Inflation Inflation and More Inflation…

U.S. consumers snapped shut wallets in July and inflation soared in what could be a bad omen for an economy dependent on consumption. Soaring food and energy prices pushed inflation to 4.5 percent, the strongest annual pace in 17 years, further pressuring US consumers as the economy is hammered by a housing market crisis, tight credit and rising unemployment.

As the effects from the tax rebate checks wind down, one has to wonder what lay ahead for the U.S. economy. How will the Fed deal with this troublesome spike in inflation in conjunction with weak economic growth. I for one believe that we are entering a period of “higher than normally accepted” inflation worldwide. The Federal reserve will have a difficult time  balancing its dual mandate of keeping economic activity robust and keeping inflation in check. It is all but evident that growth will out weight inflation in the near term even as several federal reserve presidents weigh in on the side of inflation and warn that high inflation will have a detrimental effect on the U.S. economy making goods and services more expensive to an already strapped consumer. It is almost a game of what comes first the chicken or the egg. Like someone trying to plug holes in a massive dam with their fingers and toes.  Quite frankly, it looks like we are running out of fingers and toes…

Time Is on Our Side…

Time, a valuable commodity to all of us but especially important to option sellers. Options strategies such as iron condors and credit spreads offer the trader a premium for time left until the expiration of the option. This concept, known in the options trading world as Theta, is simply a measurement of how much value an option or option strategy will lose for everyday that passes until expiration. For the sellers of options everyday that passes means accrual of time value or Theta. A good thing for sure…  

Theta decay is not constant throught the life of the option. As the chart above indicates, as options near expiration, Theta becomes more prominent and takes a larger bite of the option value. Again a good thing if you are the seller of such options. Its good to have time on your side…

Housing Starts Data Is A Plus For The Economy

Housing starts in the US fell 11% in July to the lowest point in 17 years. Building permits fell 17.7% as reported by the Commerce Dept today. While at first glance this number may be shocking I believe it to be a very good indicator that we are well on the way to chopping down the enormous inventory of unsold homes presently on the market. The ability of home builders to get out of this downturn will be helped tremendously by reducing their inventories. Sales of new homes has actually picked up in markets such as Florida and California as builders slash prices and are up  month over month. As long as interest rates remain at historically low ranges, the housing market should see some bottoming in the first half of 2009 and begin a slight uptrend during the second half of 2009 into 2010. As the housing markets stabilize, banks should begin to increase their appetite for mortgages again.

Dollar Bulls Are Back…

The US Dollar has edged higher the over the last several sessions and today it has risen again against all major currencies including a two year high against the British pound.  This bullishness has caused many investors to cut back on their crude oil positions because a stronger dollar makes oil more expensive to foreign buyers.

The dollar bulls are back mainly because the economic conditions in Europe and Asia seem to be deteriorating at a faster pace than in the U.S. and the market is seems to be pricing in lower interest rates for the  EU over the next several months. The prospects of higher interest rates in the US and lower rates in Europe will also add to the bullishness of the greenback.

The relative new found bullishness could spell trouble for the U.S. multinationals who have fared better than their domestic only counterparts during this period of economic slowdown.  With the U.S. economy close to a recession, a broader global recession could impact earnings for multinationals in the months to come. This would also presumably have a negative effect on the broader U.S. stock markets and exacerbate the economic conditions here at home.