Things you need to know ~
- Bullard tries to throw cold water on the algo’s – Kashkari and George chime in – Stocks sold off and then tried to rally back
- Is the CPI really in decline for what matters?
- Housing Starts weaker, What will today’s Existing Home Sales suggest?
- More FTX drama and insight…..Who is next to fall?
- Try the Mashed Potatoes and Peas
Bingo….now the FED sent out the ‘big guns’…..St Louis Fed President Jimmy B…..and oh boy – did he tell it like it is…..in a statement – Jimmy told us that ‘interest rates have to rise even higher to restrict the economy to the extent that it brings inflation back down to the target’ – (target here is 2%) which isn’t new news…at all…but the fact is that many do not believe it – (Kashkari and Mester confirmed what Bullard said)…..talk of a FED pause/pivot is all the rage, it is why we have seen the S&P rally 14% since the October low. We have seen the Dow +18%, the Nasdaq + 13%, The Russell +14% and the Transports +22%…..
What doesn’t help? The ongoing mixed messages that each of the talking heads tell us….We get one CPI report that suggests that inflation is coming down and BOOM off we go to the races. Some Fed heads telling us that a declining CPI suggests that we can ‘go at a slower pace’ and ‘pause earlier than expected’, while others continue to say – ‘while inflation appears to be responding, we can’t turn our backs, rates must continue to rise’ blah, blah, blah… So it remains confusing….for markets – but it does allow for lots of trading to take place in the personal accounts of the FED families and maybe a couple of Congress ‘women’ and ‘men’….(Ouch! Did I just say that? It slipped out)
Ok – what the algo’s don’t want to see is that the components that brought the CPI down were used cars and the housing price ‘adjustment’, neither of which is going to put food on your table, or gas in your car or pay to turn the lights on….No…..those expenses are still rising…..but the rise is being hidden (offset) by the decline in used car and home prices….It’s total manipulation….because all you have to do is go to the grocery store and see for yourself. Open you electric bill and see for yourself…
In my case – FPL raised rates by 18% and that translated into a 40% increase in my monthly bill. ($350 – $250 = $100/$250 = 0.4%). But wait, now I can buy a used car down 10%! – Amazing! Right? Oh, and the decline in home prices? How’s that helping – 30 yr. mortgage rates are up 133% since January…..3% went to 7% – do the math – that’s a 133% increase in the cost of carrying that home – so of course housing prices are coming down, but the cost of ownership is going up and we haven’t even discussed rising real estate taxes….what is it that I’m missing?
Now what was interesting is that he ‘never’ said a specific number out loud, but ‘pictures speak louder than words and the picture (chart) now identifies a range of between 5% – 7%! Yes, 7%…..Now let’s not get hysterical just yet – the sense is that the 5.25% number is the near term target (and the market knows that). My sense is that he put that chart up there to ‘lay the groundwork’, to put it out there, to take the temperature of the investment community….Do I really think the FED ‘wants’ to go to 7% – NO, but if inflation doesn’t respond – just like it didn’t respond to higher rates in 1979/1982 – then would they be forced to go there. Yes, and I think that is the message….so essentially – he is telling everyone to slow down, given the recent hikes and the projected hikes time to work the system…..and then let’s see….
Just for those of you who were not alive and aware in 1979/1982….it was UGLY, inflation was running near 13%, unemployment was ticking at 10%, rates were going up, but were not able to stop the increase in prices….UNTIL Fed Chair Volker – pushed rates to 21%….so before you go telling us that it can’t happen or that this time it’s different – think again….and by the way -this time it is different….Global central banks have been stimulating their economies for 13 yrs.….(remember the GFC of 2007/2010?) Do you remember how rates were slashed to zero in the US and went negative in other parts of the world? Do you recall the massive bond buying programs that are yet to be unwound? So yes, you’re right – this time it IS different – it’s more dangerous…So – sit back and take a deep breath. And we haven’ even talked about the collapse of NFT’s -95% ytd, cryptocurrencies – Bitcoin and Ethereum both down 65% ytd, (DoggeyCoin- really?) and the latest debacle – FTX – BANKRUPT – that only exacerbates the angst….as SBF (Sam Bankman-FRAUD) scammed some of the ‘smartest people in the VC world and asset management world’
I saw a funny tweet yesterday that said –
‘Isn’t it funny that people are more concerned about what Elon Musk is doing with his OWN money rather than what SBF did with investor money’.
Investor money – think about the investment committee at the Ontario Teachers’ Pension Fund that GAVE SBF $100 million dollars? POOF! Gone! What do they say to the teachers? How do they justify that investment? Now many will say that the $100 million is just a small percentage (4%) of the $220 billion that the fund manages….so it’s nothing to worry about….to which I would say – Tell that to the teachers!
They just found out that their hard earned money went to support the democratic party in the US along with lots of other wasteful spending…I mean the WSJ runs with this headline:
“CEO in Charge of FTX Restructuring Calls Case an Unprecedented Mess”
A complete failure of corporate controls, unprecedented debacle. Chaos is the word he used to describe the finances, accounting and leadership at FTX…. This story has only begun to be told…and to the extent that more and more institutions are dragged into it – will determine the extent of the damage. Names like Blackrock, Sequoia, Tiger Global, Altimeter Capital, Insight Partners, Softbank, Ribbit Capital…and the list goes on….I’d love to hear how the investment committee’s at all of these places justify their investments – when they clearly had NO idea what was going on.
