The Rally Fizzles, SNAP Snapped – Try the Simple Baby Back Ribs

Kenny Polcari Uncategorized

Free illustrations of Board

Things you need to know 

  • The rally does not have legs – stocks under pressure
  • Eco data today details the state of housing
  • 10 yr. treasuries prices are up again, oil is under a bit of pressure
  • Expect more fallout over the Joey ‘Taiwan’ commentary as the WH tries to bury that story.
  • Try the Simple Baby Back Pork Ribs

Stocks rallied nicely…. (But sold off overnight – we will get to that later) – much of the rally being credited to news out of the Asia Pacific region…. (Which I think was helpful but was by no means THE reasons).  First we learned that Joey is considering removing Trump style tariffs on China, then we learned that Joey has partnered up with 12 Indo-Pacific countries – Australia, Brunei, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam – (these countries along with the US represent 40% of world GDP) to form a new economic powerhouse…

The joint statement suggesting that this new pact will help them collectively “prepare our economies for the future”.  Notice that China is NOT part of that pact because it is the reason this new pact exists – to diversify away global risk, risk that has now upended so much of the global supply chain following massive disruptions due to the coronavirus pandemic and the Orwellian lockdowns that have forever changed the world,  toss in the unprovoked attack of Ukraine by Russia and you realize the need for a solution to the China/Russia problem that has been simmering under the surface for years and is now exposed.  

Now – What is interesting to me though, was the 3rd announcement concerning China – igniting another possible ‘geo-political crisis’ – the one that left the WH scrambling to clarify his comment that the US (and the west) would defend Taiwan in case Xi Xi felt like pulling a Vlad – and forcefully going in to ‘take it back’….that was a significant negative market moving comment (because it suggests another possible military confrontation)  – but one that the algo’s and trader types chose to ignore….and to their peril…..as stocks are in sell mode again this morning.

The WH scrambled to ‘clarify his comments’ – saying that what he meant was that the US and west would provide military equipment and intel to support Taiwan but not commit any troops – (feels very Ukraine like…).  Money, equipment but no troops.  In any event – the comment was not expected, caused all kinds of angst in DC as well as in China – and while the WH tried to ‘walk back the comments’ – they are out there and you can bet that Xi Xi is not pleased…..so there is more to come – you can be sure of that.

In US news – news that Broadcom (AVGO) was considering taking over VMware (VMW) set the M&A world and tech sector – (XLK +2.3%) on fire…suggesting that all is NOT lost and that as stock multiples and prices (in this case software) come in, M&A activity will heat up…. that is a positive.  Then JPM (+6%) lit the financials on fire (XLF +3.25%, KBE + 2.5% and KRE + 2.3%) after raising their net interest income forecast and reiterating their expected 17% return on tangible equity.

Then in a triple play CEO Jamie Dimon gave it the old college try joining the cheerleading crowd – sounding very bullish on the US economy much like both C CEO Jane Frasier and BAC CEO Brian Moynihan did in Davos.  All 3 suggesting that talk of a recession is premature and is not happening.  That the US economy and labor markets are unbelievably strong…to which I would say – they cannot see it, they do not live in the everyday world that the majority of the country does, so take what they say with a grain (or two) of salt.    – but in the end – let us be honest – after 8 weeks of selling pressure a rebound rally (however short) has been long overdue and all of that is what caused the algo’s and trader types to go all in. 

By the end of the day the Dow added 620 pts or 2%, the S&P ended the day up 72 pts or 1.8%, the Nasdaq jumped 180 pts or 1.6%, the Russell up 20 pts or 1.1% and the Transports added 267 pts or 2%.  (Did you notice how both Dow indexes rallied by the same 2%…. interesting no?)

Every one of the 11 S&P sectors was up….Financials leading the way – XLF +3.25%, Energy – XLE + 2.6%, Tech – XLK + 2.3%, Consumer Staples – XLY+ 2%, Basic Materials – XLB + 1.8%, Industrials – XLI +1.6%, Communications – XLC +1.5%, Real Estate – XLRE + 1.3%, Utilities – XLU + 1.2%, Healthcare – XLV + 0.8% and Consumer Discretionary  – XLY +0.7%.

The contra trades- DOG, PSQ and SH were all lower (makes sense) down 2%, 1.6% and 1.8% respectively.  Expect these names to be UP today as the markets come under pressure.  The value trade is now off 7% ytd while the growth trade is down 24% ytd….

The VIX sold off yesterday down 3.2% and is up nearly 3% this morning…again – why are you surprised…?

10 yr. bond yields rose 8 bps to end the day yielding 2.85% – 30 yr. treasury yields also rose ending the day yielding 3.04%.  This morning with stocks around the world under pressure – Treasury prices are rising (think safety trade) sending yields down…. the 10 yr. is at 2.8% while the 30 yr. is yielding 3.01%.

Oil is under pressure this morning – down 50 cts at $109.80……as the mouthpieces are warning that the ‘possible recession’ means weaker consumption – completely ignoring the tight global supply issues along with increasing demand out of China and other parts of the world.  I have two things to say – one the recession is here – whether officially or not – and two demand is not subsiding….  My sense is that the risk for oil still remains to the upside…. …Support is at the 50 dma trendline – $102.40 while resistance is at $112.80.  Now to be fair – if we pierce support then expect to test $96/barrel and if we pierce resistance then look to test the March highs of $120/barrel.

