Run for your life! Inflation! INFLATION! (VOX,XLK,SPY)

We’ve discussed it numerous times over the last five years, and it finally appears to be coming to pass.

We’re referring, of course, to the ongoing efforts of the U.S. central bank (and others, most notably the European, Chinese, and Japanese CBs) along with our Treasury Department to coordinate a financial reality whereby inflation puts her evil stepsister, deflation, into a merciless choke hold.

 

And to that end, we’ve seen all manner of ZIRPs and JERKs and QEs (not to mention out-and-out buying of stocks and bonds), all orchestrated to get banks to start lending and Joe Q. Public to start spending.

 

Why?

 

Because it cannot be that the economy is left alone to work out its own misallocations in a natural way.

 

No, no.

 

We economic jeanyuses know better, particularly if we have advanced degrees and have written indecipherable papers on just how that inflationary intervention has to proceed.

 

Because if we stick our fingers in the pie in just the right way, and stir it up just so, and extract from it precisely X quantity of jam and lard, all the while smearing the crust with the stem cells of a recently aborted Abyssinian lamb, then LO and BEHOLD, as you can see…

But is it still a pie?

 

Either way, there’s no longer any doubt:

 

  1. We now have two rounds of Fed tightening behind us and another on the way as early as March – if you believe those same jeanyuses on Wall Street.
  2. We have consumer prices rising at their highest rate in the last half decade.

 

  1. And we have retail sales surging at their best pace since 2012, up 5.6% year-over-year:

So just what the Krupp is going on?

 

It’s inflation, friends.  The real thing.  And it’s likely a lot worse than what we’re being Fed.

 

Haha! Get it? FED!?

 

In any event, the Treasury market trades off the ‘official numbers’, so you can expect lower bond prices as we go (commensurate with higher rates), and a great deal of cash streaming into equities from that same asset class.

 

And know it, too – it won’t always be a rational rotation.

 

With higher interest rates challenging diminishing dividend yields on stocks, one would think that the desire to own those same stocks would be subordinated to the certainty of a fixed rate on a guaranteed bond.  And one would be right, unless…

 

  • It was believed that the cycle of rising rates still had a (very) long way to run, and
  • The money flow out of bonds was expected to arrive in the equity market like a Fukushima tsunami.

 

Both of which we believe extraordinarily likely.

 

Add to that, the lure of greater returns on American exchanges than foreign bourses, and you create the prospect of a global race to buy hot American assets – a recipe for a full blown melt-up, the likes of which we’ve been bellowing from the ramparts for the last eight years.

 

But don’t listen to us.

 

Ask your neighbor, Gillian – you know, the one with the spaniel and the lacy boot-tops – yeah… ask her.

 

It’s a screaming bull market, friends, and it will not stop, as we averred last week, until absolutely everyone, including a spiteful mainstream media, stiffens his smirky upper lip and states boldly: America is Great Again.

 

And that day’s a long way off.

 

Until then…

 

We have one trade to report today, our initiative from just last week (2/14).  The letter was called The Cure? A Few Mixed Metaphors and a Good Bloodletting, and there we recommended you purchase the SPDR S&P 500 ETF (SPY) April 21st 244 CALL for $0.30 and the SPY April 21st 200 PUT for $0.33.  Total outlay on the trade was $0.63.

 

Our feeling was that we would see a strong near-term surge – but in which direction we weren’t certain.

 

And now?

 

Well, we’ve certainly witnessed a surge higher in the S&P 500 over the last five sessions, as you can see here –

The move has been relentless for fourteen solid sessions, and although we can’t determine how far it will run on its current course, we’ve a hunch we’re nearing the stall-point.

 

And for that reason, we’re going to urge you to take profits on the CALL side of the ledger and leave the PUTs alone.

 

The April 21st 244 CALL trades today for $0.48, and we say take it.  On any slide lower, we’ll bail on the PUT and, with help from the equity pantheon, rake it in hard on the pair.

 

Best of luck, Roscoe!

 

And now for this week’s trade…

 

This week, we’re looking at the best and worst performing sectors since the beginning of the year.

 

As the chart below demonstrates, there’s been a wide divergence in performance between the Information Technology sector, now up over 9% on the year, and the Telecoms, who’ve suffered a collective 4.5% loss.

 

Have a look –

The difference is stark.

 

Our aim is to play a tightening in the performance of the two going forward, that is, we expect the telecoms to outperform the techs going forward for the next eight to ten weeks.

 

And we’re employing two large ETFs in order to accomplish that, the Vanguard Telecommunications Services ETF (NYSE:VOX) and the Technology Select Sector SPDR ETF (NYSE:XLK).

 

Here’s how they match up against each other since New Year’s –

It doesn’t make a whole lot of sense, even if you consider the merger news from the telecom sector and the doubts about their coming to fruition.

 

The gap will close.

- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]

But more than that, after the short PUT expires, you get two months of free play on the long side of the trade!

 

With kind regards,

 

Hugh L. O’Haynew

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