The news release hit the tape right after the stock market opened this morning: "Philadelphia Fed President Charles Plosser said Friday there are some risks to inflation in the medium to longer run unless monetary policy is tightened more quickly than the Fed anticipated in its last statement" (LINK).
The S&P 500 stock futures dropped 4 points on this and the precious metals went into typical cliff-dive mode, with March silver dropping 50 cents from the time the statement hit the tape to its low on the day.
Plosser's remarks are either patently misleading or his view is derived from gross negligence in analyzing real world data, the latter flaw of which is typical of "ivory tower" economists and Fed officials. We can use short term trading strategies to take advantage of the effects on the market caused by deceptive and misleading comments by Fed officials who have their head buried in the sands of fantasy.
I guess Plosser doesn't follow business and economic news, because the trade deficit for November released today was significantly higher than expected. In fact, the trade deficit was 20% higher than was forecast by Wall Street's brain trust.
I can't recall EVER seeing a miss this big to the downside for import/export numbers (-$48.7 billion vs. the -$41.1 billion consensus forecast by Wall Street's finest (LINK).
The reason cited the deficit was iPhones, but that's absurd because 1) iPhone 5 sales have disappointed so far and 2) Import forecasts would have incorporated assumptions about the affect of iPhone 5 sales. Conceptually what the larger trade deficit means is that the rest of the world is buying less U.S. exported goods and the U.S. isn't manufacturing the goods being demanded by U.S. consumers.
What this means is that manufacturing, one of the primary drivers of GDP outside of consumption, is still declining. It means that anyone who asserts that GDP for 2013 will be 3% is either living in a cave on Mars or is lying - for whatever motive - given the decelerating trend in GDP.
The truth is that GDP estimates for Q4 will likely be revised to below 1%. In fact, JP Morgan issued an update later this morning, stating that it was revising its Q4 GDP estimate to .8% (LINK). Moreover, it is generally acknowledged now that holiday sales for 2012 were disappointing. The consumer is tapped out, the number of people dependent on the Government for living expenses (food stamps, general welfare, social security, social security disability and student loans) rises every month.
Please tell me, Mr. Plosser, where exactly is this GDP growth of 3% going to come from given that the trend in GDP going into 2013 is declining, 1% or less and the main driver of GDP over the last 12 years - consumption - is quickly eroding? Jim Sinclair calls this nonsense "MOPE." Management Of Perception Economics. Everyone else calls this "Orwellian." This smack on silver is a table-pounding buy.
Yesterday I implemented some short term trading hedges in our fund against some long trading positions. I shorted at-the-money calls that expire today against our position in AGQ, the leveraged long-silver ETF, and I shorted at-the-money January calls against one of the large-cap mining stock positions in our fund.
As soon as the market got hit from Plosser's statement, I covered the short position in both the AGQ calls and the stock calls for overnight profits. If I had been wrong in my intuition that the market might get hit this morning, I would have let the calls get exercised to today against the AGQ position, effectively selling the AGQ trading position at a price above the market (the strike price on the call being exercised plus the amount of call premium we kept from shorting the calls). The stock options don't expire until next Friday, so I would have had lots of "options" regarding how to trade the covered short call position.
To summarize, don't let supposedly "official statements" made in speeches by supposedly "smart" people scare you out of trading positions when unexpected comments hit the newswire and the market reacts quickly against your position. Instead, learn to analyze the source of the market move and figure out the best way to take advantage of it.
Disclosure: I am long AGQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My fund is long AGQ