A Dangerous Bet on Lower Volatility
Yellen testifies to Congress... The Fed says more rate hikes are coming... More signs that inflation is stirring... A dangerous bet on lower volatility... Crude could be headed for a big decline... Porter: 'My whole career has been leading up to this'...
Today marked the first day of the Federal Reserve's two-day, semiannual report to Congress...
Fed Chair Janet Yellen appeared before the U.S. Senate today, and she will speak to the House of Representatives tomorrow.
In today's speech, Yellen confirmed that the Fed believes up to three additional rate increases will be appropriate if inflation continues to rise and the economy continues to improve. She also warned that waiting too long to raise rates would be "unwise" and could require the Fed to raise rates rapidly, potentially disrupting the economy. Finally, she said she would consider every Fed meeting to be "in play" for a potential rate increase at this point.
In sum, Yellen's remarks suggest the Fed's forecast of three additional rate hikes this year remains unchanged. And while she didn't specify when the next hike could come, they also suggest the next increase could be coming as soon as next month.
Why? Because as our colleague Scott Garliss noted in the Stansberry Newswire this morning, the Fed tends to change monetary policy only at meetings with a scheduled press conference... in other words, at meetings where it can explain its changes. And there are only four remaining meetings with scheduled conferences left this year: in March, June, September, and December.
As regular readers know, history suggests Fed rate hikes tend to be bullish for the broad market. But Scott notes this could be especially bullish for banks and financial stocks. For the first time in years, rising rates should lead to increases in net interest margin – or the difference between how much a firm pays to borrow and how much it makes on loans.
Speaking of inflation, the latest data out of China suggest U.S. prices could continue to move higher...
China's National Bureau of Statistics reported China's producer price index ("PPI") – a measure of wholesale prices – rose at a 6.9% annualized rate in January. This is the fastest rate since August 2011...
Likewise, Chinese consumer prices rose a more-than-expected 2.5% annualized last month, the fastest rate since 2013...
Why is this important? Since China is one of the largest exporters of consumer goods to the U.S., Chinese prices tend to be a leading indicator of prices here.
Here in the U.S., producer prices also continue to hit multiyear highs...
This morning, the U.S. Department of Labor reported that U.S. wholesale prices jumped in January by the most since September 2012. As Bloomberg reported...
The 0.6% gain in the producer-price index followed a 0.2% advance the prior month, a Labor Department report showed Tuesday. The median forecast in a Bloomberg survey called for a 0.3% rise. The measure was up 1.6% from a year earlier, also more than forecast...
The pickup in prices, which also reflected higher retailer and wholesaler margins, is the latest signal that broader inflation continues to move toward the goal of Federal Reserve policy makers.
Regular Digest readers also know stock market volatility has plunged...
As we wrote in the February 1 Digest...
The CBOE Volatility Index (VIX) – the market's so-called "fear gauge" – fell to an intraday low of just 9.97. Investors haven't been this complacent in nearly 10 years, since early 2007...
As you can see in the chart above, if there's one certainty in the markets it's this: Periods of market calm and complacency (when the VIX falls into the teens or lower) are always followed by periods of volatility and fear (when it leaps past 20).
We couldn't help but think of this chart this morning... According to reports, record numbers of individual investors have been piling into the "short volatility" trade via exchange-traded vehicles like the VelocityShares Daily Inverse VIX Short-Term Fund (XIV).
As you can see in the following chart, XIV shares have more than doubled since November's election as volatility plunged...
These folks are probably feeling smart right now. But you'll also notice XIV has quickly plunged by up to 50% multiple times as volatility has spiked... including a loss of nearly half its value in a single day in the fall of 2015.
We suspect these folks may be surprised by how quickly their gains disappear when fear inevitably returns.
Is oil on the verge of a big decline?
Yesterday, oil cartel OPEC was in the headlines again after reporting it had slashed its production by nearly 900,000 barrels per day ("bpd") last month. As the Wall Street Journal reported...
OPEC's January oil production fell by 890,000 barrels a day compared with December, the cartel said Monday, confirming that its members have so far largely complied with an agreement to slash output.
Data from secondary sources showed that the cuts agreed on Nov. 30 by the Organization of the Petroleum Exporting Countries have been implemented. Production from OPEC members in January was 32.139 million barrels a day compared with 33.029 million bpd in December.
OPEC also raised its forecast for global oil demand to 1.2 million bpd this year, which would be "well above" the 1 million bpd average over the last 10 years.
The message is clear: OPEC is doing its best to "talk up" oil prices. Only, as you can see in the chart below, it hasn't been working...
After jumping higher following initial news of OPEC's deal, prices have been stuck in a trading range ever since. Despite ongoing reports that that OPEC members were cutting production as promised, prices have essentially gone nowhere. And when markets stop rising on good news, it can be the first warning of an impending reversal.
We've discussed the bearish implications of extreme trader sentiment and rising U.S. shale production... If OPEC falls even a little short of its promises, prices could plunge.
Finally, we'll end today with a quick reminder...
Tomorrow night at 8 p.m. Eastern time, Porter and Stansberry Research senior analyst Bryan Beach will be sharing all the details on their brand-new "10x Project" research.
As Porter explained in Friday's Digest, this research has uncovered a strategy that sounds almost too good to be true: a way to turn our best ideas – investments in safe, high-quality stocks – into absolute home runs.
In fact, this strategy promises to allow individual investors to earn up to 50% or more each and every year in regular stocks... without using leverage, options, or anything risky.
Again, Porter will be explaining it all... and showing you step by step how you can use this strategy for yourself... live, on air tomorrow night at 8 p.m. Eastern time. Attendance is absolutely free for Stansberry Research readers. Simply click here now to reserve your spot.
New 52-week highs (as of 2/13/17): Bank of China (3988.HK), Apple (AAPL), American Financial (AFG), AMETEK (AME), American Express (AXP), Axis Capital (AXS), Bancroft Fund (BCV), iShares MSCI BRIC Fund (BKF), Bank of Montreal (BMO), CBRE Group (CBG), First Trust Nasdaq Cybersecurity Fund (CIBR), CommScope (COMM), Cisco Systems (CSCO), iShares Select Dividend Fund (DVY), WisdomTree Japan Hedged SmallCap Equity Fund (DXJS), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), Goodyear Tire & Rubber (GT), Huntington Ingalls Industries (HII), PureFunds ISE Mobile Payments Fund (IPAY), iPath Bloomberg Copper Subindex Total Return Fund (JJC), iShares MSCI Global Metals & Mining Producers Fund (PICK), PNC Financial Warrants (PNC-WT), Shopify (SHOP), Stanley Black & Decker (SWK), TTM Technologies (TTMI), Global X Uranium Fund (URA), ProShares Ultra Financials Fund (UYG), and W.R. Berkley (WRB).
Do you have any questions about Porter's "10x Project" ahead of tomorrow night's live event? Let us know at feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
February 14, 2017