When Will The FED Realize They Can't Control Inflation?

How to position your portfolio into these repeated hot inflation prints

The economists at the fed are just that, literally none of them have ever run a business. Im not kidding, see for yourself. Why Is that important?

Welp, today was painful, this recap today will be a little different from the norm. Everything is killed and option flows get weird on days like this because there is so much buying of puts and calls before the FED next week, its hard to make a decision off the activity with all that and a VIX elevated near 30. So what I want to go over instead is the fact that this inflation doesn’t seem to be cooling and the names you should be focusing on. Inflation appears to be ramping. The CPI print came in above expectations, in every category, and equities are down. It appears the FED will have to do more, but, they can’t, so we have a pickle. When people say the FED is stuck, thats bc they’re literally stuck. If they hike too much, they run the risk of causing a US default and if they don’t hike enough, we’re told inflation will run away. The second part is a fallacy. Inflation is out of the hands of the FED. We did QE for over a decade and it didn’t cause inflation, in fact the FED was crying inflation was too low for too long. So what is causing this?

Everyone seems to have these different ideas on how to stop inflation, yet none of them work. Why is that? Because inflation isn’t something an economist can control. It is the byproduct of years of not investing in energy because we were too busy attacking energy companies to appease the clean energy crowd. Energy prices are trickling into everything. Food costs more because it costs more to transport it. Oil costs more because there is alot of demand and alot less supply, why is there less supply? Because we are drilling less here at home and simultaneously pretending like Russian oil is dirtier than oil from Iran,Venezuela, and Saudi Arabia. The jokes literally write themselves. How can the oil from Russia that everyone is pretending to not want be any worse than the oil from the other terrible countries we’re now focused on buying from?

So now we’re stuck, did anyone seel the consumer wages number? Consumers are doing worse than ever, weird how the media keeps telling us how great things are.

So raising interest rates, yes it will slow things like home buying and car sales, sure, but how will that lower the price of gas which is the root cause of everything? The answer is it won’t. Biden keeps calling inflation “The Putin Tax” everytime he speaks, how weak does that make him look? Russia, a country with GDP that is less than the market cap of Apple, is ruining the American Economy? I don’t buy it. Did you just see his live speech? He attacked Exxon saying they made more money than god and blamed their buybacks and greed for inflation. Blaming everyone but himself is just not a good look for the leader of the free world.

So what now? Ok this has become political now, the government is demanding the fed “DO SOMETHING” even thought they can’t do anything so markets are getting slammed. The 10 year is up to 3.14%. In terms of the market, that makes stocks still cheap. Think of stocks this way, if the P/E ratio is 20 then stocks have an earnings yield of 5%. If stocks have a P/E of 10 then the earnings yield is 10%, got it? So if we look at this SPY right now, we have an earnings yield of over 6% and then add in a dividend and you’re at nearly 8% on the market right here vs a 10 year(often called the risk free rate) which is 3.14%. So stocks, assuming there isn’t a huge EPS writedown are still pretty attractive relatively speaking.

Think about it, would you rather own a 10 year note paying 3.14% for 10 years or would you rather buy Google today at 16x earnings ie a 6% earnings yield? Over 10 years what will outperform? People selling these names are really shortisghted in their thinking.

So how do we position? Well although I got my ass kicked today, it was inline with the nasdaq. I repositioned into a lot higher quality names I felt were unjustly hit. Remember when you’re trading there’s no emotions, things change and you have to change, that’s where so many people get hurt. Yesterday i was over 50% long $VET a name tied to European gas which is in very high demand will continue to be for the forseeable future, but guess what? That breakout on the chart I highlighted the other day? It didn’t confirm on the weekly and actually fully reversed and is forming whats called a gravestone candle. The chart is no longer bullish so you cut your losses and move on, the good news with this is EVERYTHING else was down today so whatever you move to was also significantly off.

So I made too many trades today, but I wanted to move to higher quality names so I rotated into this going into next week, names with real earnings, nice charts, and fundamentals. This isn’t the time to own growth names because after this inflation print the fed is going to hike and hike aggressively regardless of if it works.

• Google - because this name is again trading at 16x earnings and has $150B in cash, this is probably the best name in our markets and I cannot believe its at this level. They don’t have the upside of Amazon, but they have enough and on the otherside they have none of the headwinds Amazon has short term with oil and labor costs

• Tesla - not because its cheap, its not expensive, but its not cheap, this is a name I see being a major beneficiary of high oil. Their order book is going to soar in the coming quarters even with high prices bc well you can lease a model 3 for less than a tank of gas. Gas is $7.29 at the station I go to. $200+ a week to fill my SUV, a model 3 can be leased for under $800/mo. A big win for anyone who drives alot.

• Meta - this name is trading at 13x earnings. I hate this company, but the stock is so cheap I don’t even know how much downside it could possibly have left. The only time multiples get this low is when a company is dead, thats not remotely true, facebook makes ALOT of money. $30b+ If they cut the metaverse investment the stock would be up 25% in 1 session if not more.

• Altria - Altria I bought bc it goes Ex div next week. The dividend is north of 7% and the stock was just down 8% 2 days ago. It got a big downgrade but this isn’t news we all know cigarettes are in decline but MO has a great dividend that seemingly always gets bought before ex div, so I can’t not be involved here into next week.

• Cameco - this is the biggest component in the Uraninum ETF, 25% of it. It’s probably the only investable uranimum name if you believe these world governments wake up and invest in nuclear. I actually do believe that is going to happen and its a secular multi year thing. This week there was a massive CCJ 31/39 spread out a few months from now I noted and the stock is $25.xx now. As a trade, I like it, the US made a big move towards uranium this week, which caught a lot of people offguard and sent CCJ up quite a bit before the entire market meltdown.

• Domino’s - this name has been very strong for weeks, I noted the chart yesterday, of course I also noted Home Depot and that got killed today, but that was on a downgrade from an analyst. Domino’s believe it or not outperformed all these megacap tech names over the last 20 years, same with my final name Monster. These are companies where all dips are to be bought and DPZ has had a huge one.

• Monster - this name has had signifcant option flow into the $90 and $92 calls for the next few weeks/months. It’s always been a rumored buyout name and the stock has been consolidating for so long, the chart is near the 200 week and thats where you want to be a buyer.

Finally here is a chart outlook on the market. This is SPY, we are now down 9 of the last 10 weeks on the SPY. We’re below all key shoter term moving averages, this isn’t a bullish setup and yet, I think we’re closer to the end than most think. Will we test that yellow line below? Ya probably, thats why you need to stay aggressive with your call selling but it won’t be a straight line down, we will zig zag and if you stay in mostly cheap names you shouldn’t get hurt. Remember this in your trading journey, just a simple rule of thumb, when the vix is over 27 buy all the stock you can, but never BUY options and when the vix is below 20, start lightening up on stock and BUY puts, today the vix is 28. When fear is elevated, you get more on the puts you sell, you get more on the calls you sell and when the vix cools, which is always does, those options become very profitable even if the actual equity does nothing

I want to close this by saying thank you to all of you who have subscribed, you guys are great. I want to hear from you guys on things you want to see more of. The options data and charts are my main focus, of course I can slip in some deep dives as well but mostly my day to day focus at work is generating income through the options market. Anyways have a great weekend everyone!