Money Guide
Staying on the sidelines during FOMC. Also: Indicators, Weekly Agenda, News, Musings, Opportunities.
In this issue: US Q3 GDP growth, US-Saudi Arabia tensions, Threats of a US freight strike, Long-term uncertainty, Bad Big Tech Q3 earnings, A great Crypto summary, Venezuelan bonds, Rare earth metals, and thoughts on Staying on the sidelines during FOMC.
Indicators
Previous update: October 23rd, 2022
🟢=positive 🔴=negative ⚪=neutral
▲=increase ▼=decrease ─=no change
🟢 ▼ US Inflation: 8.20% (vs 8.30% Aug '22)
🔴 ▲ US Funds Rate: 3.25% (vs 2.50% Jul '22)
🟢 ▼ US 02Y T-Note (Yield): 4.42% (vs 4.47%)
🟢 ▼ US 10Y T-Note (Yield): 4.02% (vs 4.20%)
🟢 ▼ DXY index: 110.66 (-1.08% vs 111.87)
🟢 ▼ USDEUR: 1.00 (-0.99% vs 1.01)
🔴 ▲ EU Inflation: 9.90% (vs 9.10% Aug '22)
🔴 ▲ EU Funds Rate: 1.50% (vs 0.75% Sep '22)
🟢 ▼ USDMXN: 19.79 (-0.60% vs 19.91)
🔴 ▲ MX Inflation: 8.76% (vs 8.70% Aug '22)
🔴 ▲ MX Funds Rate: 9.25% (vs 8.50% Aug '22)
⚪ ─ MX Cetes 364D (Yield): 10.88% (vs 10.88%)
🟢 ▲ DJIA: 32885.00 (+5.23% vs 31251.00)
🟢 ▲ S&P 500: 3911.50 (+3.99% vs 3761.40)
🟢 ▲ NDQ100: 11560.50 (+1.22% vs 11421.00)
🟢 ▲ RUT: 1848.80 (+5.24% vs 1756.70)
🔴 ▲ Brent Oil: 95.65 (+1.92% vs 93.85)
🔴 ▲ GSCI: 636.53 (+1.75% vs 625.58)
🟢 ▼ Gold: 1644.99 (-0.76% vs 1657.66)
🟢 ▲ BTC: 20629.21 (+5.40% vs 19572.20)
🟢 ▲ ETH: 1591.41 (+16.66% vs 1364.09)
Overall weekly (past): 🟢 ▲
Overall mid-term (future): 🔴 ▼
Weekly Agenda
Monday: EU GDP report, EU inflation report
Tuesday: US ISM manufacturing index report
Wednesday: US Fed rate decision (FOMC), US ADP jobs report, GER PMI report
Thursday: ENG rate decision, US ISM services index report
Friday: US jobs report
Q3 Earnings reports during the week
News
🟢 US GDP accelerated at 2.6% pace in Q3, better than expected as growth turns positive | US Gross domestic product was expected to grow at a 2.3% annualized pace in the third quarter, according to Dow Jones. The US economy posted its first period of positive growth for 2022 in the third quarter, at least temporarily easing recession fears (link)
🔴 America and Saudi Arabia are locked in a bitter battle over oil. The stakes are massive | The relationship between the United States and Saudi Arabia is one of the most important on the planet. Angry officials in Washington vowed “consequences” after Saudi-led OPEC sharply cut oil production earlier this month, driving up pump prices just weeks before the midterm elections. US lawmakers are threatening steps that were unthinkable not long ago, including banning weapons sales to Saudi Arabia and unleashing the Justice Department to file a lawsuit against the country and other OPEC members for collusion (link)
🔴 Threat of rail strike rises as members of another union reject proposed labor deal | Rank and file members of another railroad union have rejected a tentative labor deal, a move that further raises the odds that America's freight railroad workers will go on strike sometime next month (link)
🔴 Wall Street sinks billions into ETFs on both ends of Treasury yield curve | Wall Street divisions are growing on what’s next for the beaten-up world of Treasuries as the Federal Reserve’s aggressive tightening ramps up the risk of a recession by the day (link)
🔴 Big Tech falters on Q3 2022 results as Meta has worst week ever | While Apple gave Wall Street a reason to cheer, the other Big Tech companies showed how challenging the economic environment has become for their businesses (link)
🔴 Facebook doubles down on metaverse spending despite calls to cut costs | Facebook and Mark Zuckerberg just raised a giant middle finger to Wall Street. The company says its metaverse business will lose even more money next year. Facebook has already lost nearly $10 billion this year on Reality Labs, which handles metaverse projects (link)
🔴 First US bitcoin ETF loses record amount in its initial year | BITO’s 70 per cent decline suggests it has burnt through $1.2bn of investors’ cash (link)
Musings
Stock picking isn't dead. But it might as well be for most investors | Plenty of active traders are out there trying to make a quick buck on meme stocks like AMC and GameStop, fads like Snap and Peloton or bitcoin and other cryptocurrencies. Professional money managers try to identify stocks that can beat the broader market over the long haul. But for most individual investors, a strategy of buying and holding so-called passive funds that track top indexes like the S&P 500 and Nasdaq 100 makes the most sense if you want to accumulate wealth for retirement (link)
The only Crypto story you need, by Matt Levine | Where it came from, what it all means, and why it still matters (link)
10 Takeaways from Matt Levine’s ‘The Crypto Story’ | Bloomberg Businessweek just dropped 40,000 words on you. But at least it’s from one of the best financial writers around! Here’s a cheat sheet (link)
