August `6 2022 Option Professor Opinions & Observations
We’re 6 weeks away from the next Fed decision but a couple of things are becoming more obvious. The “neutral” is way ABOVE the 2.25%-2.50% the Fed said it was and to curb this kind of price/wage spiral; the Fed has to go to near 4% and maybe far beyond as we said before PUTTING ON A TRADE (adding $5 Trillion to the balance sheet) is a lot easier than the UNWIND ($90 billion a month way too slow). This week we heard ISM services was supposed to be decline to 53 and came in about 57. This told us the JOBS number would be an UPSIDE surprise as if services demand is huge they will need more people. So rather than 250K jobs it came in at MORE than TWO TIMES at 528K and the prior month was revised UP!! No need to candy coat it…3.5% rate…wages YOY up OVER 5%…participation dropped…where’s the Slack??
Truth is the Q2 earn and revenues are LOWER than 1 year ago but hardly the fall out of bed once feared. Here in lies the key to the future. We’re at 2.28 on SPX this year which puts us at about 18.5 X P/E. Next year is expected 2.45 X 18.5 =SPX 4410. The BULLS cite that the 10 yr Treasury will stay at 2.70% (33 P/E) and therefore SPX 20X P/E is ok value and that the employment pictures underwrites the earning forecast. Here’s the rub…if the Fed wants 2% inflation the 10 yr Treasury will go way past 2.70% (now at about 2.85%) and as the savings are depleted and credit cards are maxed (EOY); the consumer spending abates. Should this occur; repricing occurs. The Fed has picked a GREAT time to play HARDBALL. The deficits are LOW and the JOBS are HIGH…we got a rally restoring asset values….so hit it hard NOW while it’s sunny !
Being the OPTION PROFESSOR; we’ve kept our eyes on the VIX which BROKEDOWN on the break UNDER 25 and has now approached 20. We believe a mover OVER 25 VIX and AAPL UNDER 160-155=a rollover. The BULLS say that it’s all priced in, everybody’s in cash, earnings hold up, retail is out…UP UP & AWAY!? The BEARS say the parents (FED) are coming home in 6 weeks; even if we see SPX 4200-4400..it won’t last!
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