPI – 6:50PM.
Other: St. Louis Federal Reserve Bank President Bullard speaks about U.S. economy and monetary policy at financial forum at Washington University in St. Louis, MO., with audience and media Q&A – 9:10AM, Chicago Federal Reserve Bank President Charles Evans speaks about current economic conditions or monetary policy at the CFA Society of Chicago Distinguished Speakers Series event in Chicago, Ill., with audience and media Q&A – 10:00PM.
Earnings:
| Symbol | Company Name | Feb 3 Close | IV30 | B/A | AVGOPTVOL |
| BWA | BorgWarner Inc. | $40.47 | 33.08 | DMT | 966 |
| CMI | Cummins Inc. | $146.33 | 26.27 | BMO | 4013 |
| DNKN | Dunkin Brands Group Inc | $50.81 | 28.70 | BMO | 2270 |
| K | Kellogg Company | $72.77 | 25.35 | BMO | 2033 |
| NLSN | Nielsen Holdings PLC | $41.65 | 29.45 | BMO | 1116 |
| PTEN | Patterson-UTI Energy, Inc. | $27.75 | 39.18 | BMO | 1449 |
| REGN | Regeneron Pharmaceuticals | $360.56 | 38.82 | BMO | 4082 |
| ZAYO | Zayo Group Holdings Inc | $31.58 | 35.19 | BMO | 1340 |
| ACIA | Acacia Communications, Inc. | $57.34 | 62.28 | AMC | 3055 |
| ATVI | Activision Blizzard, Inc. | $40.47 | 33.83 | AMC | 16529 |
| CERN | Cerner Corporation | $53.62 | 35.92 | AMC | 2576 |
| EXPE | Expedia Inc | $120.59 | 34.09 | AMC | 6185 |
| MAS | Masco Corp | $33.00 | 31.44 | AMC | 854 |
| NBIX | Neurocrine Biosciences, Inc. | $42.15 | 66.04 | AMC | 808 |
| NVDA | NVIDIA Corporation | $115.39 | 52.73 | AMC | 94251 |
| UBNT | Ubiquiti Networks Inc | $62.73 | 51.57 | AMC | 808 |
| VIAB | Viacom, Inc. | $41.58 | 33.43 | AMC | 5455 |
| VRSN | Verisign, Inc. | $81.70 | 29.95 | AMC | 1359 |
| YELP | Yelp Inc | $42.62 | 54.13 | AMC | 4649 |
International Economic: France Industrial Production 2:45AM, Great Britain Industrial Production – 4:30AM, Great Britain Merchandise Trade – 4:30AM.
Other: Vice Chairman of the Federal Reserve Stanley Fischer speaks at Warwick Economics Summit on Saturday February 11 in Coventry, United Kingdom, with audience Q&A – 7:30AM.
Earnings: None meeting scan criteria.
Monday, February 13:
| Symbol | Company Name | Feb 3 Close | IV30 | B/A | AVGOPTVOL |
| CTSH | Cognizant Technology Solutions | $51.68 | 32.92 | BMO | 6491 |
| HCP | HCP, Inc. | $30.70 | 29.19 | BMO | 1470 |
| NBL | Noble Energy, Inc. | $39.73 | 28.15 | BMO | 1934 |
| TEVA | Teva Pharmaceutical Industries | $34.19 | 32.44 | BMO | 27768 |
| AAP | Advance Auto Parts, Inc. | $162.34 | 31.65 | AMC | 1944 |
| CSOD | Cornerstone OnDemand, Inc. | $41.56 | 58.36 | AMC | 1862 |
| LBTYA | Liberty Global PLC | $36.29 | 30.00 | AMC | 1411 |
Frank Fahey: Market News for the Prepared Mind: 1.30-2.6.2017
January 30, 2017
“Chance favors the Prepared Mind.” – Louis Pasteur
“Imagination decides everything.” – Blaise Pascal
“Risk is like fire: If controlled it will help you; if uncontrolled it will rise up and destroy you.” – Theodore Roosevelt
“To make a mistake is only human; to persist in a mistake is idiotic.” – Cicero
The stock market enjoyed a solid week. The Dow Jones Industrials, the S&P 500, and the NASDAQ composite gained 1% to 2% while achieving record highs. The Dow broke 20,000 this week. The DJIA was just under 3,000 when I started trading on the floor of the Chicago Board Options Exchange in 1985. It was just above 8,000 at the beginning of Barack Obama’s presidency. These numbers have always been little more to me than as the benchmark I use to measure my own personal performance.
