The Fed’s Bullish Gift of Low Interest Rates

Dear SlingShot Trader Subscriber,

Before we dive into our analysis for this week, we wanted to take a moment and thank everyone for the questions and comments they have been sending us via email (johnandwade@slingshot-trader.com).

Let’s face it. It has been a rough couple weeks in the SlingShot Trader portfolio. We’ve been on the wrong side of a few earnings announcements – puts on FFIV and MSFT – and we have been on the right side of a few earnings announcements – calls on MCD and NSC – only to see the market decide that stellar earnings just weren’t quite stellar enough.

We want you to know these losses are as disappointing to us as they are to you. We are in this together. But we can also tell you that streaks – both of the winning and losing variety – come and go. We’ve been through it time and time again, and this current streak will soon end. Stay consistent in your money management and position sizing, and we’ll be back up to our high-water mark in no time at all.

Now, on to the analysis…

Fed to Keep Interest Rates Low until Late-2014

How about the bullish bombshell the Fed just dropped on the market today? The Federal Open Market Committee (FOMC) just announced that the Fed plans to keep interest rates exceptionally low, at least through late 2014. That’s much longer than the FOMC’s original plan of keeping rates lower through mid-2013.

Apparently, the Fed is concerned that after two years of monetary easing, the unemployment rate still hasn’t dropped below 8.5% and the Gross Domestic Product (GDP) in the United States is still sluggish. Some of the voting members of the FOMC also think the Fed may have to step up with additional forms of monetary easing – can anybody say QE3?

Keep on Twistin’

The Fed also announced that it will continue to move forward with “Operation Twist” to lower longer-term interest rates. Lower longer-term interest rates aren’t great for banks and their profits – banks make more money when the yield curve is steep and they can borrow short-term dollars cheaply and loan out longer-term dollars at a higher rate – but they are great for companies that are looking to make longer-term investments and for individuals who want to buy, or refinance, a home.

Bullish Response on Wall Street

Stocks started to rally on the heels of today’s news, but why? One of the concerns many analysts have had coming into Q1 was whether corporate America was going to be able to continue growing top-line revenue, squeezing more productivity out of their companies and boosting bottom-line profits. Lower interest rates make it easier for companies to do just that. As borrowing costs go down, it’s easier for companies to retool their plant and equipment, invest in new software and technology and fund an expanding work force (we hope).

All of this expected borrowing, retooling and investing boosts analyst expectations of future earnings, which, in turn, boosts investor expectations of future stock prices. After all, we are looking at a market that is trading near historic low P/E rates, and if investors feel corporate growth could start to accelerate again, stock valuations could jump.

The Bottom Line for Next Week

The market has been in a bull run since mid-December. It looked like that run might be jeopardized this week as the major indices hit resistance. However, Wall Street was able to shake off bearish news coming out of Europe yesterday and push stock prices back up off of their lows. With today’s bullish news from the Fed, watch for the bullish run to continue.

This Week’s Events

Here are some of the news events that we may trade in the next week or so. We’ll be discussing some of these in tonight’s webinar.

Jan. 25 – FOMC Announcement
Jan. 26 – Chubb (CB) Earnings announcement
Jan. 26 – Durable Goods Orders
Jan. 26 – Weekly Initial Jobless Claims
Jan. 26 – New Home Sales
Jan. 26 – Leading Indicators
Jan. 27 – Gross Domestic Product (GDP)
Jan. 27 – Consumer Sentiment
Jan. 30 – Personal Income & Outlays
Jan. 31 – S&P Case-Shiller Housing Price Index
Jan. 31 – Chicago PMI
Jan. 31 – Consumer Confidence
Feb. 1 – ADP Employment Report

TRADE REVIEW

When it’s time to open or close a trade, we’ll send you alerts via e-mail. You also can sign up to receive text messages regarding our trades. For more info about our SlingShot Trader portfolio, you can read trade alerts here and view our portfolios here. You can also see more trade-specific details by clicking on the trade links below.

Positions Opened

These are the SlingShot Trader positions we opened during the past week of trading that we have not yet closed.

Chubb Corporation (CB)On January 25, we recommended you to “buy to open” the Feb 70 Puts for $1.55 or less.

Positions Closed

These are the SlingShot Trader positions we closed during the past week of trading.

F5 Networks (FFIV)On January 19, we recommended you “sell to close” the Feb 100 Puts. We closed the position for $0.82 for a profit of 78.02%.

Microsoft (MSFT)On January 20, we recommended you “sell to close” the Feb 27 Puts. We closed the position for $0.12 for a loss of 67.57%.

McDonald’s (MCD)On January 24, we recommended you “sell to close” the Feb 105 Calls. We closed the position for $0.19 for a loss of 62.75%.

Norfolk Southern (NSC)On January 25, we recommended you “sell to close” the Feb 80 Calls. We closed the position for $0.05 for a loss of 93.33%.

Top Trades Now

These are the current SlingShot Trader positions that we still recommend getting into now, assuming you haven’t already bought a full position.

Chubb Corporation (CB) See Positions Opened above.

Webinar Preview: Join Us Tonight at 6 p.m. ET

Every Wednesday at 6 p.m. ET, we host our live webinar, in which we’ll review this weekly newsletter, discuss coming events in more detail and walk through our Top Trades. We also encourage you to submit your questions live during the session. We want to do everything we can to help you become a successful options trader, which is why you’ll have live access to us for an hour every week.

And if you have any questions or comments you would like to send us in advance of the live session — or anytime during the week — you can write to us at johnandwade@slingshot-trader.com.

If you can’t attend the session live, you can watch the archived version on our website in the “Live Weekly” section. It’ll typically be posted within about two hours of the end of the live session.

Sincerely,

 

John Jagerson and Wade Hansen
Editors
SlingShot Trader