Will the Fed pause on Tuesday?
- Thread starter Rearden Metal
- Start date
makes perfect good sense for the Fed to reduce the pace to bi-monthly / quarterly review now that the 'long term' commodities uptrend has been broken... there's plenty of room to raise rates again should oil & commodities price pressures persist and the US consumer continue to prefer high gas price punishment to alternative energies options...
I'm guessing this was supposed to be mildly sarcastic.
The trade is pretty straightforward and hinges on the impact of the coming recession on the markets. Comparing this coming severe recession to the mild recession we had in 2001 shows me that the SPY's fell to ~$80 by October 2002. Given that this recession will turn out to be much worse for both consumers and businesses than the previous - a conservative target "bottom" for the SPY's is between 70-85.
As for timing, we should be in recession by Q406 - Q1'07. By this time the market will have declined on the bleak growth outlook, but may not yet have crashed or suffered its worst declines to come. I expect that these events should take place throughout 2007, with the market hopefully bottoming out in mid to late 2007 and giving me a chance to get out of the Dec 07 puts without surrendering too much theta.
That's why I'm comfortable with the strike levels and expirations. The one thing that could get me is if events occur to manifest a slow and steady market decline through 2008. This would yield gains, but not the types of gains I'm gunning for.
Theta decay isn't too much of a concern since my options are so out of the money that theta won't become an issue until the several weeks leading up to expiration, if I am still holding the contracts.
As for me buying pure vega? Well, I'm not sure what you're getting at (riskarb) in referencing the upcoming Fed decision. I'm hoping to buy more contracts for my money in the event of a rally. The vega and/or implied vol levels are almost a non-issue since given my market view and expectation of severe price declines, market vol and the implied vol on my contracts will increase two to four-fold, thereby harnessing all the vega originally purchased. Is this what you were getting at? I'm not sure...
Anyway. I don't see why this is seen as a crapshoot. I admit that calling direction and timing is not something someone should publicize, let alone bet big money on. However, given the current state of the economy and all of the fundamental indicators it seems to me like anyone NOT expecting bad things for the market and economy going forward isn't paying attention to the big picture (too much focus on specific stocks/sectors? Watching too much Mad Money? I don't know...). As for timing - I'm only going so far as December 07 puts. The 08's are a little out there and way too expensive.
Oh, and I thought about ES puts, but I am electronic-only and I think the contraqcts only go out to Dec 2006. I am looking at the big S&P pit-traded futures contract, but have to get setup to trade pit futures. I will probably only buy a few puts for Dec 07 on this contract - not sure.
Also looking for ways to play the dollar without going pure currency. Looked at the currency ETF's but none of them have options, so may just stick with the CME eurodollar contract and gold. Any ideas on currency exposure to franc, krona, euro, yen without opening a currency trading account?
A constructive way of negating my long-dated OTM put strategy would be to outline why there's going to be a "soft landing" and no U.S recession... rather than telling me I'm buying lottery tickets.
Does anyone else have an idea for a play on this event (or similar) with same/better leverage? I'd love to hear it...
A mild recession in 2001, was it? Over 800,000 jobs were lost in a 50 square mile area where I live. The State of California had to extend unemployment benefits twice, while Stanford MBAs contended with each other for Barista positions at Starbucks. Buildings that were newly built in 2000 and 2001 were never occupied, and still sit vacant today beside other empty shells of what were once billion dollar companies. What economists called a "mild recession" was more like total devastation here at ground zero.
Anyway, good luck with your high-implied-volatility-fat-tail gamble, because you are going to need it.
-segv
Total devastation you say? Hardly. I think the current 20-something generation has been spared the agony of deep and protracted recessions. Maybe some of your fellow traders who were around in the 80's can enlighten you?
My friend, the 2001 recession was like a bad dinner party with the in-laws. This one may look like a brawl at the dinner table...
Consider that in 2001 after the bubble burst, alot of wealthy people lost money on NASDAQ stocks, and alot of NASDAQ companies went belly up.
However.
Energy prices were much lower. Now they are much higher and will stay that way.
The consumer was enjoying REAL wage growth and the fruits of a housing boom (final stretch). Now, the consumer is in debt, has no savings, and enjoys wage growth that has NOT kept pace with inflation. Consumer spending is the largest part of aggregate demand and helped cushion the econny during the last recession in the absence of business spending. Let's not forget the govt (broke) and business (low/no growth = lower revenues + rising costs = cost cutting and REDUCED SPENDING ON INVESTMENT AND CAPEX) will not be able to help save the economy this time around. All three are broke, consumer, gov, businesses. I should point out that the hosuing slowdown has a triple whammy effect on the economy b/c of the a) wealth effect on consumers b) increased consumer spending from home equity withdrawal c) jobs, jobs, and more jobs
The Fed was able to cut rates to 1% to avoid a deflationary spiral - this stimulated the economy and also fueled the crazy mortgage-finance-housing-boom, a boom that not only increased the WEALTH of the avg consumer, but also created about 30% of new jobs. The Fed can't cut rates so easily now since inflation s lurking in the system. House prices and oil prices have exacerbated the inflation problem.
energy, housing, interest rates. and let's not forget the record CA deficit that could prompt a dollar crisis if the Fed is forced to ease rates while int'l central banks are raising rates. This means dollar devaluation, dollars being shifted out of int'l treasuries, dollar crisis. Let's not even talk about the adverse effect on foreign economies at the severe reduction in US consumer demand for their goods? Can you say China slowdown? China's investment mix is unbalanced towards the export side and will not be able to generate enough domestic demand to make up for all of the US consumers who are NOT buying anymore.
Face it. The US economy is going to face the music and there could possibly be worse things in store (the administration's foreign policy coming around full circle, whether through unrest, political conflict over trade/policy issues, or further terrorist attacks). Housing and energy have the potential to become mini-crises in and of themselves, but combine tema nd add inflation and you have too many risks on the table at the same time. The sht is already on its way to the fan.
I'm not a doomsdayer or anything like that. But I wasn't raised in this country and am not "fooled" by the capitalist misdirection and double-talk that is so uniquely American.
Ironically, it won't be me who needs the luck. It will be the people who end up defaulting on their mortgages, losing their jobs, and losing significant life and pension savings in the equity markets...
Now, you can't say you never saw it coming.
