Things you need to know
- PPI supports what the CPI told us – inflation is NOT going away
- JPM and MS report – they miss because they need to allocate more to loan loss reserves – Was that really a surprise considering where we are?
- More bank earnings today expect the story to be the same
- The yield curve remains inverted, the dollar is up, and oil remains under pressure
- Try the Hamburger Helper – talk about cost efficient!
Both JPM and MS missed on both the top and bottom lines…..and that set the negative tone ahead of the release of the June PPI report….You see – the earnings were released at 7 am and the PPI came out at 8:30 am – so the mood was already negative…the PPI only exacerbated the negative tone when that headline hit the tape….
JPM misses earning estimates reporting $2.76/sh vs. the expected $2.88/sh…. the cause? Lower investment banking fees and credit card income… In addition, they raised loan loss reserves by $428 million – by halting and redirecting the share buyback program as they prepared for more credit defaults given the coming ‘hurricane’ that Jamie Dimon referenced over one month ago while taking a current $657 million hit last quarter to cover net charge off’s that have already happened (think bad debt). Net interest income is expected to be up (think rising rates) but revenues on the top line missed – $31.6 bil vs. $31.9 leaving earnings per share 8 cts lower than what analysts had predicted. Now, in typical Jamie style – he took to the call and offered us both positive and negative commentary – refusing to turn a blind eye to the reality of where we are (that was direct reference to the members of the FED that refused to see or chose to ignore the writing on the wall) …. offering this:
“the US economy continues to grow and both the job market and consumer spending, and their ability to spend, remain healthy, BUT geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never before seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road.”
Now none of this should have been a surprise – remember – he did warn us of the coming economic hurricane on June 2nd….and he ‘pre-announced’ that he was guiding his bank to prepare for just that event….investors/traders and algos’ wasted no time THEN – taking the stock down 16% over the month…which is why yesterday’s additional loss of 3.5% is a bit curious….or maybe not…..
We did not learn anything really new – in my opinion – he did exactly what he said he was going to do one month ago…. – so, I credit the algo’s with panic in yesterday’s action…. You see, the algo’s could not hear the words nor could they hear the tone in which he spoke – so all they recognized was the headlines, and when they ‘scrape’ words like ‘earnings MISS’. ‘Economic Turmoil’, ‘Serious Set of Issues’ and ‘Uncertain Economy’ they ‘shoot first and ask questions later’….
The early morning action initially sending the stock down another 5.2%…as the algo’s went into overdrive….the buyers – seeing this reaction – do what they should do – they pull back and bid lower until they can assess the reaction….causing sellers to panic even more….by the end of the day – the stock lost 3.4% to end at the day at $108/sh.
MS – meanwhile reported $1.44/sh vs. the expected $1.57/sh – all while CEO Jamie Gordon told us that his earnings report was ‘complicated’……and that is all the algo’s needed – complicated? What exactly does that mean? The algo’s couldn’t figure it out – so what do they do, they initiate a wave of sell orders….taking that stock down 3.6% in early trading…..Investors expect the commentary from the rest of them will be the same taking the group lower…..C -3%, BAC – 2.3%, GS – 3%, STT – 1.8%, BK -2% while the XLF – financials ETF lost 1.9%. So maybe – when these others report the reaction will be to buy them vs. selling them….
And then at 8:30 – we got hit with the PPI report and realized that prices at the producer level in June rose by 1.1% m/m – vs. the expected 0.8% pace while prices y/y rose at an 11.3% rate vs. the expected 10.7% pace…. If you take out food and energy – then they rose as expected – +0.4% m/m and 8.2% y/y.
And that news only added to the early morning sell pressure…. Dow futures plummeted – falling more than 500 pts dragging the others with it….it felt ugly (and it was) because then the conversation turned back to what will the FED do now? The talk of a 100 bps increase at the end of the month is now a given, but the talk of an ‘inter-meeting’ rate hike (August) confirms that the sh*t is about to hit the fan – so the algos’ wasted no time in running for the exits….
As the day progressed – cooler heads prevailed and the markets attempted to recover – by the end of the day – the Dow lost 145 pts or 0.5%, the S&P gave up 12 pts or 0.3%, the Nasdaq went positive – rising by 4 pts, the Russel gave up 18 pts or 1% while the Transports lost 36 pts or 0.3%.
Treasuries across the curve remain inverted – the 2’s are yielding 3.08%, the 5’s are yielding 3.006% and the 10’s yielding 2.91% giving the recession argument more life….
The Dollar continues to rise and that continues to cause disruption…. but do not expect this to go away…rising interest rates tend to attract foreign investors – and that will cause demand for and value of the US dollar to continue to rise. Yesterday the index closed up another 0.6% to end the day at 108.65. Expect to hear more about how the strength of the dollar negatively impacts revenues for the multi-nationals…. something I think is a bit overdone – because any CFO or analyst worth his/her/they weight in gold understands this dynamic and should adjust for it in their estimates. So, earnings that miss due to ‘currency issues’ are not a negative for me – it just suggests that it is a moving target – it is what it is. Earnings that miss because of a fundamental change in the story are what you should be concerned about as a long-term investor.
