Things you need to know
- Stocks continue to ricochet around the world
- Treasury prices, stocks and crypto’s all in free fall mode
- More big banks now convinced that a recession is inevitable if not already begun
- Try the Grilled Pork Chops
So, by now you know what happened, that IS unless you have been living in a cave…. JJ Powell comes out swinging – telling us what we already knew…. that inflation IS a problem, and it is not going away anytime soon. And because that is so, the FED needed to raise rates by 75 bps…. vs. the 50 bps he had promised…. but was this really a surprise? No, they leaked it on Sunday night making sure that it was THE headline on Monday – and then for good measure they enlisted all of the big banks to continue to ‘sell the story’….and so they did and so we all go hit with it….
During the press conference – JJ appeared at times dazed and unsure of what he was saying or trying to say. Because what he said was in complete contrast to what he had been saying all along….Inflation IS a problem as the latest CPI & PPI reports suggest it is, suddenly he may have to continue to raise rates at the 75 bps increment to ‘slow the economy down even more’ resulting in (gasp…) a recession…..bottom line – that was the message. What investors have to figure out is will this recession result in the 1980’s style ‘stagflation’?
Then we get the latest revision out of the Atlanta FED GDPNow forecast and it isn’t good. Suddenly – the strong economy isn’t so strong. At the beginning of the quarter that forecast called for a 1.3% growth rate………yet – during the quarter it has been revised steadily lower week after week…and currently stands at 0% – about to go into negative territory joining the first quarter that is also in negative territory – but let’s just put that aside for now.
Hey JJ – wake up – Here’s a hint for you…the country is already in a recession – whether it’s the defined recession you need to make it official or whether it is a recession defined by the everyday American’s that are living it……Take your pick – a textbook definition or a definition rooted in reality.
Stocks which had gotten clobbered on Monday and Tuesday ahead of the rate decision rallied hard on Wednesday afternoon so, many thought, ok – 75 bps was priced in, it’s all good….time to go shopping…..wellllllll – not so fast…Once investors, analysts and strategists got a chance to really digest the news, once they realized that we are in way over our heads, they had a change of heart and stocks came under pressure overnight Wednesday into Thursday morning and then under even more pressure once the opening bell rang giving back all of the gains seen on Wednesday afternoon.
By the end of the day the Dow lost 741 pts or 2.4% slicing right through 30,000 like a hot knife thru ‘butta’ – (think Barbara Streisand – Brooklyn, NY accent) trading as low as 29,740 before finding any support. It ended the day at 29,927. The S&P tested as low as 3,639 – down 150 pts before those same buyers found opportunity helping it to end the day lower by only 124 pts or 3.25%, the Nasdaq continues to be the bearer of bad news – falling another 455 pts or 4.1% to end the day at 10,646 – down a stunning 32% ytd….with no end in sight…taking the index back to September 2020 levels, the Russell down 82 pts or 4.7% leaving this index down 26% ytd while the Transports are off 22% – falling another 455 pts or 3.4% yesterday.
Treasuries went apoplectic– tumbling in price sending yields surging to a high of 3.499% on Monday (after the story was leaked) before settling down to end yesterday yielding 3.23%. (The pullback in yields being credited to the idea that the FED will cave and actually CUT rates to avoid what is going to be a difficult time). And as investors recognize that the ‘buyer of last resort ‘ is no longer hanging around – what do you think happens to bond prices? They are not going up, that is for sure....and institutional buyers will bid lower to test the angst of the sellers, just like they are doing in stocks…and they will continue to do so until investors are convinced that this is under control. And do not forget – higher rates affect everything…. revolving credit, HELOC’s (Home Equity Lines of Credit), auto loans – everything. So, expect all of those payments to go up which will put more and more pressure on consumers and the economy.
Mortgage rates for 30 yr. conforming loans are now being quoted at 6.2% – a 113% increase over what they were in January 2021. So just to put this in perspective…. In January, an $800,000 home with a $640,000 mortgage at 2.9% would have cost $2,919/mo. (At today’s 6.2% rate – it would cost $3,900/mo.). If you wanted that same $2,900 payment, then you need to find a house for $595,000 – with a $475,000 mortgage – good luck with that. Just wait until THAT reality hits the housing market in the months ahead.
Now to be clear they want us to believe that we won’t get a substantial recession (if we get one at all.) – OK, then…let’s lay this out…financial conditions are tightening at speeds not seen in 40 yrs., and its only just begun (and we know what happened then), there has been more than $15 trillion of equity declines, $2 trillion in crypto currency losses, the largest bond market losses in history and the FED’s balance sheet reduction of $95 billion/month hasn’t even begun yet all while the U of Michigan consumer confidence index falls to 70 yr. lows…..and they want us to believe that the FED can (and will) navigate a ‘soft landing’! As for me – ‘soft’ and ‘landing’ should not be used in the same sentence at all -because THAT is not happening. Prepare for a crash and hope that it’s just the wheels that break off the plane when it lands.
And here is another thing – if anyone thinks that this unwinding is gonna be over by mid-2023 – WAKE UP…. we’ve been stimulating for 12 yrs.…. count them – not 1, not 2, not 5 – but 12 yrs.…. this process has only just begun…expect to hear about it for years to come.