Announced earnings were strong last week. Stronger than expected earnings were counterbalanced be a lackluster Q4 US GDP. Q4 GDP grew at an annualized rate of 1.9%. Consensus for the quarter was 2.2%. The economy grew at a 1.6% in 2016 vs. 2.6% in 2015. This was the 11th straight year the economy failed to reach an annualized 3% growth rate for the year. The economy and economic reports did not dominate the news last week. All eyes were on the Beltway.
Traditional media and social media were dominated by President Trump and a litany of executive orders and appointments. The background noise reached a roar this weekend with an executive order temporarily barring citizens of seven Muslim-majority countries from entering the United States. Domestic blowback came from both sides of the aisle and from the CEO’s from a cross section of the Fortune 100.
The most disconcerting aspect is how ill-prepared the relevant government agencies were to handle the impact of the this announcement. It does not auger well for the market if bold policy moves are met with incompetent implementation. It will be very interesting to gauge market reaction when the S&P 500 E-mini futures open for trading at 5:00PM on Sunday.
Here is an overview of the US market behavior last week and for 2017:
| Index | 27-Jan | Change | % Weekly | 2016 YTD | Volatility of Index |
| Dow Jones Industrials (DJIA) | 20,093.78 | 266.28 | 1.34% | 1.68% | 10.56% (VXD) |
| S&P 500 (SPX) | 2,294.69 | 28.19 | 1.24% | 2.52% | 10.58% (VIX) |
| NASDAQ 100 (NDX) | 5,168.00 | 104.80 | 2.07% | 6.26% | 12.30% (VXN) |
| Russell 2000 (RUT) | 1,370.70 | 18.85 | 1.39% | 1.00% | 16.58% (RVX) |
| S&P 100 (OEX) | 1012.93 | 9.89 | 0.99% | 2.17% | 9.87% (VXO) |
| Crude Oil (CLH7) | 53.20 | (0.04) | -0.08% | -1.28% | 29.78%(OVX) |
| CBOE Volatility Index (VIX) | 10.58 | (0.96) | -8.32% | NA |
Data Source: OptionVue8
The VIX and associated products showed lower volatility levels for the week. The VIX appears to have found a new lower trading range. The index appears to be headed towards the eighth straight monthly expiration with the VRO under 16.00. The VIX futures and index seemed oblivious to moderate down market movements during the week. Puts in the S&P 500 are trading at historically low levels. There is an aura of invincibility surrounding the bull market. The put-call call ratio in the S&P 500 is at its lowest levels since 2009. Short interest in domestic equities is at 3.5% – its lowest level since 2014.
This is an observation, not a recommendation. I become wary when indicators and prices are at the wings of their normal distribution. My experience tells me to be wary and be nimble. Do not worry about missing a move. Legendary New York financier Bernard Baruch summed up his approach, “Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.”
