Things you need to know
- Stocks were in an oversold position – which is why we had a bounce.
- Technically – 3903 proved to be support – but do not be surprised if we test it again today
- Oil bounces off $85 as the Saudi’s once again talk of defending the price
- China shuts down Chengdou and now threatens Shenzhen
- It is Labor Day – Try the Short Rib Burgers
Stocks ended mixed – (think short term oversold) – which was a relief! The Dow rose 145 pts or 0.5%, the S&P rose 12 pts or 0.3% and the Transports added 53 pts or 0.4%…. all while the Nasdaq gave up 31 pts or 0.25% and the Russell lost 22 pts or 1.15%…. … All as investors, traders and algo’s await today’s Non-Farm Payroll report…as they balance their thoughts against what is becoming an increasingly hawkish FED…..And as if we haven’t heard enough – yesterday – Atlanta’s Raffi Bostic took the message to the GA Tech college campus – telling a bunch of college students that inflation is just too damn high and that the current pace of inflation (8.5%) is a LONG way from the Fed’s target……which harks back to the Loretta Mester comments (she also thinks inflation is too damn high) where she said that it is important for real interest rates to go positive in order to tackle inflation….and we did the math yesterday and it is glaringly clear what must happen.
Either inflation has to completely collapse fairly soon – falling to sub 4% (that is not happening) or the FED must push interest rates up and thru what the inflation rate is….in order to get real rates positive. It is a math problem…. Fed Funds rate – inflation rate = real rate.
Now – let’s recap what has happened as we approached Jackson Hole – The language out of the FED began to change….(more hawkish) – stocks began to wobble (after surging some 15+%)…..then JJ took the stage – complete with a sharp beak and a 4 ½ foot wingspan (think red-tailed hawk) and stocks sh*t the bed….all of the indexes losing nearly 4% in one day…..as wave after wave of selling washed thru the system…..the sell side algo’s all running for the one door that was unlocked while the buy side algo’s stepped aside – leaving a void in prices that sent the markets into a tailspin…. When the bell rang last Friday – it was ugly, but we had weekend to consider the language, the tone, the meaning and what to do next….
Sunday night on the east coast was Monday morning in Asia – futures were weak and when the markets opened – prices plunged…..as the sun moved across the sky – day became night in Asia and night became day in Europe…..the mood – not much better sent European stocks lower and as day became night in Europe, night became day in America and the indiscriminate selling continued….stocks plunged again on Monday as all the talking heads tried to make sense of it. Minneapolis Fed President Neely Kashkari telling the country that he was ‘glad to see the markets react to JJ’s speech by selling off’ – somehow relishing in the idea that investors suffered losses – which makes me want to ask – How short was he going into the Jackson Hole speech? And how short were all of the other FED officials, all congressional officials and any member of the administration….? Now that is a statistic that I would like to see!
And the selling continued into Tuesday and Wednesday and even yesterday – until it felt like the selling had become ‘short term exhausted’.
Technically speaking….
Now look at what else happened – technically. If you look at the chart of the S&P – and drew a trendline from the June low of 3650 and connect it to the July low of 3721 – if you extended that line guess what happens….BINGO – it lands right on yesterday’s low of 3903 – where the S&P found SUPPORT – before rallying and closing at 3966! So, what does this mean? Well – in the short term – it offers some relief; it offers some hope that maybe the hysteria was a bit overdone…or maybe it just slows the next leg of the coming decline…. – because history shows that a bear market typically takes about 32% off of the index…and we have not done that yet….in fact – if we were to take 32% off of the index high in January – we would have to see an S&P trade down to 3267 (4805 * .68) = 3267! Which means – if that is true – we have another 700 pts to go! But do not be surprised if we see a couple of UP days as a result…. But I do not expect it to last once we get knee deep into September…. But that is another story.
This morning it’s all about the Non-Farm Payroll report and the expectation is for us to have ‘created’ 300k new jobs (or as I like to say ‘restored’ because we are still restoring the jobs lost when the shutdown came) and there are many street analysts/strategists trying to tell us that if we get a weak report – then that will give the FED pause…..to which I would say – Don’t go betting the ranch on that….If you think a weak NFP report is suddenly going to change the narrative that they have worked so HARD to create – think again…. I suppose that if we saw a negative print in job growth that ‘might’ cause some to at least have a conversation…. but do not plan on that.
Now – Wednesday’s ADP report was weaker than the expectation…. they also expected 300k jobs and we got 132k jobs….and the markets sold off…. So now, they want to make today’s report the lynchpin to what the FED’s next move is. If the number is less than expected the thinking goes that – well the job market is slowing so that should take the pressure off of wages, and thus take the pressure off of inflation so – JJ can pull back on his hawkishness…. Not happening….
Listen – this reminds me of the Clinton/Bush election cycle…. ‘It’s the ECONOMY – stupid’…. or more definitively – ‘It’s INFLATION stupid’!
And inflation is running at 8.5% y/y…..6 full percentage points above the FED target…and by all accounts that is the concern…..we have now heard that from EVERY member of the group…I mean they are so concerned now that yesterday Raffi took the argument to a college campus and told the students that ‘inflation is too damn high’!
Now Treasuries – This sounds like a broken record – but remember – treasury yields are up and they remain inverted…..and that historically produces a recession – one that I think has already begun, while others think it is still months away….which at this point makes no difference at all – because the majority of people do think it’s inevitable.
