Traders raising cash ahead of Fed meeting

causing a sea of red

The market is a sea of red this morning. I hope you all have capital to deploy because today looks like a great day to buy. Traders are nervous ahead of the Fed’s meeting on Wednesday. In addition, preliminary numbers coming out of the Markit Purchasing Managers Index (PMI) show the economy on the verge of contraction.

Above is the composite index. As a reminder, anything above 50 and the economy is considered to be expanding. When the number drops below 50, the economy is contracting. At 50.8 the composite index is barely in expanding territory. When split into manufacturing and services, manufacturing came in at 55.0 while services came in at 50.9. This was a big surprise to investors this morning as consensus forecasts pegged the composite to be 56.7, manufacturing at 57 and services at 56.

Chief Business Economist at IHS Markit, Chris Williamson, placed the majority of the blame at the feet of the Omicron variant.

“Soaring virus cases have brought the US economy to a near standstill at the start of the year, with businesses disrupted by worsening supply chain delays and staff shortages, with new restrictions to control the spread of Omicron adding to firms’ headwinds.

However, output has been affected by Omicron much more than demand, with robust growth of new business inflows hinting that growth will pick up again once restrictions are relaxed. Furthermore, although supply chain delays continued to prove a persistent drag on the pace of economic growth, linked to port congestion and shipping shortages, the overall rate of supply chain deterioration has eased compared to that seen throughout much of the second half of last year. This has in turn helped lift manufacturing optimism about the year ahead to the highest for over a year, and has also helped bring the rate of raw material price inflation down sharply. Thus, despite the survey signalling a disappointing start to the year, there are some encouraging signals for the near-term outlook.”

Omicron is causing businesses to have to deal with employees calling in sick. This is what is putting pressure on businesses. While some might be dealing with restrictions mandated by public health nuts, most are struggling to get workers in the door. This is not a surprise as we are near the seasonal peak in cases.

Last year the cases peaked on January 8th. This year it looks like cases peaked January 7th. Democrats have read the tea leaves and will not be forcing lockdowns. They saw what wreckage that caused the economy for Trump and do not want that hovering over them come November.

Concerning Covid, we are starting to see more people come back to the side of reality. Recently Bari Weiss was on Bill Maher’s show and really let loose on the covid-crazies. Bari is the former editor of the New York Time’s opinion section. Her and Bill both lean heavily left. Neither fall into the far-left cancel culture category. Both have now declared themselves to be “done with COVID”. This is pretty amazing stuff here. It shows the the moderates in the Democrat party have awoken. This is shifting the majority opinion into the “lets treat covid like the flu” camp.

Traders are also facing a serious data dump of a week. We have the S&P-Case/Shiller House Price Index coming out tomorrow. In addition, the Fed will post the money stock numbers. These two pieces will really give us a good look at what is going on with the economy.

Wednesday sees the FOMC meeting end with a press conference and talk of interest rates and tapers. I expect that Jerome Powell, Fed Chairman, to make a very dovish speech in an attempt to elevate the markets. Joe Biden is putting pressure on the Fed to control inflation and not crash the market. Old Joe’s bumbling speech last week was a train wreck and an embarrassment as many in his administration spent the next three days walking back just about everything he said. One thing that wasn’t walked back was his talking point about how the Fed needs to reel in inflation.

On Thursday, the GDP and consumer spending are both posted. Investors are looking for the GDP to expand at a 5.5% rate. While I consider GDP to be worthless data, traders hone in on it and will trade around it. This can cause market fluctuations when that data gets released.

Finally, Friday will have the personal income and outlays data. This includes the Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation indicator.

In total, today is a day to buy. Traders have overreacted to the Markit data and are overly concerned about Powell’s comments on Wednesday. Oil and silver look especially good here. I’m going long USO calls for July. The longer the duration the better. I may add more throughout the week. The upside for oil is high. As for silver, I’m not looking at options on it yet. Holding shares of PSLV or SLV and buying physical is my preferred route at this time. I also think ZIM and UUUU look very appealing today. As I type UUUU has regained much of it’s early drop.

Full Disclosure, I own shares of ZIM and UUUU, USO call options, and physical gold and silver.