Here is an overview of last week for the VIX and related products:
| Indexes | Ticker | 27-Jan | 20-Jan | Change | % Change |
| CBOE Volatility Index | VIX | 10.58 | 11.54 | (0.96) | -8.32% |
| VIX February Future (2/15/2017) | VXG7 | 12.525 | 13.825 | (1.30) | -9.40% |
| VIX March Future (3/22/2017) | VXH7 | 14.125 | 15.225 | (1.10) | -7.22% |
| VIX April Future (4/19/2017) | VXJ7 | 15.425 | 16.375 | (0.95) | -5.80% |
| CBOE Short-term Volatility Index | VXST | 9.36 | 9.72 | (0.36) | -3.70% |
| CBOE 3 Month Volatility Index | VXV | 13.68 | 14.49 | (0.81) | -5.59% |
| CBOE Mid-term Volatility Index (6 month) | VXMT | 16.21 | 17.07 | (0.86) | -5.04% |
| VIX of VIX | VVIX | 83.63 | 83.63 | 0.00 | 0.00% |
| CBOE SKEW Index | SKEW | 129.95 | 146.33 | (16.38) | -11.19% |
| Long VIX ETP’s | |||||
| ProShares Ultra VIX Short Term Futures ETF | UVXY | 23.83 | 28.40 | (4.57) | -16.09% |
| iPath S&P 500 VIX Short Term Futures ETN | VXX | 18.97 | 20.71 | (1.74) | -8.40% |
| ProShares VIX Short Term Futures ETF | VIXY | 15.83 | 17.25 | (1.42) | -8.23% |
| iPath S&P 500 VIX Mid-Term Futures ETN | VXZ | 30.56 | 32.73 | (2.17) | -6.63% |
| Inverse VIX ETP’s | |||||
| ProShares Short VIX Short Term Future ETF | SVXY | 120.74 | 107.20 | 13.54 | 12.63% |
| Daily Inverse VIX Short Term ETN | XIV | 62.33 | 55.28 | 7.05 | 12.75% |
Data Source: OptionVue8
The coming week brings the first Fed meeting of 2017, along with the CoreLogic Case-Shiller Home Price Index and the U.S. Employment Situation report for January. Little is expected from the FOMC’s Wednesday afternoon announcement. The week ends with the January employment situation on Friday, followed by factory orders and the ISM non-manufacturing report follow on Friday. If the data come in as expected, the week will point to a solid opening for the first quarter. The Friday reports are expected to be positive. The focus in Europe will be on the United Kingdom and Brexit.
The earnings season continues full force this week. 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 Eli Lilly, Exxon-Mobil, Harley Davidson, AMD, Apple. US Steel, Cirrus Logic, Facebook, Amgen, and Amazon.
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. I have increase the level of the average daily option volume to 800 from 400. 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:
“A fool and his money are soon elected.” – Will Rogers
“Any fool can know. The point is to understand.” – Albert Einstein “Any fool can criticize, condemn and complain – and most fools do.” -Benjamin Franklin
Monday January 30:
Economic: Personal Income and Outlays – 8:30, Pending Home Sales Index – 10:00, Dallas Fed Manufacturing Survey – 10:30.
International Economic: Germany CPI – 8:00, Japan Household Spending and Unemployment Rate – 6:30PM, Japan Industrial Production – 6:50PM.
Earnings:
| Symbol | Company Name | Jan 27 Close | IV30 | B/A | AVGOPTVOL |
| BOFI | BofI Holding, Inc. | $28.09 | 52.94 | DMT | 1877 |
| IDTI | Integrated Device Technology | $25.96 | 50.86 | AMC | 867 |
| OLN | Olin Corporation | $26.64 | 35.51 | AMC | 1134 |
| PKG | Packaging Corp Of America | $94.02 | 28.99 | AMC | 1178 |
Tuesday January 31:
Economic: Employment Cost Index – 8:30, Redbook – 8:55, S&P Corelogic Case-Shiller HPI – 8:00, Chicago PMI – 9;45, Consumer Confidence – 10:00, Sate Street Investor Confidence Index – 10:00, Farm Prices – 3:00PM.
International Economic: Germany Retail Sales – 2:00AM, France CPI and PPI – 2:45Am, Germany Unemployment Rate – 3:55AM. Eurozone GDP Flash, Eurozone Unemployment Rate – 5:00AM, China CFLP Manufacturing PMI – 8:00PM.
Other: FOMC meeting begins.