Oil – which has once again gotten slammed – did find support at the $85 level…. the exact same place it found support in early August when they tried to kill it the last time……the latest reason being the renewed lockdowns in China over 100 cases of covid 19 in Chengdou. Shenzhen is next on the list – rumors have it that there are 50 cases in Shenzhen and Xi Xi is about to shut the whole place down…… it is lunacy…. but remember what happened then? Remember what the Saudi’s said? Well, guess what – they said it again…..and for those of you who didn’t hear it or chose not to hear it – let me say it again….The Saudi’s are willing to DEFEND the price of oil….and $85/barrel is where it seems they are willing to do it. I mean you can see it in the headlines across the range of media outlets….
CNBC runs with this –
“Oil Firms on BETS OPEC+ will talk up Output Cuts to Stem Sinking Prices”
Bloomberg runs with this –
“OPEC+ in the Drivers Seat Again as Market Volatility and Confusion Mounts”
And
“Oil Risks Manic Monday as OPEC+ Convenes”
And the next OPEC meeting is September 5th – which is Labor Day for us – and now might just be known as ‘Manic Monday’ if OPEC+ chooses to slash production…..sending prices higher….Never mind that winter is coming to the northern hemisphere…..In any case – OPEC+ did slash its demand outlook – suggesting that demand will lag supply by 400k barrels/day in 2022 and by 300k barrels/day in 2023…..and that will give them cover to cut production in order to balance out the supply demand equation. Look – any talk of supply reduction will materially affect prices because inventories are at historically low levels globally and there is ongoing energy crunch in Europe in case anyone forgot…. This morning – WTI is up 2.2% or $1.90/barrel at $88.50.
Gold – yes it did…it tested $1700 yesterday….as I expected, and it bounced again to end the day at $1709……this morning it is up $7 at $1716/oz….and remains in the $1700/$1800 range.
US futures were trying to rally – but as of early this morning – they have turned lower again…. Dow futures – 30 pts, S&P’s down 5, the Nasdaq down 45 and the Russell down 2.
European stocks are all a bit higher……with markets across the zone all up about 0.5%. Eco data revealed that Industrial Eurozone producer price growth was UP again…..rising to 37.9% in July up from 36% in June…..and well above consensus of 35.8% while producer prices rose 4% m/m up sharply from June’s 1.3% rate…..suggesting that consumer prices are only going higher and this will surely cement the ECB’s move to raise rates by 75 bps next week.
The S&P closed at 3966 – after testing 3903 as it flails around…..Remember – the chart suggests that 3955 should be a place of support – it was not…..but let’s see what happens today…..Remember – lots of people are out….the algo’s are in charge – and if we get an exaggerated UP move today expect that to correct next week – when everyone is back. I still think we need to test lower….and while I think the June lows are the lows….it will depend upon the macro data in the weeks ahead….remember we are going to get another round of inflation data – CPI and PPI are due out on the 13th and 14th…..and while many expect them to show a bit more relief (myself included) I think it rears its ugly head in October and beyond and that is why the FED can not change course…..Mester and others have said a pivot is not in the cards….But – hey, what do I know?
Look – no one said this was easy – but what you need to do is stay focused, build a cash position and be patient if you are nervous…… If you own good, solid US mega cap names that are decent divvy payers then sit tight take advantage of weaker prices that will bring down your cost average. Sectors to be overweight in? Energy, Healthcare, Utilities & Consumer Staples all fit that bill. But you have to balance that with where you are in the life cycle…younger = more risk, older = lower risk.
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Short Rib Burgers (Great for all the Summer BBQ’s)
These are crazy good…. they are a bit of work – but if you have the time and you really want to impress – go for it.
Refer back to the Short Rib recipe below. Make 1/2 dozen ribs – the night before……cool and then shred the meat off of the bone…. Now when ready…. bring the shredded meat to room temperature and then mix the cooked short rib meat with the ground chuck (now use real ground chuck – not lean hamburger meat…you want it to have the fat for flavor) season with s&p and form the burgers. Light the grill and let it get nice and hot and cook. Top with sautéed onions and Monterey jack to complete this burger.
While this is cooking – butter the Brioche buns and toast either on the grill or in a frying pan……Then place the cooked burger on your bun – with fresh lettuce and the sautéed onions. Mayo and Ketchup on the side. Outstanding.
Braised Short Ribs – you have to get up early to make them for an afternoon cookout….
Begin with 6 / 8 beef short ribs. season with s&p and then brown in a frying pan with a bit of Olive oil. Make sure to brown all sides being careful not to burn the meat. After you have browned them – place them in a large/deep baking pan. Lining them up on their sides. Next – large Chop – 2 lg White Spanish Onions, 1 bunch of celery stalk, 1 bag of carrots. Smash 4 /5 cloves of garlic and add to the meat – making sure you disperse the garlic all around. Next add the chopped veggies right on top.
In the frying pan that you used to brown the meat – add: 1 can beef broth, 1 can tomato paste, and 1/4 to 1/2 bottle of red wine. mix well and let the broth come to a boil for a couple of mins as you steam away some of the alcohol in the wine. Bathe the short ribs in this mixture and cover tightly. Place the baking dish in the oven – preheated to 350 degrees. Let cook for 4 hours – tightly covered. Remove, let cool and then take the meat off the bone and shred with two forks…
Buon Appetito.