Opportunities
Two-Cent Venezuela bonds lure traders hunting lottery-like score | It’s one of the most outlandish bets in global credit markets: Buying up defaulted bonds sold by a country under sanctions that leave US investors locked out of the market. Somewhat akin to buying a lottery ticket, a handful of Latin American and European funds are dipping their toes into Venezuelan securities, encouraged by signs of thawing tension between Washington and Caracas (link)
Researchers find possible replacement for rare-earth in magnets | Scientists may have discovered a method for making magnets used in wind turbines and electric cars without the rare-earth metals that are almost exclusively produced in China (link)
Staying on the sidelines during FOMC
The Federal Open Market Committee (FOMC) meetings are held by the US Federal Reserve at pre-defined dates, roughly every month. The members of the commitee evaluate and define the US monetary policy, mainly through changes to the Target Federal Funds Rate and to the US Fed assets and liabilities. In common terms: how cheap or expensive will borrowing money be, and how much money will it supply (or sustract) from the economy by buying (or selling) US Treasury Bonds (or other financial products, like Mortgage Backed Securities).
The FOMC meetings have become appointment viewing for financial analysts, since those two variables directly influence the growth or contraction of the economy as a whole.
A couple of weeks ago, I wrote about the current Fed strategy:
Right now, the US Federal Reserve is trying to fight inflation by using its most powerful tool: raising interest rates.
The Fed rises the Funds Rate, which is the rate at which banks lend money to each other. All other rates are dependent on that one, because each step adds additional interest until it gets to mortgages, credit card rates, commercial loans, etcetera
By raising rates, money becomes more expensive to borrow, and interest makes future money more valuable. The overall result is a reduction on the general economic activity, and the market forces that normally push prices higher (investing, development and supply/demand dynamics).
The consequences are somewhat obvious: unemployment (as explained by the Phillips Curve) and prices dropping (including commodities, products, services, bonds, stocks, and almost everything else).
(Click here to read the full piece)
Probably every asset class is affected by the FOMC decisions. Those decisions are made public on Wednesdays at 14:00 ET (US), followed by a Press conference at 14:30 ET (US). How do the markets react to these events?
Around the September FOMC announcement, the S&P 500 index experienced a 2% swing on each direction, and then fell more than that 2%. The historical average daily volatility for this index is close to 1.4%. For Bitcoin (BTC), the swing was closer to 5%.
Why is this happening? Obviously, there are many market participants analyzing the announcements (using different tools), arriving at different conclusions as to the effect of them on their holdings. There are differences between the information that is published at 14:00 and the comments made during the press conference at 14:30. When those market participants open, close or change their positions, in such a short amount of time, they cause a lot of volatility. And there is an additional ingredient that amplifies the noise level: automated trading systems.
When we think about automated trading, most of the time we picture bots and complex algorithms. And, certainly, they exist. But most automated trades and algorithms are very simple: limit orders, stop-loss orders, and take-profit orders. Almost anyone can setup one of those orders with some preset values to execute when those values are reached.
Volatility during FOMC announcements, can trigger lots of automated orders. For example: if the price falls, stop orders to sell and exit positions are executed and that drives the price down even further, and when the price reaches an attractive level, limit orders to buy are executed and push the price upwards. Those orders are not executed all at the same time, so the cumulative effect tends to be chaotic.
And then, on top of that, there are those very complex automated systems, reacting on real time to market movements, and even parsing the transcripts of the announcements looking for predefined relevant values and terms. Those systems appear to go crazy everytime, contributing to the amplified noise and feeding off of it.
The next FOMC meeting is scheduled for this week. More often than not, those volatility swings can derail a trading strategy. I’ve learned the hard way to stay out of the way.
take care, have fun, be chill
-SM
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