Things you need to know 

• Markets go into reverse – Dow loses 3% or 981 pts and is lower again this morning.
• Investors raise cash from everywhere….
• Investors/Traders & Algo’s ‘suddenly’ realize that valuations are too rich
• While earnings beat on the bottom line, declining revenues suggest weakness ahead
• Treasury yields fall as money looks for shelter in the bond market

 
Dow plunges 980 pts or 2.8%, the S&P fell 120 pts or 2.7%, the Nasdaq lost 335 pts or 2.5%, the Russell fell 50 pts or 2.5% and the Transports gave back 345 pts or 2.2%.  The VIX (fear index) shot higher by 25% to end the day at 28.20 all while investors suddenly grew concerned about……. nothing new last week….

And this morning does not look any calmer……Global markets are under assault!  China declines by 5% on concerns that ‘the virus’ has been spreading undetected now in Beijing – sending that city into lockdown mode – putting even more pressure on the global supply chain….as China has been unable to halt the newest strain.  Hong Kong falls 3.7%, Japan down 2%, Taiwan down 2.4% and South Korea down 2%.

So, I have to ask – what changed on Friday that sent the algo’s into panic mode? What new information did we get?  And don’t tell me it is because Jay Powell reiterated a 50 bps move next week…..that is ridiculous….we have been talking about a 50 bps move for weeks now –  ….investors and markets were fully prepared for that move…..They (the FED) making sure to tell us that it’s OK, that the economy can handle it, that there is nothing to worry about – so please don’t tell me that was the reason….It was not…..

Markets – which have been struggling all year now, have gotten decidedly more bearish as we move through earnings season…and while 75% of the companies that have reported have beaten the estimates on the bottom line, many are struggling to beat the estimates on the top line and now we are seeing weakness in both retail and healthcare.  So when you have everything that we have been talking about for months now – even greater inflation, rising rates, weakening macro data, a swift reduction of the balance sheet, the ongoing war in Ukraine and the renewed lockdowns across China, joined by weakening or downbeat earnings reports from banks, retail and now healthcare what did you expect was going to happen?

On Friday – GAP – GPS fell 18% after they cut guidance that sent shivers thru the industry…. names like Target -2.5%, Ross Stores -3.5%, Dollar Gen -2.6%, Abercrombie and Fitch -5%, Nordstrom’s -5%, Macy’s -6% etc.…. the retail ETF – XRT fell 4% – taking it down 19% ytd.

HCA – the latest healthcare victim – announced on Friday at 7:30….and the algo’s were not happy….the stock sank 11% in the premarket and continued to fall another 11% during the regular trading session to lose $58/sh or 22% in just 6 hours….Now to put this in perspective – the stock had been up 7% ytd coming into Friday….…healthcare is seen as a ‘defensive’ play…and so over the past 4 months – money had moved into this name as it moved out of other names….and that made sense….but – then on Friday morning they reported a miss on BOTH top and bottom lines….and that sent the algo’s into a tailspin….sending the stock spiraling out of control – opening BELOW all 3 trendlines and ending the day on its low….Other healthcare names that got slammed include Tenet Health -15%, Community Health -17%, Universal Health -14%, United Health -3%, Anthem -4% and Cigna -4%.

Now – while this move might be described as dramatic – the truth is that the markets have NOT been paying attention to what is happening in the economy and the world.  Many of the talking heads trying to maintain a sense of ‘it is not as bad as the economic data suggests’…. when the truth is, it just might be….

The recent very hawkish commentary out of EVERY FED official has pointed to the need to be more aggressive than originally thought…. I just wish they had been this ‘keen’ one year ago when the data started to suggest building pressure…. When they remained at ease in the face of worsening macro data. 

In addition to some of the earnings reports – Friday data also reported a weakening services sector of the US economy (we are a 75% service economy – so this IS important) On Friday morning the S&P Global US Services PMI (purchasing managers index) – came in at 54.7 vs. the expectation of 58.  Remember that 50 is the dividing line…. anything below 50 is contractionary while a number north of 50 suggests expansion – so yes…54.7 is expansionary – BUT compared to last month’s 58 report and this month’s expectation of 58 – 54.7 is worrisome and only falls in line with what the other data has been suggesting and now add in the weakening top line revenue numbers we are getting this earnings season and you see what’s happening.

FED Fund Futures are NOW forecasting a 75-bps rate rise at both the June and July Fed meetings and call for fed funds to be 3.5% by year end – a full percentage point more than what we were being told – and you have a recipe for – ‘we better take another look at this…’.  Valuations which need to be revisited as the data inputs change – got revisited….As revenues slow, as guidance becomes more cautious and as hawkish rate talk becomes the more of the norm – then expect markets to adjust…..Toss in the panic of the ongoing FAILED China ‘zero tolerance’ covid policies that are further disrupting the supply chain and the war in Ukraine that is decimating an independent country causing ripple effects around the world that threaten energy supplies and food supplies and you wonder why markets are anxious?

