TEENAGE ANGST CONTINUES…

When it comes to the Fed, I feel like I’m watching a teeny-bopper romance movie.  Will they, won’t they… the teasing never ends.

Teen heartthrob (said no-one ever) Jerome Powell held interest rates steady yesterday.  HOWEVER, he hinted that rate cuts might be on the table for September.  What a tease…

Here’s what might sway his decision…

First, recent jobless claims are up… clocking in at 249,000, well above the expected 236,000.  This is a new 11 month high, and implies the markets are softening.

Remember the Fed has a dual mandate, the need to keep inflation in check and employment high… While the jobless claims are up, unemployment rates are holding steady.

This could be read as an early sign of the economy slowing - and inflation staying stable.

Second, the Bank of England cut rates today…  It was the first rate cut in 4 years - a cut of 0.25%.  They indicated inflation was holding steady in the UK - so they cut rates.  Might the BOE be paving the way for the Fed?  

With inflation moderating in England, might we see it slow here in the US too?

Third, Consumers are pushing back on higher prices… First it was Lamb Weston (LW) then it was McDonalds (MCD), now Hershey's (HSY).

Nobody wants to pay higher prices any more. 

I recently read an article about companies selling bags of chips and consumers saying NO to the high prices.   As consumers balk at the high consumer goods prices, they’ll naturally look to lower cost replacement goods, or just simply buy less stuff… another datapoint in keeping inflation in check.

So, jobless claims are up, consumer spending is softening, and other countries are already cutting rates.  It’s a perfect situation for a softening economy and moderating inflation.  Ideal for a rate cut!

Why don’t I see Chairman Powell cutting rates? 

He will cut rates.  

My question is when.  If he cuts rates in September, weeks before the Presidential election, he risks the wrath of the politicians.  Powell wants to look as independent as possible… and it’s important the Federal Reserve remains independent of the shifting political winds.

So, I don’t see him sinking into the political morass of a presidential election.  

I think he might cut rates in December or the New Year - but he’s playing political hot potato if he cuts rates in September!

And that brings us to earnings season…

EARNINGS ARE SHOCKING

Apple announces earnings tonight, and I promised to tell you how to make money from the news.  More on that in a moment.

We’ve seen a bunch of consumer facing companies announce weakness, and their stocks were punished.  (See LW, MCD, and HSY noted above)

Where we’ve seen strength is in the Tech space.

Facebook / Meta (META) announced blowout earnings and the stock is up huge… 

Microsoft (MSFT) saw the stock fall after posting good numbers - as analysts wanted to see more revenue from AI.  Management didn’t hype the AI story enough, some thought, causing the stock to soften.

Apple (APPL) announces earnings tonight… I think - if you have some risk capital - you look to buy BEFORE the earnings announcement and capture a move higher.  Wall Street is worried about Apple sales in China and looking for strong growth from the AI space.  I can't help but think Apple will over deliver, and the stock will pop.

Here’s The Lottery Ticket Trade… Apple does trade weekly options - so if you think the stock might pop tonight - you can buy options that expire tomorrow (Aug 2)!

These options are literally a lottery ticket!

As I write this - at / near the money calls and puts are trading for around $4 each - that implies the markets think earnings will move the stock by at least $4 - one way or the other.

Just realize with no time value in these options - if you hit the direction right (Up or down) you’d need to see the stock move by more than $4 to be in the money… and another $4 to show any profit.  That’s an $8 point move on a $220 stock or about 3.6%.

Like I said, I think the stock rallies - but I might be right and I might be wrong!  This is what makes investing fun.

Remember whatever you do - you do at your own risk!

Email me back and let me know if you’re going to buy Apple before earnings… or if maybe you’re going to short the stock.