Things you need to know
- Stocks shake off early Monday blues to end the day higher
- Today starts the long awaited FED meeting – 75 bps is the expectation
- Oil thrashes around and remains in the $80/$90 range
- Gold fails to hold $1700 all as the dollar remains at the highs
- Try the Grilled Sea Bass
Stocks began the week in what looked like a carryover from Friday’s drubbing…Yesterday’s pre-mkt action pointed lower and that wasn’t really a surprise – considering the news that FDX delivered on Friday – news that sent the stock tumbling more than 22% in one day – in fact it fell more on Friday than it did on October 19th, 1987…..when it declined by 17% on a day when the markets collapsed – falling 22.5% in 6 hours….Now THAT was historic and dramatic…
For those of you who have not heard – FDX pulled their full year guidance, they offered a weak first qtr. forecast and warned that the 2nd qtr. could be even worse….all while committing to ‘aggressively accelerate’ plans to slash costs….and that hit analysts and investors like a ton of bricks….sending the algo’s into a tailspin that took the market down big to end the week…and then yesterday morning futures pointed to more weakness…….traders and investors bracing themselves for more turbulence…..the bell rang and stocks plunged…..making the day’s low at 9:30 am…..finding support at 3838….leaving us just 200 points shy of testing the lows of June at 3621….but then investors shook off the losses and marched steadily higher….as there was NO economic data to help tell the story…..so investors focused on what is sure to be the biggest event of the week – the start of the FOMC (Federal Market Open Committee) meeting. And by the end of the day – cooler heads prevailed, and stocks closed up – which might be nothing more than an anomaly….at 4 pm – the Dow closed up 200 pts, the S&P gained 26 pts, the Nasdaq ended higher by 90 pts, the Russell gained 15 pts and the Transports- added 250 pts.
Now it is important to note that the Transports fell BELOW the July lows on Friday (yes July not June only because July has been the cycle lows for the transports)…..taking that index to a new low of 12,656 (in this cycle) vs. the July low of 12,748…….completing ‘half’ of the sell signal dictated by Dow theory – the other half suggests that the Dow Industrials must now fall to a new cycle low too…….which means that the index has to pierce 29,653… if Dow Theory is to prevail….Yesterday- the Dow tested a low of 30,559 – leaving it just 1000 pts shy that level.
And this is important why? Because the transports do send an important message about the health of the economy – it is a leading economic indicator – leaving many to remind themselves that if the transports are not ‘taking’ what companies are ‘making’ then stocks will be falling……See how that works? Now in order for that theory to work – the industrials must make a new cycle low….and that might just be coming…
Now treasuries are the next piece of the puzzle with 2 yr. rates now kissing 4%, (3.985%), 5 yrs. yielding 3.70% and the 10 yr. yielding 3.53%….leaving the curve inverted and causing investors to reconsider where to put their money…..considering that now less than 16% of the S&P companies have dividend yields greater than the 2 yr. yield and fewer than 20% have yields greater than the 10 yrs. which is now 3.53%. Recall that when the FED held rates at 0% it forced investors to take more risk by investing in stocks – as there was no return available in the treasury markets…. but with treasuries now yielding better than 3.5% – many now ask themselves do I really need to take on more risk?
Which is why tomorrow’s FED results continues to dominate the picture…. what will the FED do? It is all but certain that they will raise rates by 75 bps….and that is what the market is expecting…..but there are some out there that continue to suggest that they will surprise investors and raise rates by 100 bps while a handful of others are pulling for a 50 bps hike….either one of those results will cause even more chaos – because both send a different message….One of FED panic and one of FED complacency….but in the end – what investors/traders and algo’s will focus on is what JJ says at the press conference…..will he continue to push the narrative that the FED will maintain ‘jumbo’ rate hikes or is JJ convinced that these 3 – 75 bps hikes have done the trick and we can expect a slowdown in rate hikes, NOT a halt, but rather a slowdown into the new year….and this hike will get us to 3% – 3.25% – a full percentage point below what many now expect the target to be by year end… 4% – 4.25%…which means that they will have to raise rates by 50 bps at both the November and December meetings.
Now higher interest rates leads to higher mortgage rates…which are now pushing 6.3% for 30 yr. money on a conforming loan and that is important because today we are about to get the latest read on Housing Starts which are expected to be up 0.3% (which I think is a mistake) and Building Permits which are expected to be down 4.8% (which makes more sense)…..while tomorrow brings us Existing Home Sales – which are expected to be down 2.8%….and that is assuming we don’t get a recession in the months ahead….(which is also a ridiculous assumption) – but let’s not go there right now!
