1/15 Morningline: The Inflation Puppeteer at Play

The price of the longest-term Treasury bonds, issued for periods of 20 and 30 years, gapped up by 3/4 of a percent this morning. Since trading opened yesterday, the bonds have risen 1.6 percent.

The Consumer Price Index, released today before the start of trading, showed very low inflation. Interest rates on bonds are typically a premium over and above the inflation rate. With expectations of lower inflation, the market prices in lower rates when selling bonds by lower the bond price.

The CPI is a like a gigantic global puppeteer. It pulls one string, and all of the world's economic arms and legs and heads spring into motion. . . .

The euro declined sharply against the dollar in forex trading of the two currencies. The EUR/USD chart shows a bear signal and a 0.9% decline today in the amount of U.S. currency a euro will buy. Companies dealing in foreign currencies generally don't want to the see the value of their money eroded by inflation and so are willing to pay more for the dollar. Gold, a hedge against inflation, is down a bit, as is oil, which is priced globally in dollars. If the dollar is worth more, it takes fewer of them to buy a barrel of crude. And if inflation is under control, there's less need to store your wealth in gold to preserve its value.

Note that unlike the Treasuries, corporate junk bonds barely showed a blip. They're more sensitive to default rates than to interest rates.

Blue chip stocks were down 3/4 of a percent, and the VIX fear index was up 6% from the open. I'm always reluctant to assign a cause to stock market movements. Bonds and forex are fairly simple compared to the complexity of stocks.

It's options expiration day for my holdings in Coca-Cola and Las Vegas Sands.

Coke is a four-legged options construction called an iron condor, which means that it is profitable within a certain range, but not above or below it. Coke has been flirting with the upper limit of maximum profitability and before the markets opened moved past the limit briefly, but it is now declining to a point safely with the area of profit.

Las Vegas Sands, the casino, is a covered call and is trading well above my basis, so it will almost certainly expire with the profit.

Let's look at the numbers . . .

Note a change in my method. I have in the past given opening prices. Beginning today I'll be giving the prices the shares are trading at as I write. The signals show the last signal before today, since any signalling doesn't become valid until the close. (They sometimes disappear during the trading day.)

Indicators:

• Blue chip stocks (SPY) is trading at 113.86, entered bull mode at close on Jan. 4 (at 113.33)
• Fear index or volatility (VIX) 18.63, bear (bullish for stocks), Jan.5 (19.35)
• Treasury long bonds (TLT) 91.19, bull, Jan. 12 (90.32)
• Corporate junk bonds (JNK) 39.88, bear, Jan. 13 (39.85)
• Gold (GLD) 110.45, bear, Jan. 12 (110.49)
• Oil (USO) 38.73, bear, Jan. 12, (39.63)

Forex currency pairs:

• Dollars per euro (EUR/USD) 1.4372, bull, Jan. 11 (1.4512)
• Yen per dollar (USD/JPY) 90.92, bear, Jan. 12 (90.97)

Stock options holdings, January expiry:

• KO, iron condor (p50/-p52.5/-c57.5/c60) 56.63, bull, Jan. 12 (56.88)
• LVS, covered call (-c16) 18.27, bull, Jan. 4 (16.62)
  

Stock options holdings, February expiry:

• CVS, iron condor (p29/-p31/-c34/c36) 33.87, bull, Jan. 5 (32.85)
  
• MRVL, bull put spread (p20/-p22.5) 20.05, bear, Jan. 12 (20.36)
• ORCL, bull put spread (p25/-p27)  25.32, bull, Jan. 13 (24.80)
  

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Topics:
S&P 500, SPDR, Spiders, Treasury bonds, high-yield corporate junk bonds, gold, precious metals, oil, petroleum, CVS, pharmacies, drugs Coca-Cola, Las Vegas Sands, gambling, resort, Marvell Technology, Oracle.