Oil – fell by more than $5 at one point…. going from $96.80 at 2 am to $90.56 by 10 am…. before finding support near its 200 dma trendline ($88.57) and rallying all the way back to end the day at $96.47. Now nothing has really changed…. other than the rising dollar and the realization that global monetary policy will have to get more aggressive to battle rising inflationary pressure around the world. And that argument is expected to destroy demand – I am not sure I agree with that completely…. yes, rising rates are meant to destroy demand, but the planet needs energy to spin, so rising rates will destroy demand in other sectors of the economy first. Joey is visiting the Saudi’s this morning – trying to repair (or reset) the US/Saudi relationship as he begs for more oil.
Staples vs Discretionary……in an anxious economy….
The same argument is true for how consumers allocate money for necessities vs. desires…. which is why consumer staples (necessities) – XLP – should be a safer haven than consumer discretionary’ s (desires) – XLY. In fact – staples were up yesterday while discretionary’ s was lower. YTD – the XLP is off by 5.7% while the XLY is off by 30%! Capisce? In addition – consumer staples are bigger divvy payers – so they pay you for owning them and that supports the total return story.
In the end – on the year – Energy – XLE is still up 21% – far and away the best performer of the 11 major S&P sectors. Consumer Discretionary – XLY and Communications – XLC are tied for last place – both down 31% ytd. Industrial – XLI, Tech – XLK, Financials – XLF, Basic Materials – XLB and Real Estate – XLRE all down more than 20% ytd, while Healthcare -XLV is down 9% while Utilities – XLU are off 3% ytd.
The cybersecurity, semis and artificial intelligence sectors also remain under extreme pressure – down 24%, 33% and 44% respectively. The contra trades – DOG, PSQ and SH are all up on the year. Coal and natural gas stocks are also on a tear…. up 100% and 50% as the energy story turns to these fossil fuels to power the world as oil production cannot keep up with demand and Russian sanctions disrupt supply.
This morning US futures are not down….and while they are up – they are not up significantly…. Dow futures up 25 pts, the S&P up 3, the Nasdaq up 10 pts and the Russell up 1. Investors wrestling with the fact that the FED (will most likely) have to get even more aggressive to stop the bleeding….
Earnings on the docket include PNC, USB, BK, BLK, WFC, C & STT along with UNH, PGR.
Economic data includes Advance Retail Sales – expected to be +0.9%, ex autos and gas of +0.1%, Industrial Production of +0.1% and Capacity Utilization of 80.8% and THIS IS IMPORTANT… Capacity Utilization speaks to the manufacturing and production capabilities that are being utilized by the country. A reading of 80+ suggests that we are beginning to stretch the limits of capacity – and that means that in order to control being stretched too far – companies will raise prices – which will feed inflation – to try and slow demand to take the pressure off – did you understand that? Companies will RAISE PRICES to slow demand – sound familiar? Think – Raise interest rates to slow the economy (slow demand).
European stocks have begun the day moving higher…. Markets across the zone are up between 0.4% (France) to 1.2% (Italy). Investors there are also now focused on the start of earnings season both in Europe and here in the US. In addition, expect more chatter surrounding what the ECB (European Central Bank) will do with their monetary policy decision later this month. Remember – they are still negative while inflation is more than 9% across the region. This week – we have seen rate increases in Canada, South Korea, New Zealand, Singapore and the Philippines and with more pressure on the FED – the ECB will have to make a move sooner vs. later. The only question is at what pace will she move?
The S&P closed at 3790 yesterday after trading as low as 3721 earlier in the day after we got the PPI report and earnings from JPM and MS. The rally back was impressive but would have been more impressive if the indexes ended in positive territory. The action this morning is suggesting a better day – I guess the tone will be tied directly to what we here from today’s banks and what we hear from the economic data. We remain in the 3600/4000 trading range…As noted – we test and hold the 3600 level…. Let us see.
Take Good Care
KP
Chief Market Strategist
kpolcari@slatestone.com
Hamburger Helper (think cost efficiency)
After yesterday’s strong PPI report confirming what Wednesday’s CPI report revealed – I featured potato and eggs for breakfast, lunch and dinner – as an economical alternative. Then one of my readers suggested that I offer up the Betty Crocker – Hamburger Helper meal – as it is very cost efficient too. So, I looked it up – you can buy it on Amazon for $1.49. Add in the hamburger – 1 lb. of ground beef for $5 and Bang for $6.49 you can feed a family of 4. Try doing that at MCD’s!
Now, I will ask – who hasn’t ever had Hamburger Helper? I mean – tell the truth – no shame here…. it is an American classic when you buy your first house and are trying really hard to make ends meet. And with the cost of housing, food and energy today – this just might be your only choice.
The double cheeseburger macaroni entrée is a fan favorite. The package tells us that it is made with 100% real cheese and no artificial flavors or colors from artificial sources.
It is QUICK AND EASY: you can make it in 3 easy steps; simply brown beef, stir in ingredients and pasta sauce and simmer. It takes you 20 mins max…. Happy Weekend – go ahead – I know you want to – Tweet me the pictures @kennypolcari.
Buon Apetit