And remember how a 2% inflation rate WAS the target that the FED identified as the tipping point? How’d that work out? Why didn’t he follow the game plan? Why did he dismiss it as a non-event back in May of 2021? Oh boy, it is a tangled web we weave…
So, now it’s time to face the music…. it’s time to recognize that all of that stimulus, all of it –went on for way to long…. Remember the December 2018 taper tantrum? The S&P fell 11% in 3 weeks when JJ started to raise rates off of zero…. All of the big asset managers would have none of it – they called up the FED and said – don’t you dare do this now…. its year end, the economy can’t handle it – what are you thinking? And so, the FED backed off – They kissed the ‘boo boo’ and made it all better, but that was exactly the WRONG thing to do…he should have grown a pair and raised rates then……stocks would have repriced, and it would have been over, but he didn’t and stocks gained another 106% thru January 2022. So, now think about what the unwind could be……
And just to add fuel to the fire yesterday – the Swiss National Bank raised rates unexpectedly – joining the FED, the ECB (European Central Bank) and the BoE (Bank of England) along with a handful of others….and this rate hiking is draining liquidity and that is sparking ‘losses’ across a range of assets in the US and around the globe – resulting in the worst week since the start of covid – March 2020. So, the question has been and remains – How far will the market fall before the tightening cycle is fully priced in? And that is not an answerable question, it’s anyone’s guess and we know that MGS is calling for S&P 3400 while GS is calling for S&P 3100!
Of the 11 S&P major sectors – Energy XLE fell 5.6%, Tech – XLK -4.6%, Consumer Discretionary – XLY -5%, Communications XLC – 3.9%, Industrials – XLI -3.4%, Basic Materials XLB – 3.6%, Financials XLF – 2.5%, Real Estate XLRE -2.6%, Healthcare XLV -1.5%, and Utilities XLU – 1.9% while Consumer Staples XLP were the winner down 0.8%.
Metals and Miners XME – 4.3%, Housing XHB – 6.6%, Semiconductors SOXX -3.5%, Airlines – JETS -5.9%, Artificial Intelligence – BOTZ – 3.5%, Disruptive Tech – ARKK lost 9.2% (Cathie Woods thinks we are ‘near the bottom’ – just fyi).
And the contra trades – well, they did as you would expect. The SH up 3.3%, PSQ + 4%, DOG + 2.3%, SPXS +9.6% (that’s the triple levered Direxion S&P).
And it’s Friday morning – the week can’t be over fast enough…and futures are up as the thrashing continues….and the reality of a more aggressive FED takes root. The Dow up 250 pts, the S&P up 35, the Nasdaq up 125 pts and the Russell up 20.
Eco data includes Industrial Production of +0.4% and Capacity Utilization of 79.2% – remember that a reading of 80% or greater will only further fuel the inflation monster as capacity constraints begin to kick in.
The building angst is all about how the FED and the administration will navigate this. The risk of a ‘crash landing’ is rising every day – no matter what they tell you. The consensus now is for us to see 2 – 75 bps rate increases that takes us to 2.5% by September and then it may scale down to 50 bps and then 2 – 25 bps moves…. which gets us to 3.5% by year end….and then we have the 2023 schedule…. which calls for even more hikes….
European markets are up as well…. ricocheting as investors there contend with all of the same issues…. surging inflation, rising rates, slowing economy, Russia/Ukrainian war that threatens to further disrupt the energy and food supply chain. At 6 am – European markets are up about 1% across the board.
After the S&P failure at 3800 – 3600 is now the target… Yesterday we tested as low as 3639….and while this morning’s action suggests it won’t happen today – it doesn’t’ mean it’s all safe. All of the Wall St banks are now lining up, some have already called for a ‘mild’ recession while the others are playing nice. Joey gave an interview to the AP yesterday and we are told that he fought back against inflation blaming it on Putin, the Iraq/Afghanistan war, Trump, and the big oil companies – the thought that any of this has to do with the massive spending done by his administration is ridiculous….…..Sit back – grab the popcorn….this will be entertaining…especially when he tells us that he ‘feels it too’.
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Grilled Pork Chops in a Dijon Marinade
Grilled Pork Chops in a Dijon Sauce – Summer time – grill time….so try this one on for size. This is easy to marinate and grill and presents beautifully – This dish should cost you about $60 to make.
For this you will need: Dijon mustard, brown sugar, apple juice, Worcestershire sauce, and bone in pork chops….
Marinade – Mix 1/2 cup each of apple juice and Worcestershire sauce with 1 cup each of Dijon mustard and brown sugar…. Mix well and add chops…. place the whole thing in a zip lock bag and refrigerate overnight.
Next day – remove from fridge and let come up to room temp….. light the grill and heat to high. Now add the chops and sear – turn heat to med and allow to cook for 5 – 6 mins (depends on thickness) and then flip over and repeat…. (You can dip the chop back in the marinade when you flip it).
When cooked – remove and cover in tin foil and let rest for 3 mins or so……Present this meal on a plate with garlic mashed potatoes and corn on the cob (which you have boiled in a pot of water enhanced with butter and whole milk). Have a large mixed summer salad with red onions, tomatoes, cucumbers, ceci beans, and even blanched French cut green beans. Dress with a red wine vinaigrette and you are done.
Buon Appetito.
