CPI is NOT Peaking, It is Persistent – Try the Pasta, Butter, Eggs and Cheese

Kenny Polcari Uncategorized

Bitcoin, Currency, Crypto, Cyber, Electronic, Finance

Things you need to know 

  • CPI suggests that inflation is persistent vs. peaking
  • PPI due out at 8:30 am – what will we learn?
  • Crypto meltdown only adding fuel to the fire
  • European markets down 2.5%, US futures pointing lower as well
  • Try the Pasta, Butter, Eggs and Cheese

And the beating continues – stocks get hammered as some investors want out, while others are happy to get in – just at lower prices and better valuations (good for the long term investor – you have to try and find the silver lining) – the Dow lost 326 pts or 1%, the S&P down 66 pts or 1.6%, the Nasdaq gave up 375 pts or 3.2%, the Russell down 44 pts or 2.5% and the Transports gave back 172 pts or 1.2%. 

The big event of the day was the CPI report and it revealed that inflation continues to be hot – The y/y report was up 8.3% (lower than last month but higher than the expectation) …. prices up everywhere you look.  Food, shelter and energy – the 3 most important pieces of the report continue to accelerate…..and with shelter 32.5% of the report – it is hard to believe that CPI is ‘peaking’ as they would like  you to believe – but rather I would argue that we can expect inflation to remain persistent – and no, I am not in the camp that we saw the highs in March at all.   Last months very strong PPI (Producer Price Index) hasn’t even made its way to the consumer yet, so I would expect that next month’s CPI will be stronger than yesterday’s CPI.

And speaking of PPI – we are about to get that report this morning… core demand m/m expected to increase by 0.5% while y/y demand is expected to up 10.7%.   Ex food and energy m/m up 0.6% while y/y is expected to be up 8.9%.  Now those readings are all down from last month – but remain stubbornly high…..They do not suggest that inflation is rolling over at all…….so I suspect that we will continue to see pressure on stocks and that will continue to bring valuations down from the ‘lofty levels’ that might have made sense in a zero rate environment – but no longer make sense in a rising rate environment that could see fed funds be at 3+% by year end.

And then to add fuel to the fire – the crypto space is coming apart at the seams…..Bitcoin, Ethereum and the other coins in free fall while the stable coins that were supposed to offer ‘stability’ are doing anything but….and that has seen that asset class circle the drain…..trying to find a bottom here is like trying to find a needle in a haystack – ain’t happening….and if you are wondering – an 80% drawdown in Bitcoin would equal a price of $14k – Bitcoin is trading at $27k – it is in free fall mode – there is no support until you hit $14k (that 80% drawdown level)….. while the same draw down in Ethereum would take that back to $800.  Curious how we have not heard a peep from supporters of the asset – think Mikey Novogratz or ‘the Mooch’…. maybe today….

Look – it has been a tough time – both the Nasdaq and Russell are well into Bear Market territory now – but put in in perspective – while it feels ugly and uncomfortable – the Nasdaq is up 595% since the depths of the GFC (Great Financial Crisis – March 2009).  It is up 70% since the selloff of March 2020, The Russell is up 274% and 72% while the S&P is up 350% and 82% respectively. Now – while those are decent numbers – they were achieved during a zero rate, full on stimulus environment…..That is changing and so investors need to reassess and reprice the risk to stocks – and that is what is happening….and we discussed this…..and we discussed how to prepare yourself and your portfolio for this event…..underweight ‘sexy’ tech and overweight cash, overweight big, boring mega cap US multinationals that represent value and protect yourself by taking the opposite side of a trade.

Utilities (boring) are flat on the year (a win), Consumer Staples (boring) are down 1.6% on the year, Energy – (value) is up 40% on the year, Gold (value) is up 3% on the year, Metals and Miners +11% on the year, Coal stocks (BTU) up nearly 100% on the year, Natural gas exploration and production companies up 40+% on the year….And if you went short the market since January you are also doing pretty good – DOG + 12%, PSQ + 30% and SH + 18%….. So, in all of this RED – you can find GREEN….

Now, The indexes are all below trendline supports so they are looking for stability and a bottom – something that will take time to find as investors continue to try and price in the risk….the risk of future FED policy, the risk of rising rates, the risk of persistent inflation, the risk of slowing US macro data that will likely produce a recession……something that appears to be more imminent than it was 2 months ago.  The idea that we would see a recession some time in 2023 has been changed with many now expecting that we could see an ‘official’ declaration by the summer of 2022.  Recall that a recession is defined as 2 consecutive quarters of negative growth…..and 1st qtr. 2022 came in at -1.4% (that fairly negative)…and even with 2 revisions – it is hard to see how they could take it from a negative to a positive…..and then in July – we will get the 2nd qtr. GDP read…..and if that is another negative number – then BINGO – we’ve got ourselves a recession….

