Things you need to know

• Danger Will Robinson, Danger…….!  CPI hits a 41 yr. high; FED is now backed into a very tiny corner as the walls begin to cave in, everything is up and gas is now above $5/gal on average, Crypto’s getting crushed as well – Bitcoin down 11% (today), Ethereum down 17% (today) and the other lesser-known ones down even more. Treasury prices getting slammed sending yields higher as investors reprice the risk of owning stocks as a recession looms large over the country and more likely the world.
• Try the Fried Bologna (Baloney) Sandwich

 
Rising prices continuing to hammer stocks and bonds AND investor psyche….Worries that surging inflation will now force the FED into more drastic action is what sent the algo’s into overdrive – initiating waves of sell order after sell order as they trampled over each other in an effort to ‘get out’….Buyers on the other hand – were happy to let prices decline – stepping back to avoid getting run over – in an effort to ‘shake out the weakness’ allowing stocks to reprice as we move into what is sure to be a much more aggressive FED posture.

Friday’s stronger than expected CPI report showed inflation running at an 8.6% up 0.3% over last month and well ahead of what the expectation was along with a plummeting consumer confidence  – that came in at 50.2 down from 58.4 – traders types, algos’ and some investors decided that enough was enough – and now it was time to ‘get out’…..which is usually one of the signs of pending capitulation…..when everyone gets so anxious that they throw everything out INCLUDING the kitchen sink!  (Just to be clear – that has not happened yet, but feels like it is getting closer – think today?)

As the morning turned to afternoon – stocks get weaker and weaker…closing on their lows (again).  Recall they did that on Thursday evening and on Friday morning I told you that that was NOT usually a good sign, that when stocks (or indexes) close on their lows – it usually means that they test lower the next day – which is exactly what they did on Friday….So now the question is – will they ‘rinse and repeat’ today and apparently that answer is a resounding YES – as futures got crushed overnight and are all pointing significantly lower this morning.

At 5 am Dow futures are lower by 600 pts, (which is up from being lower by 800 pts at 2 am), S&P’s down 90 pts, the Nasdaq lower by another 350 pts and the Russell is off by 46 pts.   Stocks in Japan, Hong Kong, Taiwan, and South Korea all down more than 3% overnight and markets in Europe are all lower by as much as 2% as the sun makes it way across the sky.

By the closing bell on Friday  – investors and traders were a little ‘less’ wealthy – as stocks got slammed….the Dow gave up a whopping 880 pts or 2.7%, the S&P lost 117 pts or 3%, the Nasdaq gave back 415 pts or 3.5%, the Russell lost 51 pts or 2.7 and the Transports gave back 360 pts or 2.6%….All this as rising energy and food costs surge beyond 41 yr. highs….with gas at the pump now more than $5/gal across the nation…..

Declines across the board in everything….suggest that investors now expect JJ to change his tune once again….and while Wednesday this week – promises to bring us a 50 bps increase – there was already talk that they may change as well….that the realization that inflation is spiraling out of control may force the FOMC (Federal Open Market Committee) to surprise markets by raising rates by 75 bps…..- which in my opinion – would NOT be a smart thing to do at this late hour…..they set it up for a 50 bps move, over and over again – suggesting that they had it under control…….So, a sudden change on Wednesday would suggest that they have lost complete control and that they have lost all credibility (the equivalent to screaming FIRE!)  NOW, that does not mean that the narrative cannot change for July, September, November and December….and I now expect that it most likely will.

Tomorrow we are due to get the monthly PPI (Producer Price Index) report and that is supposed to suggest that prices at the producer level are DROPPING…..the estimate is for y/y demand of 10.8% (down from 11%), now that’s funny (and full of baloney) …..My gut tells me that it is at least 11% and I would not be surprised if it was higher as well, just like the CPI….so brace yourself…..and then on Wednesday we get the results of the June Fed meeting….and the 2:30 press conference should reveal what JJ and his ‘team’ thinks…and it can’t be good….. 