And this – in my opinion is exactly why building a fortress of stocks that represent global economies is always the winner (think Uncle Warren)…the trick here is to know how to build that fortress as we enter the next phase. While I support a broad portfolio that includes the major sectors – it is the how you weight them to perform……and if we are going where I think we are going – then I would continue to suggest that you buy the stuff that people need…..in any economic condition…so that includes: Utilities XLU which is only down 5.8% ytd, Consumer Staples – XLP only down 4.8% ytd, Energy – XLE up 66% ytd, Healthcare – XLV down 5.6% ytd, Metals and Miners – XME +13% ytd….and by the way most of the names here are decent divvy payers as well and grow their divvy’s.
While you should own other sectors – you need to own them ‘less’….but still own them….because when we turn the corner – you’ll want to have these names in your portfolio….and if you don’t have them – start to put a list together….think of the value being created as some of the big names in these sectors get taken down – Financials – XLF – 10%, Communication stocks – XLC down 36% ytd, Semi’s – SOXX or SMH down 32% ytd, Cybersecurity down 24% ytd (which makes no sense to me at all considering the world we live in….thus I think this group is completely misunderstood), Consumer Discretionary – XLY is off 31% ytd…but I’m not a big fan yet….so I don’t have any of that….And while Tech XLK is off by 24% – there are very specific names that you can pull out of that hat and own for the long term….and you know the ones I like – AAPL, MSFT, AMZN are fan favorites….
While you should own other sectors – you need to own them ‘less’….but still own them….because when we turn the corner – you’ll want to have these names in your portfolio….and if you don’t have them – start to put a list together….think of the value being created as some of the big names in these sectors get taken down – Financials – XLF – 10%, Communication stocks – XLC down 36% ytd, Semi’s – SOXX or SMH down 32% ytd, Cybersecurity down 24% ytd (which makes no sense to me at all considering the world we live in….thus I think this group is completely misunderstood), Consumer Discretionary – XLY is off 31% ytd…but I’m not a big fan yet….so I don’t have any of that….And while Tech XLK is off by 24% – there are very specific names that you can pull out of that hat and own for the long term….and you know the ones I like – AAPL, MSFT, AMZN are fan favorites….
In any event – the Bullard news – while causing early angst didn’t derail the markets yesterday as the reality of higher rates sinks in….Remember – we are coming into the end of the year….there is lots of re-allocations going on, tax loss selling and repositioning for 2023….By the end of the day the Dow lost 7 pts, the S&P gave back 12 pts, the Nasdaq gave back 38 pts, the Russell lost 14 pts and the Transports gave back 150 pts.
US treasury yields rose – the 2 yr. back at 4.48%, the 5 yr. at 3.96% and the 10 yr. at 3.8% – up from 3.6% just 2 days ago.
Gold remains at $1781/oz as it challenges resistance at $1830…..leaving it solidly in the $1740/$1830 trading range.
Oil had a tough week…..they managed to talk up the demand destruction/global recession story and oil broke thru support and is now trading back at $81.30/barrel….the Key level to watch – although I don’t think it’s going there is the September low of $75.50…..since we are just a hair below the October low of $81.30. Remember – Russian oil is being redirected as of December 5th (Europe won’t buy directly from Russia, but Russia will sell to India and Europe will buy from India) – because at that point it’s Indian oil not Russian! So demand is not going away…..and winter is here…..just sayin’
This morning – we see US futures are up. Dow +140, S&P’s +25, Nasdaq +90, and the Russell +9. After the bell – ROST, PANW and GPS all reported BETTER than expected results and those stocks are rallying in the pre-mkt…. Expect more chatter about the Bullard comments and what the FED will do next. Next week brings us the PCE report, 3rd Qtr. GDP, ADP employment and the NFP report. So, lots to talk about…
Yesterday we learned that Housing Starts fell by 4.2% vs the expected -2%, Building Permits fell by 2.4% vs the expected -3.2%, Philly Fed outlook declined by 19 pts vs. the – 6, Kansas City Fed fell 6 vs. the expected – 8. Today we get Existing Home Sales and they are expected to show a decline of 6.6%.
European Stocks are all higher….up by more than 1% as investors digest the macro data this week across the continent and here in the US. Investors in Europe betting that the recent hikes are doing their job and that the ECB and BoE will pause sooner rather than later. Again, we are coming into the final 6 weeks of trading for 2022…so lots of shuffle going on….
The S&P closed at 3946 – down 12 pts – leaving us solidly in the 3793/4073 trading range. While I think the worst is over, I am expecting more ongoing volatility with a slight bias to the upside into year-end…. but once 2023 begins, it’s a new slate and new drama…. Sit tight, stick to the plan – focus on the end game….
Take good care,
Chief Market Strategist
kpolcari@slatestone.com
Try the Mashed Potatoes and Peas
These are more Thanksgiving side dishes…
For this you need – the Idaho potatoes, butter, cream, s&p,
For the Peas you need – 2 bags of frozen peas, 1 lg onion, butter, olive oil s&p.
Peel the potato’s and cut into cubes. Boil in salted water until soft. Strain, return to the pot. Add in 1 stick of butter (cut into pieces) ½ c of heavy cream (you can use lite cream), season with s&p (taste as you go). Using a large wooden spoon – mix well until creamy…..(so good). Now you can also add 2 tbsp of sour cream, shredded mozz or cheddar and even some fresh grated parm if you choose.
For the peas – slice an onion, add to a pot with olive oil and a slice of butter….saute for 10 mins….careful not to burn. Now add the frozen peas, season with s&p – simmer on low for 20 mins. Should be good.
Serve them in separate dishes but mix them on your plate when you eat them! Yum.
Buon Appetito