Now – the FED has 2 choices here…. they can force the country into a mild recession, or they can force us into a deeper recession.  And that is what the markets are trying to figure out.  And as usual – it is a ‘shoot first ask questions later’ type of move right now…. And why is that?  Because the path is not clear – they (the FED and the administration) say one thing one day, and the do a complete reversal the next….so some investors will choose to bail (sellers) while others are choosing to get in (buyers).   Will the next Fed move be 50 bps like JJ suggested it ‘could’ be, or will it be 75 bps like Jimmy B and Loretta Mester suggested?  One way or the other – rates have to rise – we know that – so it just depends on how fast they want them to rise –I think the market is giving you a head up as to what it expects is coming….

And again – I have to ask – Why are you surprised?  Haven’t we been talking about what the Fed needs to do and how the market will respond?  Recall the valuation story…. when you change the inputs then the answer has to change – there is not debate about that – so as we change them – we are seeing valuations respond in kind…lower valuations mean prices have to adjust (lower)…just how far – who knows?  But I suspect that the ultimate reaction will be an overreaction…. when capitulation comes – that will be the time to buy…not sell…. but that’s a difficult concept for so many.

10 yr. treasuries – are trading UP as money flows into the safety trade forcing yields lower – this morning we see the 10 yr. yielding 2.83%!  And if the action remains anxious and the tone negative – then I guess we can expect to see prices continue to rise and yields continue to fall….

The VIX (fear index) is up again today trading at 34.15 – still below the 40 level that many analysts think will ignite more of a capitulation.   US futures are pointing to a lower open as the relentless selling continues.  Dow futures down 140 pts, the S&P’s off 22, the Nasdaq down 110 and the Russell off by 5 pts.

It is beginning to feel like its about to come apart….like we are getting closer to that ‘throw everything out mode’…..and that is when you need to have a strong stomach, because it is exactly then that you should be allocating money to good quality names in your portfolio…..Again – run with the theme we’ve been talking about….

The S&P ended the day at 3935……down 17.5% ytd….and down 18.25% from the all time high…..3800 has been a level that many strategists are targeting…and that would take the S&P down 20% into Bear Market Territory…..Remember- emotions for humans runs high when the market is trading lower……algo’s on the other hand run roughshod over the markets – completely unemotional which can also create exaggerated moves in good quality names. 3800 is not really a level of much support so if we get there and fail to hold – then expect the algo’s to go into a frenzied sell mode again –and that could see the S&P trade to 3550 ish…. I would also expect at that point that the FED will try and calm markets by becoming dovish once again.   Hold cash and be patient……while you may feel that you have to ‘do something’ …. doing nothing (and holding cash) IS doing something.
 So now is the time to grab your coffee and stay awake.   

European markets are all lower by 2.5% across the board….

San Fran’s Mary Daly is due to speak today…. Can’t wait to hear what she has to say.
In the end investors need to prepare for more turbulence ahead…because stocks will continue to thrash around until valuations get even more attractive or until the FED decides to slow down all the hawkish talk.  And while stocks are starting to look attractive for longer term buyers – the risk to the downside is still very real……Do not kid yourself.

Take Good Care

Chief Market Strategist

Pasta, Butter, Eggs & Cheese

This is not only simple – but you can make this dish for about $12 to feed a family of 4.  It is a go to dish when you just want something easy to make and will fill your stomach, so you don’t go to bed hungry.  The kids will love it.

You need 1 lb. of Penne Rigate, 2 eggs, 1 stick of butter and 2 handfuls of fresh grated Parmegiana cheese.

Bring a pot of salted water to a rolling boil

Add the pasta and cook until aldente – 8 mins.

While that is cooking – crack two eggs into a bowl and scramble.  Add one handful of cheese to the eggs and mix well.  Melt the butter in the microwave….

Strain the pasta when done – reserving a mugful of water.  Put the hot pasta back in the pot, add the butter – and stir to coat – now add in the eggs – mix.  Allow the hot pasta to ‘cook’ the eggs leaving a nice coating on the pasta.  Now add in the other handful of cheese – mix…  If you need to – add in a splash of the pasta water.  Serve immediately in a warmed bowl.  Trust me – there won’t be any leftovers.  A simple go to dish when you don’t have time to cook or when you run out of money because inflation is out of control.

Buon Appetito.