US futures are under pressure today (and global markets are lower as well).  Dow futures down 320 pts, the S&P down 60 pts, the Nasdaq down 245 pts, and the Russell is down 22 pts.  Yesterday’s feel-good rally was nothing more than a rebound from a short-term oversold position. We have seen this storyline play out again and again this year……stocks sell off, then we have these one-day rallies which lead to further and larger selloffs….

The news today that changed the tone.  A SNAP earnings/profits warning………. (And they were not good).  CEO Evan Spiegel delivered this message –

“The macroeconomic environment has deteriorated further and faster than anticipated, as result, revenue and earnings this quarter will fall BELOW the low end of forecasts issued only one month ago”  

OUCH!  And the stock proceeded to drop 30% or $6.73 in the after-hours session taking the whole social media group out to the woodshed and the chopping block.  FB fell 8.5%, PINS lost 16%, GOOG – 3.6% TWTR fell 3.5% and is now $18 below Lonnie’s takeout bid price of $54.20/share – which is a whole other issue.  But in the end – an individual stock story – usually hits that stock and may affect the sector as well – if it is broad enough and this one appears to be broad enough, but it doesn’t usually hit the whole market – unless of course there is so much anxiety in the whole market – and there is….and so the reaction.

Eco data today includes S&P Global US Manufacturing PMI – exp of 57.7 and S&P Global US Services PMI and that is expected to be 55.2.  Both of these readings remain north of 50 – which is the dividing line, so that is good, but both are weakening – which is not good.  Today’s services PMI is very important as the US economy is a 75% services economy.  In addition, we will get the Richmond FED survey – exp of 10 and New Home Sales – expected to be down 1.7%…the risk here is that this number is even larger and that would reflect the jump that mortgage rates are having on home sales in general.  Recall that this metric was down a stunning 8.6% last month – which should not surprise anyone.

Tomorrow we will get the latest FOMC (Federal Open Market Committee) minutes – and no one expects to hear anything we do not know – other than the FED trying to convince us that they got this! (They do not – who is kidding who.).  Thursday will bring us the 1st revision to 1st qtr. GDP and that is expected to be negative 1.3% (no real change from the negative 1.4% original estimate).

Next up – get ready for higher prices……Chip giants – Intel, Taiwan Semi and Samsung are all expected to raise prices by 10% – 15%  (and this is on top of the 15% increases we have already seen in the space over the past year) and this will make anything electronic even more expensive….just think of ALL the products that rely on semiconductors and there are a lot of them.  All 3 chip makers citing rising costs and looming inflation concerns as the reasons for the most recent price hikes. So again, if anyone is expecting inflation to peak – you might want to revisit that idea.

Look – markets have been all over the place and are expected to remain volatile, but opportunities are being created….and as such investors who have been patient are now finding bargains in very good, solid quality names.  Do not let the noise distract you and while that is difficult – that is exactly what you need to do…. remain focused and do not get caught up in the emotion of it. It is ok to pause for now – because doing ‘nothing’ is doing something.  No one has to feel like they have to always be buying or selling…You are not a day trader…. you are in investor.

Stocks across Europe are all lower…. At 6:30 this morning – markets across the region are trading down between 0.5% and 1%.

The S&P closed at 3973…. The SNAP guidance and the Taiwan comments are behind today’s weakness…. JJ is expected to speak later this morning…and the big risk is that the FED continues to push ahead completely ignoring what the markets are predicting…. yesterday though, Atlanta’s Raffi Bostic fired the first shot suggesting that just maybe the FED should consider pausing in September….and boom – there you go…the first hint at pausing……so expect more of the team to put this out in the public square – allowing it to marinate…. The talk of a more aggressive FED will cause stocks to remain volatile while the talk of a more patient FED may allow for stocks to stabilize…. In any event – stay awake…this is not the time to fall asleep.

I did not for one minute change my investment thesis based on these headlines at all.  In fact, I am not changing my investment thesis at all…. I own and am buying names that I know, that represent real American companies, that have real businesses, which have multi-national exposure, which pay strong dividends, which represent a diversity of sectors, opportunities and innovation.  Stick to the plan…do not try to call market bottoms or market tops.  Buy quality names that offer long term stability and pay you to own them.  In the end expect more turbulence ahead…because stocks will continue to thrash around.  The larger risk still remains to the downside.    
 

Take Good Care

Chief Market Strategist
kpolcari@slatestone.com

 

Simple Baby Back Ribs

These are simple to make and so good.  For this you need:  the Baby Back Ribs, and some Sweet Baby Rae’s BBQ sauce.

Bring a pot of slightly salted water to a boil – add the ribs and return to a boil.  Remove the ribs and place in a baking dish.  Now add the BBQ sauce and massage the ribs well.  Cover tightly with foil and place in a 325-degree oven and let cook for min of 2 hrs…..

Now – remove the foil and broil until nice and crispy…. Serve immediately with cole slaw and fresh corn on the cob.  Prepare to get your hands sticky… – the only way to eat these ribs is outside on the deck at your weekend BBQ

Buon Appetito