Earnings:
| Symbol | Company Name | Jan 27 Close | IV30 | B/A | AVGOPTVOL |
| HCA | HCA Holdings Inc | $80.28 | 27.47 | DMT | 4270 |
| ZBH | Zimmer Biomet Holdings Inc | $115.35 | 25.19 | DMT | 916 |
| ABC | AmerisourceBergen Corp. | $83.39 | 30.88 | BMO | 1984 |
| CIT | CIT Group Inc. | $42.78 | 27.03 | BMO | 2891 |
| COH | Coach Inc | $35.90 | 32.50 | BMO | 4226 |
| HOG | Harley-Davidson Inc | $60.18 | 35.04 | BMO | 3400 |
| HP | Helmerich & Payne, Inc. | $75.11 | 29.83 | BMO | 1503 |
| NUE | Nucor Corporation | $60.71 | 30.52 | BMO | 5855 |
| PCAR | PACCAR Inc | $68.08 | 27.60 | BMO | 819 |
| UAA | Under Armour Inc | $29.13 | 43.97 | BMO | 15077 |
| APC | Anadarko Petroleum | $71.14 | 26.12 | AMC | 12197 |
| EA | Electronic Arts Inc. | $81.70 | 30.97 | AMC | 10401 |
| UA | Under Armour, Inc. | $25.50 | 43.66 | 1641 | |
| X | United States Steel | $33.54 | 66.33 | 60525 | |
| VLO | Valero Energy Corporation | $67.37 | 27.67 | 11777 |
Wednesday February 1:
Economic: Motor Vehicle Sales, MBA Mortgage Applications – 7:00, ADP Employment Report – 8:15, Gallup US Job Creation Index – 8:30AM, Treasury Refunding Announcement, PMI Manufacturing Index – 9:45, ISM Manufacturing Index – 10:00, Construction Spending – 10:00, EIA Petroleum Status Report – 10:30.
International Economic: Germany PMI Manufacturing Index – 3:55AM, Eurozone PMI Manufacturing Index – 4:00AM.
Other: FOMC Meeting Announcement – 2:00PM.
Earnings:
| Symbol | Company Name | Jan 27 Close | IV30 | B/A | AVGOPTVOL |
| CRUS | Cirrus Logic, Inc. | $60.34 | 55.28 | BMO | 2740 |
| IAC | IAC/InterActiveCorp | $69.95 | 31.47 | BMO | 1026 |
| RGLD | Royal Gold, Inc (USA) | $69.58 | 39.19 | BMO | 1890 |
| USG | USG Corporation | $30.09 | 35.53 | BMO | 1087 |
| EW | Edwards Lifesciences Corp | $95.13 | 36.61 | AMC | 2138 |
| FB | Facebook Inc | $132.78 | 28.61 | AMC | 269855 |
| LNC | Lincoln National Corporation | $69.65 | 30.19 | AMC | 1207 |
| MET | Metlife Inc | $56.03 | 25.42 | AMC | 18579 |
| QRVO | Qorvo Inc | $63.34 | 53.57 | AMC | 2447 |
| SYMC | Symantec Corporation | $27.21 | 31.52 | AMC | 3394 |
| TSCO | Tractor Supply Company | $74.99 | 29.27 | AMC | 898 |
| TUP | Tupperware Brands | $57.65 | 37.60 | AMC | 1021 |
| MPC | Marathon Petroleum Corp | $49.44 | 33.11 | 18003 | |
| MPLX | MPLX LP | $38.25 | 29.41 | 1800 |
Thursday February 2:
Economic: Chain Store Sales, Challenger Job-Cut Report – 7:30, Weekly Jobless Claims – 8:30, Productivity and Costs – 8:30, Gallup Good Jobs Rate – 8:30, Bloomberg Consumer Comfort Index – 9:45, EIA Natural Gas Report – 10:30, Money Supply – 4:30PM.
International Economic: Eurozone PPI – 5:00AM. Bank of Japan Minutes – 6:50PM.
Other: Bank of England Announcement and Minutes – 7:00AM.
