Weekly Update 09/12/2023
Oil Prices Surge!
Morgan Stanley: Tesla’s Dojo Supercomputer could add $500B in Market Value
Investors Brace for Key Economic Data as Fed Meeting Looms
Nasdaq Leads Recovery from Last Week
Weekly Meetings:
INVESTMENT CLUB THURSDAYS 6 PM (BPC188)
INVESTMENT FUND THURSDAYS 8 PM (BPC188)
(MEETINGS BEGIN THIS THURSDAY SEPTEMBER 14th!)
—Market Madness—
Howard: Markets are in an uptrend, so stay long and buy stocks
Big tech stocks lead Wall Street stocks higher
US stocks rose on Monday as a jump in Tesla shares led a rally in mega-cap tech stocks, while investors awaited the closely watched US inflation report later this week. Wall Street’s benchmark S&P 500 finished 0.7 percent higher on Monday, while the tech-focused Nasdaq Composite gained 1.1 percent.
Tesla rose 10.1 percent after Morgan Stanley analysts said the electric car maker could add $500bn in value as its supercomputer Dojo opened new markets to the company. Tesla shares have more than doubled this year, as investors turn to large US tech companies amid heightened enthusiasm for artificial intelligence and concerns about global economic growth. Other heavyweight technology groups also rose on Monday, with all of the Magnificent Seven stocks except Nvidia making gains.“The picture underneath tech has been very mixed,” said Aaron Dunn, co-head of value equity at Eaton Vance Equity. “It’s hard to over-emphasize how much those seven stocks have really impacted market returns this year.”
The S&P 500 has advanced more than 16 percent year to date, while its information technology sector has added 41 percent in the same period. Meanwhile, traders were waiting for US consumer price index data due on Wednesday, with a view to how this latest inflation report could affect the outlook for interest rates through the end of this year. The Federal Reserve is widely expected to hold monetary policy steady at its September meeting next week, but there are mounting concerns that higher oil prices could make inflation harder to tame. That could result in interest rates remaining higher for longer or potentially raised further. “We have seen pretty large increases in WTI or Brent in August relative to August of the previous year, so we are going to see a bounce in inflation everywhere, attributable to that energy effect,” said Chris Jeffery, head of rates and inflation strategy at LGIM.
The Fed May Hold Rates Steady In September, But That Doesn’t Mean It’s Done
Federal Reserve officials have signaled ahead of their next policy meeting this month that they can move slowly in their fight against inflation as the labor market softens and prices tick down from pandemic highs.
That could mean a pause this month. But they have also warned that may not mean the central bank is finished raising rates.
“At this stage, I believe we must proceed gradually, weighing the risk that inflation will be too high against the risk of dampening the economy too much,” Federal Reserve Bank of Dallas president Lorie Logan said in a speech Sept. 7 before the Dallas Business Club.
“Another skip could be appropriate when we meet later this month,” Logan added. “But skipping does not imply stopping. In coming months, further evaluation of the data and outlook could confirm that we need to do more to extinguish inflation.”
Logan’s message echoed comments from other Fed officials in recent days. Boston Federal Reserve president Susan Collins said on Sept. 6 that the central bank should take its time as it looks to bring inflation down, and also warned further rate hikes could be warranted.
“This phase of our policy cycle requires patience, and holistic data assessment, while we stay the course,” Collins said in a speech at the New England Council. “While we may be near, or even at, the peak for policy rates, further tightening could be warranted, depending on the incoming data.”
San Francisco Federal Reserve Bank president Mary Daly also told Yahoo Finance in an August interview that while inflation is coming down, it’s still too high and that there’s still more work to do. Daly left the door open to multiple options.
“Whether we raise another time [or] hold rates steady for a longer period, those things are yet to be determined,” Daly said.
A Way To Generate Income For Adobe Stock Earnings
Adobe (ADBE) is showing an IV percentile of 46%, which means the current level of implied volatility is higher than 46% of all other occurrences in the last 12 months.
When implied volatility is high, it can be a good time to be an option seller rather than a buyer.
Part of the reason for the high volatility in Adobe stock is because the company will report earnings Thursday after the market close.
Option traders can take advantage of the high volatility by selling a strangle. This option trading strategy involves selling an out-of-the-money put and an out-of-the-money call with the same expiration date.
This trade generates a premium for the option seller, but it does come with risks. A short strangle is an unprotected trade, sometimes referred to as a “naked” trade. Naked options can be risky because they expose the trader to potentially unlimited losses if the stock makes a big move.
Big Gains If Adobe Trades Sideways
However, if the trader is right and the stock trades sideways, solid gains are also possible.
Assuming a trader believes that Adobe stock will trade sideways over earnings, they could look to sell a Sept. 15, 525-strike put and a Sept. 15, 600-strike call.
The 525 put can be sold for around $2.50 per share and the 600 call could be sold for around $3.85.
Selling those two options would generate a total of $635 in premium ($2.50 + $3.85 x 100.) That is the maximum possible gain on the trade if Adobe stock closes between 525 and 600 on the day of expiration.
To work out the break-even price of the trade, subtract the total premium received from the put strike price and add the premium to the call strike price.
That gives us break-even prices of 518.65 and 606.35.
Watch Out For Rise In Implied Volatility
This trade is a short vega trade. That means if implied volatility increases early in the trade, losses could occur.
With a trade like this the potential losses are unlimited and a lot higher than the potential gains. So traders want to be very confident that the stock is going to remain flat over the course of the trade.
A stop loss could be placed at the break-even points. Adobe stock has stayed within the expected range following four of the last six earnings reports.
—REAL ESTATE WORLD—
Office sector collapse will cost US banks as much as $250 billion, hedge fund boss says
The commercial real estate market is poised to weigh down US banks that have considerable exposure to the space, according to Hayman Capital Management founder and CIO Kyle Bass.
He identified the main stress to be office space, which continues to see depressed occupancy rates amid ongoing work-from-home and hybrid work trends.
In an interview with Bloomberg TV, Bass estimated that US banks could lose up to $250 billion on their exposure to commercial offices, which would represent about 10% of their combined $2 trillion in equity.
“It’s obvious that office is having enormous difficulties,” Bass said on Monday.
Also weighing on the commercial real estate market is higher interest rates, which should put pressure on landlords that have to refinance their loans in the near term.
Most owners of commercial real estate have been able to take advantage of the near-zero rates over the past decade. But the combination of higher rates and falling property values in the commercial real estate sector could be the one-two punch that leads to losses for banks, as some loans near their maturity.
But other areas of the commercial market should remain solid, like industrial real estate, multifamily housing, and data center spaces, according to Bass.
“When you’re looking at industrial, it’s still performing incredibly well despite the rate hikes. If you look at data centers, you can’t build enough data centers today. I think the AI revolution is causing a giant push for new data centers. When you look at multifamily, multifamily is doing really well,” he said.