Wednesday Fed Watch

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TSLA, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Philip Davis

Summary

Hot PPI and rising wages have us betting on 4 rate hikes.

A quick economic overview.

Waiting patiently to short Tesla.

It's Fed day!

The Federal Reserve is expected to raise rates by 0.25% this afternoon, but what matters more is what Chairman Powell has to say at 2:30 pm. In the last statement, the Fed eliminated a line from the March statement that said, “the committee is monitoring inflation developments closely.” That seems to indicate they feel inflation is now at their 2% goal, and clearly unemployment is better than their goal, so now the Fed must move to head off inflation pressure before it begins.

In fact, this morning's Producer Price Index is up 0.5%, miles above the 0.2% expected by economists, who obviously do not shop where we shop or eat where we eat. This should bring the markets down from their perch, and we can short the S&P (/ES) below the 2,790 line (with tight stops above) and, of course, the Nasdaq (/NQ) at 7,250 and the Russell (/TF) at 1,685 - all Sept. contracts now. Yes, we keep trying to short and it keeps failing... but one day!

There are already many signs of wage inflation. The recent Beige Book indicated all regions were having a lot of hiring pressures, and once employers have to start competing for employees by raising wages and benefits, that's a genie that's very hard to put back in the bottle. Wage inflation is bad for corporate profits, and wages are about 30% of a corporation's operating costs, so a 10% increase in wages knocks 3% off earnings unless they raise prices - which adds to inflation and makes more workers demand higher wages...

I remember working in the late '70s and early '80s, when it was downright insulting if you didn't get a 5% annual raise just for doing your job, while 10% was fairly normal for doing a good job. When you took a job that started at $25,000, you fully expected to be making ~$50,000 in less than 5 years. That seems like a fantasy these days, as it's been decades since the workers have been given a fair share of the profits.

At some point, the pendulum will swing back and some portion of the $2 trillion in corporate profits will find its way back to 165 million workers as they begin to realize that just half of those profits would represent a $6,060 per worker raise. That's right, $1 trillion is a lot of money, and US corporations are sitting on $2 trillion in cash (!!!) after being given massive tax cuts as they brought it back from overseas.

Ultimately, the taxpayers funded that tax break for the corporations, and they promised to use that money to raise salaries and hire more workers, but none of that happened - and don't think the Democrats aren't going to remind voters of that in November's mid-term elections. The Republicans got elected promising workers they would make things better, but the answer to the simple, standard question of "Are you better off now than you were two years ago" is, sadly, "No" for the bottom 80% of our population.

Image result for minimum wages

Yes, there are more jobs, but they aren't quality jobs, and in reality, 200,000 jobs a month is barely keeping up with population growth, so jobs are not really being created at any good pace. The biggest impact is coming from one of the things the GOP would love to roll back, which is rising minimum wage requirements across the country - wages are going from $7.25 to $15 over time in many states - after years of stagnation.

We found out yesterday that Elon Musk will be laying off 9% of Tesla's (NASDAQ:TSLA) workforce, and if you think it's hard to reconcile Musk's claims that Tesla will be doubling its rate of production by the end of the month with the fact that the company has decided to lay off 9% of its employees, then you must be too rational to trade the market. Fortunately, TSLA investors have never been accused of being rational, and they are still buying the stock this morning, pushing it to nearly $350/share. We caution to wait for the madness to subside before jumping in on the short position.

We added more hedges to our Short-Term Portfolio (which protects the Long-Term Portfolio) and our Options Opportunity Portfolio. The Fed meeting and Powell's speech should create a very exciting day!

Yesterday, we suggested an upside hedge using the Nasdaq ETF (NASDAQ:QQQ) 2020 $220 calls which did fill at $2.03 in the morning and finished the day at $2.20 - up 0.17 (8.4%) in day one of 583 until expiration. This is why we don't fear missing out on a rally, as it only takes a very small percentage of our cash (!!!) to make sure the markets won't fly away from us.

Disclosure: I am/we are long QQQ, SQQQ, TZA, DXD, SDS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to RAPIDLY change (currently mainly cash and an otherwise slightly bearish mix of long and short positions - see previous posts for other trade ideas).