So, now you have to ask – will he attempt to ‘downplay’ Friday’s spike in CPI and try to blow smoke up your (fill in the blank) or will he ‘wake up and smell the roses’? Will he come out and say that ‘everything is on the table including ‘inter-meeting hikes?  And if he does what does that really say about what the FED heads are thinking?  Because in any event – investors/traders and algo’s are smelling the roses and they do not smell so good! Talk of 75 bps and now even 1% rate increases in the months ahead are now legitimately part of the narrative – they have to be – the FED would be considered illegitimate if that did not become the narrative. 

Now – that will surely push us into a recession (as if we are not already there…) and deeper into bear market territory – the only question now is how deep will we get pushed?  How much pain is the FED willing to impose?  And again – isn’t it comical that we are charging the very people that put us in this position to get us out?  I mean – the FED is responsible for at least 75% of it (stimulated too long and completely missed all the signs back in the Spring of ’21)….the Biden administration’s ongoing ‘stimy checks’ and the ‘Build Back Better’ plan adding the next 23% and then Putin’s 2% contribution has pushed inflation rates to levels not seen since the early 80’s…. To be crystal clear – Putin is NOT the root cause of this level of inflation – this has been building for years and has now come home to roost. 

The 10 yr. treasury surged to 3.16% up from 3.02% and this morning it is up another 7 bps at 3.23% as bond buyers were nowhere in sight – plunging bond prices sending yields higher only begin to tell the story of what is to come.

Remember – the FED has been the buyer of last resort for years and now that they are really beginning to raise rates and reduce the balance sheet by $45 billion soon to be $95 billion per month – do not expect them to be standing in place supporting the bond market the way they have been doing for years now…so then do not expect institutional buyers to just stand there and get run over….No, no, no….just like with stocks, bond buyers are choosing to bid lower (and they should – remember the FED is no long holding their hand)  and with every increase in Fed Funds you can expect that stock buyers and bond buyers will continue to bid lower – sending yields UP, UP and away.

Of the 11 S&P broad sectors – Consumer Discretionary – XLY led the day’s losses – down 4% – taking that sector down 30% ytd, Tech – XLK was right behind at -3.8%, Financials – XLF lost 3.6%, Basic Materials – XLB down 3%, Industrials – XLI down 2.9%, Communications – XLC -2.8%, Real Estate off 2.4%, Energy XLE, Healthcare – XLV both down 1.7% while Utilities only lost 0.8%.  The Value trade – lost 2.2% leaving it lower by 8.5% ytd, while the Growth trade gave back 3.6% – leaving it down 26% ytd.

As of this morning the Dow is now down 14% ytd, the S&P -18%, the Nasdaq down 28%, the Russell off by 20% and the Transports are lower by 19%.  Oil is up 65%, food commodity prices are up 35% and housing costs are surging as well. All this while Joey told Jimmy Kimmel – in his first interview in 150 days – that we have the ‘strongest economy’ in the world. I must have missed that memo…

The contra trades continue to do well – the DOG (short the Dow) gained 2.8%, the PSQ (short the Nasdaq) was up 3.5% and the SH (short the S&P) gained 2.9%.  These 3 trades are up 13%, 30% and 18% respectively.  And the VIXY – which gets you LONG the fear index (VIX) gained 6% on Friday, was up 25% last week  and is looking to spike higher again today. This morning it is up another 17% trading at $32.80 – with many suggesting that $40 is the level to watch and would signal the start of real capitulation which will see indiscriminate selling of everything.

Oil ended the day at $120.50 barrel after testing as high as $122.50 and as low as $118.50…. confusion over what the data reveals sent oil on its wild ride.  Many now asking – Will inflation kill the goose that laid the golden egg in 2022 or is everyone just overreacting? The Energy etf – XLE up 65% ytd mimicking oil is rise this year.  This morning – oil is under a bit of pressure – down $2/barrel as China re-imposes lockdowns once again on another Covid Alert – Beijing demands that in dining at restaurants close their doors as 35 new cases are reported causing Beijing to demand another round of mass testing for millions of Chinese citizens. 