Then yesterday ‘after the bell’ Ford Motor ‘warned’ of tougher times ahead…. saying that 3rd qtr. earnings may not be what the dr. ordered! Yesterday they told us that 3rd qtr. earnings would take a $1billion hit – due to higher supplier costs (think the PPI), parts shortages (think supply chain) that left them with loads of unfinished products (think cars) during the qtr.….which then caused them to ‘adjust’ 3rd qtr. results…..they also reaffirmed full year estimates of something between $11.5 and $12.5 billion – leaving themselves plenty of wiggle room….it should be known that street analysts think that F will earn $11.9 billion – but let’s see what they do now that F issued this warning….….F which had traded up by 1.5% during the day – traded down by nearly 5% after the announcement.
And this goes exactly to the point I have been driving home for weeks now….I have been cautious ahead of the start of the next beauty pageant – which begins the week of October 10th…..warning you that I expected companies to ‘pre-announce’ weaker numbers (based off of what they told us in July) causing analysts to ‘adjust’ estimates lower – both FDX and F have now done that – joining a host of others…a practice which companies hope causes the pain now – ahead of the actual announcement – while then taking the stocks higher when the announcement hits – that is as long as they don’t surprise us with anything new….It’s a tangled web we weave….
Oil –This morning WTI is trading at $85.82/barrel after trading as low as $82.25 yesterday…..The latest narrative….is that rising rates will put pressure on demand…which I think is comical….just like food and housing, the world revolves around energy…..and I am not buying the demand destruction story for energy, we still need to heat our homes, drive our cars, manufacture products etc….and in fact both OPEC and the IEA have raised year end 2022 estimates and 2023 estimates….So – where exactly is the demand destruction? Are 4% rates going to stop you from using energy? Doubtful…. now would 10% rates cause a change in behavior for energy – maybe, but 4%, not happening. And remember – oil is not the only energy source…we have coal and Nat gas which have also seen a surge in demand and will remain places to find opportunity. Remember- Oil is up 20% ytd, Nat gas is up 114% and coal is up 182% ytd – while the energy sector – XLE is up 40% ytd all while the broader indexes are all lower by double digits…. think 14% – 27%. Oil remains in the $80-$90 trading range.
Now Gold is at an important crossroad….it pierced $1700 and has now failed to hold onto it…. this morning – gold is trading at $1678/oz after having fallen to a low of $1674/oz breaking what I thought would be support at $1700. And with rates expected to go higher still – Currency traders are betting that given the latest inflation data – the FED is not going to slow down on rate hikes anytime soon and that will send the dollar higher -which in the end will put pressure on the commodity complex – as commodities are prices in dollars – so the relationship is inverted…stronger dollar, lower commodity prices, weaker dollar, stronger commodity prices….
The dollar is trading at 109.86 – teasing the high of $110.70 which is the level to watch – a breakout there will send the dollar higher and that will put renewed pressure on commodities while a failure there will help them stabilize.
US futures are lower this morning…… Dow futures down 110 pts, the S&P -15, the Nasdaq lower by 64 pts, while the Russell is down by 8 pts. While we do have some eco data today – the focus will be squarely on what the Fed will do and what will be the message tomorrow. Earnings start the second week of October and that will be the next hurdle for the markets and investors. Will we see a significant slowdown in reports? What will the C-suite say about the next 6 months…. are we about to get more FDX and F types of pre-announcements? I say yes….so get ready.
You know me – I remain cautious about the coming earnings season….and am being patient…which does not mean I am paralyzed – it just means I am putting money to work in a handful of names that I believe are at the core of a long-term portfolio.
European markets are all lower…. German producer prices are due out and Sweden – which is not a country we discuss very often launched a 100-bps rate hike today…saying that inflation is much too high…. but don’t worry yet, that move only takes Swedish rates to 1.75%. At 6 am – markets across the region are all down about 0.75%.
The S&P gained 26 pts….to end the day at 3899. Now we have broken the trendline I identified last week….3946… we then appeared to be ready to test the July lows of 3721 – which we have not (yet) but will most likely do in short order. A failure to hold that will surely set us up to test the June lows of 3630.
Remember – we are in a seasonally difficult time – September and October remain volatile….and a test lower is still very much a reality. Stick with the Big, Boring names…. that pay decent divvy’s (although that is getting more difficult) and take advantage of the lower prices.
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Grilled Sea Bass
As we kiss summer 2022 goodbye – try this very simple yet delicious dish.
4 Filets of Striped Bass w/skin on, Olive oil, freshly squeezed lemon juice, oregano, smashed garlic cloves, s&p, fresh chives, cut into 1 inch for garnish.
Combine oil, lemon juice, oregano, garlic, and pepper in a large shallow bowl. Add fish to marinade, and flip to coat both sides. Cover with saran wrap, and place in the refrigerator 45 minutes.
Heat the grill – to med high. Take the striped bass out of the fridge and remove from the marinade, place it on the grill, skin side down, and season with salt. Grill until skin is lightly browned and starting to crisp. Using a spatula – Carefully turn fillets and cook through until the center is opaque – no more than 5 to 6 minutes.
Serve with rice pilaf and sautéed spinach (garlic and oil, s&p). Decorate with the chives and lemon wedges.
Buon Appetito.
