Does the Fed Really “Feel Our Pain?”
According
to CNN, the University of Michigan’s consumer sentiment index plunged to a
preliminary reading of 97.4 in December from a final 107.6 in November. That’s
a pretty clear indication that the consumer has felt what the stock market has
been telling all of us since late March and that is that the economy is
stagnating.
Throw in the stock market debacle, the coldest winter in many years and the highest
energy costs in memory and you can see why sentiment is so bad. Now whether the
Fed “feels our pain†will be clear in a few hours. The vast majority of us
feel the best we will get is a neutral bias, but there is a vocal minority on
Wall Street that is shouting for a rate cut. Personally, I believe we will get
multiple rate cuts, perhaps as many as three 1/4-point moves in 2001, but only a
move from inflation watch to recession watch today.
Clearly, there are investors betting that the Fed move, even just a change in
stance, will benefit financial stocks, as Goldman Sachs
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Stanley
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trading activity.
The action in Goldman is most interesting to us, as dollar-weighted call trades
are hugely outweighing put action. As of 12:30 CST, 1500 January 80 calls have
traded with hardly a sniff of puts trading. Out-the-money call trades are
likewise accelerating. If there are any believers out there, they’ll be looking at the APR
100 — 115 bull call spread. The APR 100s are trading $10 and the APR 115s are
bid $5. That’s only $5 for that 15-point bull call spread, which would look
like a million bucks if we get a January rate cut!
The volatility indexes we track are still on the high side, but they are down an
average of 3% from yesterday.
