Hakuna Matata? No worries? The Eastern African phrase taken from the Swahili language and popularized in Disney's (DIS) "The Lion King" might be more accurately translated as "no problems." At least that's what Wikipedia tells me. The CBOE Volatility Index, frequently referred to as the VIX has run sideways over the past couple of days, after finding support almost precisely where it has all year.
I find the VIX perhaps less useful as a tool than do some other traders. Any of you wonderful kids see the CBOE Put/Call ratio for Tuesday. This end of day print, at least for me, illustrates just how motivated traders were through the course of any give trading session to actually seek to purchase or sell protection, to feel a need to incur extra expense. Check this out...
At 0.63, Tuesday's CBOE Put/Call ratio actually suggests market confidence, or should we say "lack of concern" on a day that the markets really moved sideways at levels rarely approached since the presidential election in November of 2016.
Are you sure, Sarge? Is the water safe? The answer would be that yes, the options market does suggest this higher confidence, but this answer in reality is a little more convoluted that just a simple glance at these numbers. Let me explain...
Readers will note that once we sift out the noise, or options relative to broader market performance, that the CBOE Equity Put/Call ratio is just 0.53 which sounds very positive. Yet, we'll note that when it comes to equities, the 50 day SMA for this ratio has been drifting lower, and now stands at 0.60, the 200 day at 0.64. This ratio was actually lower (or more worry free) last Wednesday and last Thursday, as well as in November.
In fact, according to the CBOE equity put/call ratio, 2019 has been a rather quiet year. The great selloff of December 2018 was the last time that volume of equity puts actually exceeded that of equity calls as of the end of any given trading session.
So, yes... the water does appear to be safe, or at least that is the opinion of equity traders as expressed through volume in overt vehicles meant to provide protection. But, and this is a big but... not really that much more so than has now become commonplace.
Not So Fast, My Friend
As U.S. financial markets have basked in the welcomed warmth of what seems to be a burgeoning environment better for trade with China as well as our North American neighbors, new threats to economic tranquility will arise. No rest for the weary, you say? Try "no rest for the wicked" for when we get tired, we adapt, we find a new way, digging deeper we find more. We turn our attention, not in the least bit eagerly, but fully focused on what comes next, and two immediate threats force that focus, at least for me...
1)... The United States Navy has long enjoyed global superiority on the seas, and has been able to use aircraft carriers as means to project U.S. power and influence wherever and whenever necessary. The U.S. fleet of 11 more traditional nuclear powered aircraft carriers carrying roughly 80 fighter aircraft apiece have no earthly peer. In addition, the U.S. Naval fleet includes another nine amphibious assault ships. These ships carry helicopters as well as up to 20 fighter craft capable of making short runway takeoffs and landings.
On Tuesday, The Chinese Navy entered into service its first ever domestically built aircraft carrier, the Shandong. This carrier brings the Chinese naval fleet of aircraft carriers to two, having purchased the Liaoning from Ukraine's Navy in the years after the end of the Cold War. That ship has been used primarily for training purposes. The new ship is larger, and has room for 36 fighter craft. Chinese plans unveiled in the past suggest that this program will result in a fleet of six carriers, with four of them nuclear powered. Satellite photos show another carrier currently under construction in Shanghai.
A threat to the U.S. Navy's long understood supremacy? Not globally, at least not yet. Regionally? That's a different ballgame. Think the Chinese Navy won't use air power to project influence over Japan, the Korean peninsula, the autonomous government in Taiwan, or southeast Asia? Think again. Even if the Chinese decide that they need a whole lot of soybeans, and a whole lot of pigs, this makes real the threat of what could become without much provocation, a world divided into spheres of influence. Heck, some might say it already is.
2)... Happen to catch U.S. Trade Representative Robert Lighthizer on the Fox Business Network with Maria Bartiromo on Tuesday? Yes, Lighthizer expressed confidence that the U.S./China trade deal accomplished much that would address the trade imbalance between the two nations, as well as in mechanisms meant to enhance enforcement.
