Hard Landing vs. Soft Landing – Where do you stand? – Try the Fettuccine

Kenny Polcari Uncategorized

Open Doors, Open, Exit, Doorway, Freedom, Opportunity

Things you need to know 

  • Stocks got smushed yesterday but look to rally today
  • Oil continues to come under pressure – global slowdown and stronger dollar
  • Buy the Dip?  What do you think buyers HAVE been doing?
  • CPI due out tomorrow and lots of FED speakers today….Can you imagine the narrative?
  • Markets are pricing in a hard landing vs. the soft landing many hoped for
  • Try the Fettuccine

It was ugly yesterday…. stocks were hammered Sunday night into Monday morning….and then got hammered some more as the morning turned to afternoon and afternoon turned to evening. By the end of the day – trader types got scorched.   The Dow ending the day – 653 pts or 2%, the S&P down 135 pts or 3.2%, the Nasdaq choked up 525 pts or 4.3%, the Russell fell 77 pts or 4.2%, while the Transports gave back 430pts or 2.9 %.   The markets and investors are leaning into the worst-case scenario – and that is typical…. remember the pendulum analogy – it swings too far to the right and then it swings too far to the left….
And now we are hearing more and more pundits starting to scream – Buy the Dip! – Well, here is a secret for you – They are and have been buying the dip – Do you think that the sellers are selling into the metaverse? That no one is on the other side as the market continues to plummet?  Buyers are having a field day – at least in high quality names that are being temporarily dislocated and why not?  They are not defending any position at the moment – why should they?  The Sellers are panicking and the buyers know that…..and they aren’t worrying because when this turns around – and it will –  it will be the buyers who didn’t participate on the way down that will be anxious to get in for ‘fear of missing out’ and this will force  prices higher as sellers choose to NOT stand in the way either.  Remember – it does work both ways….

I mean think of AAPL – 15% in the last month or MSFT -23% since January.  Where are these stocks going in the long term?   NVDA – 50%, JPM – 28%, STT – 34%, AXP – 19%, all since January while JNJ – 7%, PG – 7%, since mid-April and XOM -8% in 2 weeks… I mean talk about long term opportunities…. when the market stabilizes these names will skyrocket higher…. Remember – good stocks get taken down when they start throwing everything out the window…. Large cap multinationals suffer at the end of the cycle because it is easy to sell them and raise cash and is usually the final step before complete capitulation.  And as my friend Ron Insana pointed out – there were 957 new 52-week lows on the NYSE yesterday – that 31% of the listed companies – and that is getting close to ‘throwing everything out including the kitchen sink’!

Now – what is clear is the idea that investors are pricing in a ‘hard landing’ because of ‘soft data’.  Forward guidance comments suggesting ‘weak demand’ rose to the highest level since April of 2020.  Foot traffic in malls is beginning to slow, analysts cutting yr. end profit estimates for 2022 is not bullish.  Slowing Services PMI’s are not good, since we are a 75% services economy.  Rising interest rates will bring home price appreciation to stall mode if not force it into reverse – and we are already seeing that as 30 yr. mortgage rates kiss 5.6%.  Avg hourly wages are up 5.5% y/y, yet inflation is up 8.5% y/y – So, guess who loses?    All this as interest rate increases and balance sheet reduction have not even really begun yet – just wait until rising Fed Fund rates cause 10 yr. treasuries to surge again all while they try to roll $95 billion/month off the balance sheet hoping no one notices.   

And then there are 10 yr. treasuries – that surged to 3.2% before settling back in to end the day at 3.033%. And does make some sense – as yields ticked at 3.2% – money flowed into the bond market as investors locked in treasury rates that they have not seen in years….and that money forces prices up and yields down…. which is why yields ending the day at 3.033%. 

The VIX settled up 15% to end the day at 34.75 – but not before it traded as high as 35.50.

Oil fell by 7.5% or $8.35/barrel because they created hysteria that China’s continued covid lockdowns will once again destroy demand – in addition don’t discount the strong dollar…..the DXY has advanced by 6.25% since April 1st…..and is now trading at 103.67 – up from 98….A stronger dollar – just fyi – will impact the stock market…..it tends to slow global economic growth and it translates into what appears to be ‘lower corporate profits’ because when the big multinationals convert foreign currency earnings into stronger dollars – they get fewer dollars….Now – while that statement is true – it makes no sense to me – because analysts know this, so it is built into (or should be built into) estimates and projections.  A stronger dollar should not surprise any analyst doing their job. So, when you will hear them talking about how a stronger dollar impacts stock prices – make sure you understand the context.  If their int’l business is in decline and foreign currency revenues are down – then when they convert the lower revenues into stronger dollars, it appears even worse…. but again – any analyst worth his/her weight would identify that before it happens – so it should not be a surprise to investors.

After the bell stopped ringing – we surveyed the damage and the only things that were green – were the contra trades!  DOG + 2%, PSQ + 4% and SH + 3.2% – Energy – XLE lost 8%, Real estate – XLRE down 4.7%, Consumer Discretionary – XLY down 4.25%, Basic Materials – XLB down 3.2%, Tech – XLK down 3.9%, Communications – XLC down 2.6%,  Healthcare – XLV – 2.6%, Financials – XLF – 2.4%, Industrials – XLI – 2.4%, Utilities – XLU – 0.7% while Consumer Staples XLP ended flat – which is a huge win on such a down day.