Now again – none of this calls for you to jump ship – but it does call for you to  protect capital and have some downside protection….Consider – the SH ETF (S&P short) +9.5% ytd, the PSQ ETF (Nasdaq short) + 18% ytd and the DOG ETF (Dow short) up 5.6% ytd and if you choose to ‘lever up’ the SPXS  – Direxion 3x levered S&P short ETF has been going higher – was up 8% on Friday and is now up 26% ytd.  But – here is a warning…. the SPXS is not for everyone…it is a volatile ‘stock’ and can CUT both ways very quickly….so talk to your advisor before doing anything that is levered.

US futures are down again this morning as markets brace for a very busy earnings week….160 names are set to report that span across sectors and now we are learning Beijing is at risk of a lockdown due to surging covid infections threatening to shut that city down as well. At 5 am – Dow futures are lower by 300 pts, the S&P’s down 40, the Nasdaq down 100 and the Russell is off by 25 pts. The recent weakness causing even more damage to an already wounded market and even the ‘defensive plays’ are now under pressure as reality sets in.

Eco data today includes both the Chicago and Dallas Fed surveys, tomorrow brings us Durable goods, Capital Goods Ordered and Shipped, and the Conf Board Consumer Confidence reading.  New Home sales are also due on Tuesday and with mortgage rates now piercing 5% and going higher – this will be another key data point.  Friday brings us the FED favorite inflationary gauge – the core PCE deflator (personal consumer expenditures) report…. estimates call for 5.3% – but after last week’s very strong PPI report – it will be hard to see how this isn’t worse than expected. ….so, hang on….

10 yr. treasuries are yielding 2.8% down 8 bps as the move into treasuries (ultimate safety trade) sends prices up and yields down….

Oil is trading at $97.50 barrel after the latest China report suggests that a  lockdown in Beijing will cause demand for energy to plunge (and it will if they shut down the country again)….We have now broken support at $99.20 and it looks like a test of the low 90’s may be in order….Expect oil stocks to come under pressure on the back of this…XOM, CVX, OXY etc.…already quoted down 3%…but remember- these names are up nearly 40% ytd.

European markets are also joining in – all falling more than 2% across the board.   French voters have put Manny Macron back in power – defeating nationalist Marie Le Pen…. now we wait until June to see what happens at the legislative elections…will Manny have a mandate or not?  What will that do to the balance of power in France?

Word has it that Twitter is now taking a hard look at what Lonnie Musk is proposing….now that he brought $46.5 billion to the table….the stock did close up 4% to end the day at $48.93 – still below the $54.20 bid, suggesting that investors are NOT completely convinced yet….but today is a new day and the stock is quoted up about 60 cts at $49.55/$49.60 while TWTR management is now forced to consider the bid.  Twitter could be a private company by Friday….

The S&P closed the day at 4271 – down 122 pts…. sending it careening through the support trendline at 4406!  This now puts the January low of 4220 in the line of sight and the weakness in the S&P at 5:30 am is suggesting that we could open right there…. – which then puts the February low of 4130 in the line of sight.

Earnings are only halfway over and this week – we will get reports from a stack of companies – including Apple, Amazon, KO, UPS, PEP, MMM, ADM, MSFT, JNPR & FB…to name just a few…. but there are 152 more….so get ready.  Now, you’ll know the FED has changed their position if Goldman or Blackrock comes out and suggests that calls for more aggressive rate hikes are overblown or if Lael Brainard suddenly becomes a dove again…

Bitcoin is down 3% trading at $38,300 while Ethereum is trading at $2,800.
Take Good Care

Chief Market Strategist
kpolcari@slatestone.com

Pulled Pork (makes sense, no?)

Thanks to my friend Frankie D for giving me this great recipe.  You need a slow cooker for this.  You need a 3 – 5 lb. pork butt/shoulder plus 1 cup of ketchup, 1/2 cup of beer, 1/2 cup of light brown sugar, 1/2 cup of chopped onion, 1/4 cup of red wine vinegar, 1/4 cup of Worcestershire sauce, 1 tbsp Montréal steak seasoning, 1 tsp of garlic powder, 1 tsp Cajun seasoning. 

Now place the pork butt in the slow cooker – mix the other ingredients together, stirring well with a spoon and then this to the slow cooker.

Cook for 8 hours. Remove and shred with a fork. Ladle sauce onto pork. If you want a thicker sauce, mix in some flour.

Buon Appetito.