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Fed Lowers Interest Rates 0.25 Percent

Posted: 01 Aug 2019 03:00 AM PDT

First rate cut since 2008's financial crisis.

The Federal Reserve cut interest rates on Wednesday by 0.25 percent. It is the first rate cut by the central bank since 2008, when it slashed interest rates to zero.

Unlike then, the economy is growing, although it is showing signs of a slowdown. And the rate cut still leaves interest rates above 2 percent, for the time being.

 

While unusual for the Fed to cut interest rates while the economy is still growing, recent mixed economic data, particularly on items such as industrial production, indicated a steep slowdown.

While the Federal Reserve can only control the federal funds rate, it spreads over the entire economy. Thus, investors should expect lower interest rates on everything from business loans to car loans and mortgages. Lower costs of borrowing are designed to encourage borrowers, and in turn, stimulate the economy.

Other major nations around the world have been moving towards interest rate cuts in recent months, or are already seeing interest rates far lower than the rates set by the United States. This has led to many, particularly President Trump, to point out that the U.S. is at a disadvantage compared to the rest of the world in terms of the cost of capital.

Stocks declined as Fed Chairman Jerome Powell explained that this move was a “mid-policy” correction, and that future changes in rates will vary on economic conditions.

Insider Activity: CARBO Ceramics (CRR)

Posted: 01 Aug 2019 03:00 AM PDT

President & CEO buys 50,000 shares.

On Tuesday, July 30th, Gary Kolstad, President and CEO of CARBO Ceramics (CRR) bought 50,000 shares of his company, paying $53,000. This increased his stake by over 10 percent, bringing his total share ownership in the company to over 512,000 shares.

This is the first insider buy at CARBO this year, but Kolstad has been a buyer multiple times in 2018 at far higher prices.

CARBO Ceramics is a technology company that provides products and services to the oil and gas industry, such as base ceramic proppants, frac sand proppants, and oil and gas operators for hydraulic fracturing of natural gas and oil wells.

Shares of the fracking-related company have dropped 87 percent in the past year, and the company is currently sitting on losses and declining revenues. The company has missed earnings and revenue estimates in all four quarters of the past year.

Action to take: On some metrics, the shares look cheap. The company's technologies indicate a book value of just over $10 per share, nearly ten times higher the current price.

With all the fear in the natural gas space right now, however, any trade would be a speculation.

Should a turnaround in the natural gas space occur, this is a high-risk/high-reward opportunity to double or even triple a small investment here. We suggest a small stake, but only if shares can be had under $1.25.

Unusual Options Activity: Advanced Micro Devices (AMD)

Posted: 01 Aug 2019 03:00 AM PDT

Big bet on continued decline through September.

On Wednesday, shares of Advanced Micro Devices (AMD) dropped following decent, but lackluster earnings. Some traders saw further weakness, as evidenced by a number of bearish options trades following the earnings report.

One particularly active option was the September 20th $26.00 put options, expiring about 50 days away. The option saw over 3,100 contracts trade against a prior interest of 174, for a nearly 18-fold increase in volume.

With AMD shares knocked down to $31.15 in trading, the $26 strike price implies a further move lower in shares of at least 17 percent between now and September for the option to trade in-the-money.

As a key supplier of computing technology, AMD is also a big mover on any trade war fears, making shares particularly volatile.

Action to take: While we like the company for the long haul, at $0.28, or $28 per contract, this is a cheap way to bet on a volatile stock having further weakness in the coming weeks.

The option could end up providing a short-term, short-side profit and looks like a nice hedge right now. We would suggest buying under $0.30, and with an eye towards taking a 30-40 percent profit in the option as quickly as possible before the time premium eats away at the option's remaining value. The trick to profiting from out-of-the-money put option trades is to not get greedy.

 

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Crude Oil Inventories Make Another Sharp Drop

Posted: 01 Aug 2019 03:00 AM PDT

Drop nearly four times larger than expectations.

Data from the EIA on petroleum inventories showed a further big drop, with a decline of 8.5 million barrels. While less than the prior week's drop of 10.8 million barrels, the consensus was for a drop of only 2.6 million barrels.

Gasoline also fell 1.8 million barrels, beating expectations for a 1.5 million barrel drop. And distillates dropped 0.9 million barrels against an expected gain of 1 million barrels.

Oil prices rose modestly on the news. Unlike prior data from previous weeks, which have showed a headline decline in crude oil inventories, this data also shows other forms of processed oil declining as well.

This indicates that energy demand remains robust, a sign of economic strength, and that overall energy inventories are declining, rather than seeing one area build up a large inventory.

Action to take: The data is showing that oil demand and supply are somewhat in balance right now. As long as OPEC, Russia, and other major producers are willing to hold off on pumping as much oil as possible, we see oil prices in a range between $50 on the low side and $65 on the high side. For the time being, that puts oil in the middle of a range.

Stay invested in the space if you are, and look for opportunities to buy into the space when oil gets to the low end.

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