Where Do Interest Rates Go From Here? 9.14.2012

While issues like gold and silver contracts may come to mind during an announcement like this; there is a plethora of interest rate sensitive underlings that are either helped or hurt by these actions.

One of the most popular trades has been the high yield trade; naturally involving the real estate investment trusts (REITS). REITS must, by law, distribute about 90% of their net income as yield to investors. These massive dividends, which can be seen as an extrinsic value difference in the option chain and big gaps/candles on the chart, are then distributed to shareholders.  Considering these are rather interest rate sensitive; they can be an indicator for the greater interest rate environment. AGNC rallied over 3% this week to a new all time high and the bond etf TLT got wacked by over 2.3%; closing its candle body nearly on its 150 day moving average and its lower wick near its 200 day moving average.

While the ebb and flow of the bond market may be challenging to understand, especially why anyone would accept such a low yield and high principal risk, it is interesting to look at other yield curves. Below is a chart of the Swiss yield curve against the USA yield curve; one can observe the negative rates in Switzerland (because of the currency peg); so is not only us having to deal with bad rates. While prospects may see dim and challenges seem monumental…there are trading opportunities in the interest rate market around the world, but more importantly it is still morning in America.

Across the pond the FT reported that, “investors in the €1.1tn European money market fund industry are facing losses as big managers prepare to pass on the impact of negative short-term interest rates.” American debt is still considered a staple of safety to the market, even though we are nearly at our fiscal tipping point. 

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Market Recap 9.13.2012

The Federal Reserve today released its projections for GDP, unemployment and inflation for 2012 and 2013. GDP estimates were lowered for both years, 2012 reduced to 1.7% – 2.0% from 1.9% – 2.4%. Estimates for 2013 were reduced by 2%-3%. Unemployment estimates stayed relatively the same for 2012 at 8-8.2%, while 2013 estimates narrowed but stayed in the old range, now between 7.6%-7.9%.

After the report was released, Ben Bernanke, the Chairman of the Fed, held a press conference to discuss the quantitative easing announcement earlier today. Bernanke expressed concerns for those who hold interest-bearing assets, but then went on to say low interest rates support homes and businesses throughout the economy. With no specific target, it isn’t clear where the Fed will begin and end its economic tweaking, however, Bernanke explained that the purpose is for general improvement in the labor market by reductions in unemployment among other indicators.

Tomorrow’s economic events include the Consumer Price Index Report, Retail Sales Report, and an Industrial Production Report. The CPI is expected to gain about 0.2% to 0.9%. Retail sales are also expected to grow less than a one percent. Industrial production is projected to shrink.

Google Inc. stock was $3.81 away from its high hit last week. Google stayed steady most of the day but exploded upwards around 12:30 pm, and continued its way up to close $15.16 higher at $706.04. Some products consumers are looking forward to from Google are Google Fiber and Google Glass. Google Fiber is currently in Kansas City but is planning to expand into five more cities in Kansas soon. Google Glass, a light electronic device in which data is projected into the users field of view, is set to be released next year.

Alex Kalish has a master’s degree in economics from Suffolk University. 

Questions, comments and suggestions welcome: [email protected]

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Trade of the Day (FST) 9.13.2012

Chart emini Stocks TradingTrade:  Buying the FST Oct 10 Calls for $.20

Risk: $20 per 1 lot

Reward: Unlimited

Notes:  Good risk vs Reward, but need a Parabolic move higher.

UPDATE 9.16.2012  With the stock moving higher, these Calls are exploding to the upside.  These Calls are now $.60 good for a terrible.

UPDATE 9.21.2012  I took high off at a double and now the Calls are worth $.25 and I will leave the rest on until Expiration, playing with the house’s money.

Fed Announcement 9.13.2012

The program will be open ended; the aggressiveness will depend on the rate of economic improvement and recovery.  The Fed will also continue Operation Twist, buying longer term bonds in an effort to lower long term interest rates. 

The combination of the new mortgage buying program and Operation Twist will add around $85 billion to the Fed’s balance sheet every month which is currently at $2.8 billion.

The FOMC will closely monitor the effects of each month’s asset purchases, and will make adjustments accordingly.  The Committee also anticipates that exceptionally low fed funds rates will likely be warranted at least through mid-2015.

The FOMC forecasts and press conference is scheduled for today at 2:15pm ET where the Fed will release its growth forecasts.

James Ramelli B.S. in Finance from UIUC. Email: [email protected]com Follow: @Jim_KOTM 

Market Recap 9.12.2012

 The new phone will also be lighter and thinner than previous versions. The iPhone 5 will retail for $199-$399 with a 2 year contract with a service provider.  In addition to the iPhone 5, Apple announced a new line of iPods.  Updates to iTunes were also unveiled, users will now be able to share photos via Apple’s iCloud.

Coming up tomorrow, markets are looking to the FOMC meeting announcement and forecasts as well as Bernanke’s press conference.  Bernanke is expected to announce another round of quantitative easing. The recent poor employment numbers support Bernanke’s case that the economy is struggling.  However the upcoming presidential election complicates the upcoming Fed decision.  Any position that Bernanke takes will likely be viewed as politically motivated. A new jobless claims report is also scheduled to be released tomorrow.

James Ramelli B.S. in Finance from UIUC. Email: [email protected] Follow: @Jim_KOTM

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Trade of the Day (NRG) 9.12.2012

Chart Candle Stick StocksTrade:  Buying the NRG Sep 22 Straddle for $.95

Risk: $95 per 1 lot

Reward: Unlimited

Notes:  Paper bought 4892 NRG Sep 22 Puts for $.40 OPENING position

UPDATE 9.16.2012  With time decay is against me, these Straddles are worth $.70, but time is working against me.

UPDATE 9.21.2012  I sold all my Puts out at $.65 and and Calls expired worthless, so the Straddle was sold for $.65.  Moving to the next trade.