Lighthizer also mentioned the U.S. $180 billion trade deficit with the European Union. The implication here is that now with a trade truce in place with China, and with the USMCA all but done, President Trump will turn his focus on addressing barriers to trade in Europe faced by U.S. exporters, as well as taxes placed on U.S. technology based businesses by European governments. Does a trade war with Europe become the "next market threat"? Would one be so foolish as the calendar turns from one decade to the next to be surprised at this point by anything? I think not.
Not really. Keep in mind that a couple of weeks back, BLS data for job creation skyrocketed way beyond expectations for November, while dragging upward revisions to past months along with it. That however had come on the heels of some lousy ISM Manufacturing numbers for November. Then some weak looking results for Retail Sales hit the tape (Cyber Monday was in December). Morale started to sag.
Fast forward a couple of weeks, and now we know that Industrial Production exploded to the upside in November on increased capacity utilization. Manufacturing Production was not a drag on the headline. I repeat... was not a drag. What happened? General Motors (GM) got back to work. We also know home builders ripped the cover off of the ball in November and remained supremely confident into December. In addition, we also now know that job openings across the nation rebounded in October after a September slump.
According to the Bureau of Labor Statistics, there are a rough 5.2 million unemployed persons in the U.S. labor force. Also, according to the Bureau of Labor Statistics, employers would like to fill 7.2 million open positions. Remember in mid-November when the Atlanta Fed's GDPNow model for the fourth quarter was "humming" along at 0.3%? Haven't heard much about that model of late have you? Know why? The model has screamed all the way to 2.3% in a month's time, up from 2.0% before Tuesday's data for November Housing Starts and Industrial Production made these headlines.
This Friday we'll see some numbers for November personal consumption. Atlanta will update the model by mid-morning that day. To tell you the truth, I can hardly wait. There will also be some data for consumer level inflation released on Friday. Along those lines...
In Through The Out Door
On Tuesday, President Trump tweeted out once again that it "would be sooo great if the Fed would further lower interest rates and quantitative ease. The Dollar is very strong against other currencies and there is almost no inflation. This is the time to do it. Exports would zoom!" Oh the media went crazy. I had to laugh just a bit. I think it obvious to anyone with an IQ above that of a toad, that this president pushes for far more than he ever expects, and then keeps the pressure on. Yet, "they" go for the bait every time.
If what the president wants is really "lower for longer", he may just get his wish. On the very same day of that tweet, Boston Fed President Eric Rosengren, an outgoing voting member of the FOMC in 2019, indicated that this is the time for the Fed to be "patient for a material period of time until we actually see a significant change in the outlook." Almost simultaneously, Dallas Fed President Robert Kaplan, an incoming voting member of the FOMC for 2020, stated, "I've got penciled in no change, I think the appropriate path of policy is to stay where we are."
It may be of note, that Rosengren dissented on all three rate cuts in 2019, and that while not a voter, Kaplan had been supportive of the Fed's trajectory. Meeting of the minds? Central agenda? Something creative in the works regarding short-term liquidity? My hunch is that the answer is "yes."
Has it bottomed? Not if central banks around the globe fully digitize their currencies.
Speaking of Disney Movies
Disney's movie studio has already rung the register this year. Six, count 'em... Six billion dollar hits after "Frozen II" scored big. This coming weekend, the firm's latest release "Star Wars: the Rise of Skywalker" opens across North America. Expectations are for something in the $175 million to $205 million for this weekend in this region.
The success or lack thereof will have great implications for the future of this franchise within the Disney universe. It's the last of the current trilogy, the franchise though a strong enough performer has badly underperformed in comparison with another Disney franchise, that of Marvel comics, and on top of all that pressure, this is the last Star Wars movie that the firm plans to release for at least three years.
Economics (All Times Eastern)
10:30 - Oil Inventories (Weekly): Last +822K.
10:30 - Gasoline Stocks (Weekly): Last +5.405M.
The Fed (All Times Eastern)
05:15 - Speaker: Reserve Board Gov. Lael Brainard.
12:40 - Speaker: Chicago Fed Pres. Charles Evans.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (MU) (.48)