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Goldilocks Stock Market and What Could Derail It? | Interest Rates Aren’t Historically High | Cheap to Hedge the Downside Now with Options

By Derek Moore

Show Summary:

Derek Moore and Jay Pestrichelli, CEO of ZEGA Financial discuss the idea that the stock market is in a Goldilocks period based on sustained higher margins and earnings growth. Then, they discuss how out of the headlines the Fed has already started easing by reducing their balance sheet runoff each month. Why reducing the Overnight Reverse Repo usage (RRP) isn’t restrictive but rather was a reaction to demand for short term treasuries by money markets. Later they talk about how interest rates are below long run averages despite what everyone tells you on CNBC and why high rates may not be a problem. Finally, they look at corporate earnings and profit margins for the S&P 500 Index and how they’ve growth over the years, gold prices vs oil prices as a predictive model, and yes some shipping container inflationary commentary.

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Topics Include:

  • Growth in S&P 500 earnings per share analyst projections
  • How net profit margins for the S&P 500 Index companies has growth over the years
  • Why this might be a hated bull market despite some goldilocks market aspects
  • What could derail this market?
  • Why profit margins continue to be higher and why they do or don’t have to revert to the mean
  • The Fed balance sheet explained
  • How the Fed is going to be reducing the amount of bonds running off the balance sheet.
  • How the Fed is restrictive and easing at the same time
  • Explaining what the Overnight Reverse Repo Market (RRP) is
  • Why the Fed reducing the balance of Overnight Reverse Repos isn’t restrictive policy
  • The order of how the Fed may ease (hint, it may not start with interest rates)
  • The 1990s bull run with higher interest rates and lower profit margins
  • Maersk container shipping operating hints at higher costs due to capacity, fuel, and congestion
  • What does higher container shipping costs mean for inflation and prices?
  • Do Gold prices project out what oil prices will do in the next 19 months?
  • Explaining the cost of hedging and how it is very cheap to put on downside hedges right now
  • The cost of a 1-year 10% out of the money put option
  • The cost of a 1-year ATM at-the-money put option
  • Using low or no cost collars to hedge the downside
  • Using long put spreads to hedge or buffer the downside

Mentioned in this Episode

Explaining High Dividend ETFs and Stocks and How Reinvesting Dividends Works to Build Share Count and Compound Returns

Previous Week’s Podcast:

 Explaining High Dividend ETFs and Stocks and How Reinvesting Dividends Works to Build Share Count and Compound Returns

Jay Pestrichelli’s book Buy and Hedge

 Derek’s new book on public speaking Effortless Public Speaking

 Derek Moore’s book Broken Pie Chart

 Contact Derek derek.moore@zegafinancial.com