Big Tech Earnings + FOMC Rate Decision
MUST READ
Good Evening MTR readers, we have a very big day ahead of us tomorrow headlined by the FOMC rate decision where a 25bp cut is widely expected. We will be listening intently to the press conference for any clues as to the end of QT and perhaps the start of a more proactive QE type FOMC once again. As rates fall we suspect credit tightening to occur (counterintuitive) yes we know but, the reality is there are very few winners and a lot of losers lurking in the weeds, we believe credit will be quite abundant for the cash and asset rich crowd but tight for pretty much everyone else. The net interest margin compression will continue to shackle legacy banks who will begin to see their net interest income start to tumble and will in the future have to begin to take extraordinary measures to make up for that risk free interest loss.
You see everyone thinks rate cuts are a sign to buy everything, cheaper money, but in today’s modern monetary mechanics, lower rates leads to tighter interest rate margins and it reduces the overall risk free monetary transfer mechanism from the state to the private sectors who have been enjoying 4% plus risk free rates. For those that don’t believe us, well, its just math and we prove it very simply, the US Govt at $38Tn in debt at 4.5% rates pays around $1.7Trn in debt interest costs. Now do the same math at say 1.5% Federal Funds rate, that same debt at 1.5% is $570Bn…So you see its JUST MATH!
Paying $570Bn vs $1.7Trn is well “inconceivable.” (The Princess Bride version)
But Magnelibra, its not that simple…no dear reader it is that simple, really. But what about inflation?
Then I say what inflation? You mean asset prices?
Well that’s what you get when the FOMC Balance sheet assets goes from $3.8Tn to $8.9Tn in 2 years time, but that is now over, that money has been siphoned through the dolled out hands of the commoner and sitting pretty in both MMMFs and the equity and RE markets, not to mention funding all the private equity GPs, LPs, secondaries, intermediaries and the rest of the circled round robin components of the rent seeking, hoarding top 5% class.
Its no secret honestly, we disposed of the “the stock market is a reflection of the economy” a decade ago, that went away actually in March of 2009 when Congress decided to air drop $1Tn TARP. From that singularity the new modern monetarist regimes were reborn, reconstituted and the old plunge protection team was relegated to the dustbins of history! Most of you were probably not around for Helicopter Hank, but we were, it was a dark day for anyone who preferred our markets have integrity.
As Phil Angelides the Chair of the Financial Crisis Inquiry Commission put it,
So Paulson creates this TARP [Troubled Asset Relief Program] plan. And I guess the way it is written out is he writes it on three pages, and then he goes to Congress and has to sell them on the disaster that is about to happen. What’s your take on that moment?
Well, that moment was the result of everything that had preceded it, you know. And Hank Paulson came before a commission. He said that by the time he became Treasury secretary [in 2006], the toothpaste was out of the tube. In fact, he had been doing a lot of squeezing as the CEO of Goldman Sachs, and in many respects the toothpaste was out of the tube.
So, you know, TARP I think was just emblematic of the slow-footed response, the lack of grasping of the depth of the rot within the financial system. Again, I don’t impugn people’s motives here, but Hank Paulson is the same person who, throughout the spring of 2007, is assuring everyone. And he is Treasury secretary. He has been in the financial marketplace. He is assuring everyone that the subprime crisis will not spill over and there is little risk of that, as is Bernanke.
So look, TARP, like the AIG bailout, is just a manifestation of the mad scramble that has to take place to try to contain the damage from years of neglect in Washington and recklessness on Wall Street. I mean, the bill finally came due. -Frontline
So please don’t lecture us on what the markets are or aren’t, we have 30 years of experience behind us. We know what they are and we want to make it very clear to you exactly what they are.
With that and knowing that all the chips are on the table and heavily invested in what Magnelibra calls the MEGA9, lets just say, nothing but the FOMC itself can stop this train. We know the start of a downturn will come when rates continue to fall and fall, then things get spicy. In fact the Federal Funds rate will be at its lowest level in 3 years after tomorrows cut. Federal Funds will be near 4% down 133bp off the high or a reduction of 27%:
Good thing to for the FOMC who are sitting on $243.5Bn in deferred assets (losses), the lower Fed Funds rate should start to alleviate this assuming the 5yr rate continues down as well:
So we have the FOMC decision, and the big tech giants reporting after the close, which include, META, MSFT and GOOG. We will also be watching CMG and CVNA for consumer sentiment and look at ServiceNow. So plenty of action for risk types to play the casino in the options markets. Speaking of lets look at the option BE or Breakeven straddles to see what they are expecting in regards to the overall moves.
For META we will target the 10/31 expiry $750 strike, the straddle is priced at $51 indicating a 6.8% move. META gets interesting above $780 and below $700. The $730/$700 put spread is trading around $9.15 for a risk/reward of 2.27x, with BE with META near $721. $700 is a massive level that bulls need to maintain:
***That is it for the free look, we reserve the rest of our analytics for our dedicated supporters and subscribers, we cover more options analysis and of course have our daily subscriber data trackers to review as well.***
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