Monday, January 10, 2011

Jobs and the Economy

Here's a quick note on the economy as of AP's report on Friday. I posted this on, so I had to hold it off a day for us here. Let me know if you want more broader scope pieces or if you want me to just stick to option trading.


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Now that we’ve turned the page on 2010, let’s get a feel for what happened in the past year with respect to the economy, where we are right now and what, as of today, is expected in the new year.

First, what happened in 2010:
According to AP, 1.1 million jobs were added in 2010. What does that number mean? The 94,000 average monthly job gain is actually right around what is required to keep up with population growth. Or, in English, in order to significantly lessen the unemployment rate, we need about double that amount.

The Report Friday:
The new employment report today has good and bad news.

• The Good
o October jobs were revised up from 172,000 to 210,000
o November jobs were revised up from 39,000 to 71,000
o Unemployment rate as of today is 9.4%, the lowest it’s been for 19 months (14.5 million unemployed)
• The Bad
o December jobs created came in at 103,000 net, which was in fact below estimates.
o The unemployment rate may have dipped because of the discouraged worker effect: People stop reporting themselves as unemployed because they stop looking for work out of frustration

Taking text directly from AP’s report Friday:
“Including those who are working part-time but would prefer full-time work, and those who have given up looking for work, the underemployment rate was 16.7 percent last month. That's down from 17 percent in November.”

Man, 17% (ish) is a big number.

What About 2011:
With all the job gains last year, unemployment only fell from 9.7% to 9.4%. For what it’s worth, the forecast into 2011 is stronger growth. According to AP, the 20 month streak of 9%+ unemployment is the longest streak on record, but I don’t know how far “the record” goes back.

Helicopter Ben says that while he expects things will get better, he still believes it could take 4-5 years for the unemployment rate to return to its longer-term trend of 6%. Here’s a side question – what’s the likelihood that in 4-5 years we don’t have another rough patch and go further backwards rather than recover? Yikes.

Alright, that’s where we were, are and may be going. The conclusion as it relates to option trading?

In my opinion, there is some edge to be long this market overall. Obviously short-term vol trades are less about the long-term trend, but keep that in mind. BUT – the market reads the news, the news is uncertain, and that means vol can pop. Given that VIX is in the 17 area and how little we actually know about where we are (and we never know where we’re going), this is not the time for naked long or short options other than very specific opportunities. With VIX and uncertainty at current levels, 2011 is the year of the spread – whether it be calendar, diagonal, or both. Now more than ever, know your vol levels.

As of this morning, the new "be worried" report is this:
Europe's debt crisis returned to the fore of investor concerns on Monday amid reports Portugal is facing mounting pressure to accept an aid package to prevent contagion to other countries.
Source: AP (on Yahoo! Finance Home Page)

You can read my take on the European Crisis here:
European Crisis Explained and Currency Option Trading

Even though this was posted on 5-18-2010, a lot of it is exactly the same today with regard the broader scope.

This is trade analysis, not a recommendation.

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1 comment:

  1. Love more posts like this as long as they dont take away from the usual trade posts :)