With little fanfare and some surprise, coming out of its December FOMC meeting the Fed announced it has boosted interest rates by 25 basis points. No surprise there as heading into that meeting, there was more than a 90% probability the Fed was going to do exactly that. Based on the misses for both November reports for industrial production and retail sales pretty much killed the notion of a 50-basis-point hike.

What did change was the announced outlook for the number for potential interest rate hikes in 2017 to three from the prior two rate increases. Let’s remember that in 2015 and 2016, the Fed increased interest rates all of two times. With that bumped-up outlook, the Fed’s dovish bent remained intact and once again trotted out the much-used if not often-abused “data dependent” phrasing when it comes to those follow-on rate increases.

Let’s remember that over the last few years the Fed has often targeted raising rates, but did far less than it telegraphed for a variety of reasons. The message here is just because the Fed thinks it might raise rates, does not mean it eventually will.

As the market digested those comments, the S&P 500 traded off modestly in the last 2 hours of trading as Fed Chairwoman Yellen held her post rate decision press conference. As we’ve shared in recent editions of Tematica Investing the post-election market move has the market priced to perfection so it’s not all that surprising to see it take a breather following the news the Fed could squeeze in one more round of tightening in 2017. Again, just because Fed thinks it might raise rates, does not mean it eventually will.

To us, the modest changes to the Fed’s 2016 and 2017 economic projection, issued alongside the FOMC statement, was more interesting. That forecast showed a modest bump higher in both 2016 and 2017 GDP expectations to 1.9% and 2.1%, respectively, from the 1.8% and 2% forecast in September. Alongside those revisions, the Fed’s unemployment forecast also ticked lower compared to September expectations.

For 2018, the Fed still sees GDP at 2%, which suggests it isn’t quite ready to forecast any increase in growth rates from the potential stimulus policies to be enacted by President-elect Trump just yet, even though the stock market has risen over the last five weeks.

Given all the jawboning and hinting with a wink-wink by Fed officials, this report is about as baby bear as one could expect.

 

Stopped out of our XLU January $48 calls, but we’re still holding the January $50 calls

In response to all of the above, our Utilities SPDR (XLU) calls both traded off with our Utilities Select Sector SPDR ETF (XLU) January $48 calls  (XLU170120C00048000) being stopped out as they crossed our 0.85 protective stop loss. Paired with the 125 percent return when we trimmed back the first half of those calls on Tuesday, yesterday’s 60 percent return on the remaining calls led to an overall return of more than 90 percent for the entire XLU January $48 position.

We were not stopped out of our Utilities Select Sector SPDR ETF (XLU) January $50 calls (XLU170120C00050000), which closed at 0.25, but they are rather close to our 0.22 stop loss. Should that stop loss be triggered in the next few days, the remaining slug of that call option position will return just over 57 percent, bringing the full position return to just under 80%.

As the market’s digestion of the Fed’s latest action continues, the news flow is apt to move on to the arctic temperatures gripping the eastern US today will fill the cable channels and soon be followed by the wintry mix that will be hitting there and in other parts of the country. That has us looking for a rebound in the underlying XLU shares as utilities fire up production to offset those cold temperatures.

• As such we will continue to hold the XLU January $50 calls, but given the move in the calls, we would not commit new capital at current levels.

Sticking with our Facebook and Alphabet Calls

Looking past those utility-centric positions, our Connected Society and Asset-lite Business Model positions moved higher since Tuesday’s Special Alert, but did give back some of the day’s gains in late afternoon trading. That’s right, bucking the market trend our Facebook (FB) February $120 calls (FB170217C00120000) closed at 6.15 last night while our Alphabet (GOOGL) January $800 calls (GOOGL170120C00800000) finished up trading yesterday at 30.50.

Those moves over the last few days have pushed up our returns in those two positions to just over 57 and 26 percent, respectively.

• Given the moves, subscribers should not add to those positions at current levels, but instead, hold them for additional gains over the coming weeks.
• As we described yesterday in Tematica Investing, we see little selling pressure near-term given the prospects for lower tax rates come 2017. 

 

Given the gift of Cocktail Investing

With 10 days to go until Christmas morning, last minute gift giving can be a bit of a bear. We’d like to suggest that either for yourself, someone you love or someone you know that needs to improve their investing acumen that you give them a copy of Cocktail Investing: Distilling Everyday Noise into Clear Investment Signals for Better Returns by Tematica’s Chief Investment Officer Chris Versace and Chief Macro Strategist Lenore Hawkins.

Not only does it cover the 12 questions you need to answer before you buy any stock, but it also shows how to read the economy like a pro and provides a soup to notes resource guide for all the key data one needs to track as well as where to find it.