Earnings:
| Symbol | Company Name | Jan 27 Close | IV30 | B/A | AVGOPTVOL |
| AZN | AstraZeneca plc (ADR) | $26.72 | 32.25 | BMO | 7007 |
| BLL | Ball Corporation | $76.36 | 25.41 | BMO | 1035 |
| CI | CIGNA Corporation | $146.80 | 33.14 | BMO | 1430 |
| COP | ConocoPhillips | $50.63 | 25.36 | BMO | 19210 |
| EL | Estee Lauder Companies Inc | $81.96 | 28.00 | BMO | 1654 |
| RL | Ralph Lauren Corp | $90.01 | 40.17 | BMO | 1591 |
| SNE | Sony Corp (ADR) | $31.12 | 29.71 | BMO | 809 |
| AMZN | Amazon.com, Inc. | $839.15 | 28.74 | AMC | 107702 |
| AMGN | Amgen, Inc. | $152.98 | 25.84 | AMC | 15987 |
| ATHN | athenahealth, Inc | $123.85 | 45.08 | AMC | 1449 |
| CMG | Chipotle Mexican Grill, Inc. | $418.73 | 31.18 | AMC | 20140 |
| DECK | Deckers Outdoor Corp | $60.59 | 48.11 | AMC | 1475 |
| DLPH | Delphi Automotive PLC | $71.86 | 31.87 | AMC | 1417 |
| FTNT | Fortinet Inc | $32.57 | 44.94 | AMC | 3384 |
| GIMO | Gigamon Inc | $32.50 | 64.41 | AMC | 1172 |
| POST | Post Holdings Inc | $82.64 | 36.44 | AMC | 2247 |
| SCCO | Southern Copper Corp | $37.82 | 27.74 | AMC | 873 |
| DATA | Tableau Software Inc | $48.21 | 62.41 | AMC | 1747 |
Friday February 3:
Economic: January Employment Situation – 8:30, PMI Services Index – 9:45, Factory orders – 10:00, ISM Non- Manufacturing Index – 10:00, Factory Orders – 10:00, Baker-Hughes Rig count – 1:00PM.
International Economic: Eurozone PMI Composite – 4:00AM, Eurozone Retail Sales – 5:00AM, Global Composite PMI – 11:00AM, Global Services PMI – 11:00AM.
Other: Chicago Federal Reserve Bank President Charles Evans speaks on current economic conditions at the Prairie State College Economic Breakfast in Olympia Fields, Ill., with audience and media Q&A – 9:15AM.
Earnings:
| Symbol | Company Name | Jan 27 Close | IV30 | B/A | AVGOPTVOL |
| LYB | Lyondell Basell Industries NV | $95.39 | 27.19 | BMO | 3368 |
| BERY | Berry Plastics Group Inc | $51.56 | 28.63 | AMC | 848 |
Monday February 6:
Economic: Gallup US Consumer Spending Measure – 8:30, Labor Market Conditions Index – 10:00, TD Ameritrade IMX – 12:30.
International Economic: No major announcements.
Other: Philadelphia Federal Reserve Bank President Patrick T. Harker discusses Fintech opportunities at Kona Kai Resort in San Diego, Calif – 4:30PM.
Earnings:
| Symbol | Company Name | Jan 27 Close | IV30 | B/A | AVGOPTVOL |
| CTSH | Cognizant Technology Solutions | $56.27 | 31.56 | BMO | 6239 |
| HAS | Hasbro, Inc. | $81.51 | 31.10 | BMO | 1136 |
| NOV | National-Oilwell Varco, Inc. | $39.25 | 31.45 | BMO | 3200 |
| NWL | Newell Brands Inc | $46.35 | 28.44 | BMO | 1969 |
| GOLD | Randgold Resources Ltd. (ADR) | $81.30 | 38.15 | BMO | 1681 |
| TSN | Tyson Foods, Inc. | $61.71 | 33.07 | BMO | 4372 |
| HAIN | Hain Celestial Group Inc | $39.98 | 36.76 | AMC | 4252 |
| TSO | Tesoro Corporation | $81.94 | 31.39 | AMC | 8132 |
| FOXA | Twenty-First Century Fox Inc | $31.00 | 26.77 | AMC | 3247 |