There is no economic data today that will drive the tone…. but tomorrow will bring us the April CPI (consumer price index) report…. Yesterday I told you what the expectation is for the report….and I also said that I would be surprised if it came in weaker as the estimate suggests…. Why?  Because prices are surging everywhere. …. last month’s PPI report came in well ahead of the expectations and that means that CPI HAS to increase…. it is illogical for it not to increase….so this idea that CPI is going to be lower than last month is convenient for the FED narrative – but is difficult to believe as a truth.  Now to be fair – it usually takes about 6 weeks for higher PPI prices to make their way to higher CPI prices – so maybe we will not see those increases until the June report – but they are coming.

Now in any event – the market action of late has repriced the risk that it sees ahead…..The Nasdaq – the biggest loser is now off 26% ytd with the Russell small and mid-caps off 22%  – both in bear market territory…..The S&P is down 16%, The Transports off by 12% and the Dow down by 11%.  The S&P is now trading at 17.5 x’s 2022 earnings…that is down from 24.5% at the end of 2021.  And that makes sense – valuations have to change, we have been talking about this for months now – So, again – why is anyone surprised that it happened?  It was swift and vicious – but prices are no longer trading at ridiculous valuations…valuations that did not make sense in a rising rate environment.  The market is doing the work for the FED….it is pricing in what it thinks the FED needs to do to meet their mandate of ‘price stability’.

There could still be further downside…do not kid yourself – there has been lots of internal damage to the broader market – so it will take time to repair it, but in that damage is opportunity – names that I identified earlier in this note, names that are getting dragged down as panic and capitulation take hold. Yesterday we pierced 4000 on the S&P to trade as low as 3975 – leaving us just 175 pts or 4% away from 3800 – a level that many street analysts/strategists have identified as support. The macro data in the next couple of weeks and months will dictate the next move….

To begin the recovery process – we need to see inflation not only peak but start to decline….because peaking and remaining at elevated levels (9%) isn’t gonna do it….it needs to roll over and decline…..….something I don’t see right now….So while I remain a buyer – I remain a cautious buyer (value camp)….If we get a burst higher – it’s ok – because I’m invested and participating….I am not missing the boat….so there is ‘no fear of missing out’ there is just the long term plan.

European markets like US markets are all higher – Market across the region is all up about 0.75%.

Now look – stocks will trade higher today…. from well oversold positions…. But ask yourself – has anything really changed other than stock prices? We still have inflationary concerns, there are still central bank concerns, there is still a war in Ukraine that is only getting worse….as Vlad prepares for an attack on Odessa, there is still covid concerns, energy concerns and supply chain concerns.  But today – the markets are focusing on the dislocated stock prices so run with it…. watch the names I identified – see how they perform today….

Oil is down 1.8% or $1.80 as the recession story and China covid story continue to drive prices.  The stronger dollar is also helping to bring it down.  Now the Covid thing – I am not buying it – but China’s reaction is and will cause further disruption to the global supply chain – all the more reason we smarten up and move away from being so China dependent. How much more disruption (and control) will China continue to wield over the global economy.  It is exhausting now.

The S&P closed the day below 4000….at 3991……  This morning – futures action suggests that we will see a bounce…. Great…. I suspect the 4062 level which should have been support will prove to be a bit of resistance.   Recall what I said yesterday……“A breach of that level – which happened early this morning has now set the algo’s on fire and ignited a new round of sell orders…. buyers will NOT stand in the way…” And they did not …and sellers will not stand in the way today – on the way up…. much like they did last Wednesday when markets rallied strongly

I also suspect that they will do everything they can to downplay tomorrow’s CPI report – attempting to focus on the estimated slight improvement – making it out to be more than what it is…. So, 4062 will be the level to watch ….

Cleveland’s Loretta Mester, Atlanta’s Raphy Bostic, NY’s Johny Williams and Fed Governor Chris Waller are all expected to speak at different times today Bostic to speak again on Wednesday and on Thursday – we will hear from San Fran’s Mary Daly.  Do I need to tell you what the narrative will be?
Take Good Care

Chief Market Strategist

Fettuccine w/Cherry Tomatoes, Butter and Parmegiana Cheese

This is a simple dish.  You will not find this at your favorite Italian restaurant because it is not considered ‘fancy’ enough…. but once you make it – you will make it again and again and maybe again.

For this you need:  1 lb. of fettuccine, 3 pints of cherry tomatoes – sliced in half, 1 lg Spanish Onion, 1 stick of butter, fresh chopped parsley, & fresh chopped basil and you need fresh grated parmigiana cheese. 
Start by bringing a pot of water to a rolling

Now in a large 14 in skillet add the stick of butter and let it begin to melt – now add the diced onion and sauté for about 5 – 8 mins…. keep the heat on med – you do not want to burn the onions….  Now add the cherry tomatoes – season with salt and let it cook for about 20 mins.…. keep the heat on med – you do not want the butter to burn, and you want the tomatoes to soften.  You can take the back of the slotted spoon and crush some of them – not all of them. – this will help to make the sauce.

Now add the fettuccine to the water and cook until aldente – 8 mins or so.  When the pasta is about ready – take 2 ladles of pasta water and add to the tomatoes.  Now using tongs – remove the pasta and place in the skillet.  Keep the heat on med low and toss…. mix it well…. taste to adjust the seasoning and then add in 2 handfuls of fresh grated parmigiana.  If it looks like it is drying out – add a ladle or two of the pasta water to give it life.  Now add the chopped parsley and chopped basil   Stir and serve immediately in warmed bowls.  Always have extra cheese on the table for your family or guests.

Buon Appetito