It seems to me that Xi Xi does not get it (or maybe he does) lockdowns clearly do not work to control the virus, but it does work to control the people and it does work to disrupt the global supply chain – once again, another reason to diversify AWAY from this communist state.  If we are going to continue to outsource our manufacturing to Asia – then Vietnam is a place to look…. In any event – It is time to move out of China and with each new lockdown – it only reiterates that point.

This morning US futures are getting crushed again as noted above. There was nothing specific over the weekend to add to the angst, it is just the realization that it is not good out there.   Eco data today includes nothing, but tomorrow brings us the PPI report, which is expected to be hot, Wednesday brings us Mortgage Apps – which will surely be down again, Advanced Retail Sales – exp of +0.1% and ex autos and gas of +0.4%.  At 2 pm – we will get the FED decision along with the press conference. Thursday brings us Housing Starts -1%, the Homebuilder ETF – XHB off 4% on Friday is now down 32% ytd.  Industrial Production of +0.4% and Capacity Utilization at 79.2% inching ever closer to that 80% level that also suggests inflationary pressures continue to build.

Calls for S&P 3400 by MGS and 3100 by Goldman are at the top of today’s headlines.  Just to be clear that would be down another 13% if MGS is correct and down another 20% if Goldman is correct.  This on top of the 18% that it is down as of this morning.

European markets are all down by 2+% across the board…. German Bunds, Italian Bonds and other benchmark sovereign bonds all trading lower sending yields higher across the region.  Last week’s confirmation by the ECB (European Central Bank) that they are about to start the tightening process by ending the bond buying program along with raising rates continues to set the mood.  Toss in rising inflation pressures and BANG – stocks and bonds will go lower until the risk profile stabilizes.

The S&P closed at 3900 – down 116 pts…. right on the low of the day.  Which usually means that we will test lower today.

I said it last year and I keep saying it today…. The FED needs to shock the markets, they need to stop the insanity and crush it….it won’t be pretty, but it needs to happen…the question is – will he do that in an election year?  Will he do that when voters are going to the polls in 5 months? Get ready for another volatile week. PPI, the FED, Housing and Advance Retail Sales are this week’s storytellers.  Capitulation is coming, the countdown has begun.

I have been calling for a retest of S&P 3800 – it is here, now the question is – Will it hold?  A failure to hold will cause all of the algo’s to go into a selling frenzy as another technical level gets shattered – leaving S&P 3600 as the next downside target. I am remaining hopeful but setting myself up for more trouble ahead. Just sayin’….

Take Good Care

Chief Market Strategist
kpolcari@slatestone.com

Fried Bologna (Baloney) Sandwiches

Considering what is going on right now – and the cost of food and energy – It is clear to me that it is time for some bologna sandwiches.

It is relatively inexpensive to make and always makes you feel like a kid. I mean WHO did not eat fried bologna sandwiches as a kid?

For this you need – Butter, 4 slices of bologna, 1 slice of yellow American cheese, mustard, or mayo – or both mixed, white bread, lettuce, and tomato (if you want to be fancy).

Start by heating up some butter in a frying pan.  When hot, add the bologna slices and let them crisp up on one side, then flip and repeat.  While this is happening, lay out two slices of white bread.  Spread the mayo/mustard mix on both sides of the bread.

When the bologna is all crisped up – place two pieces on one slice, then the cheese and if you are using lettuce and tomato – now add those.  Top with the other 2 slices of bologna and then the other piece of bread.  Slice at a diagonal and serve.

A side of potato chips works well with this.

This whole ‘meal’ should cost you no more than $15 to feed a family of 4.

Buon Appetito.