Things you need to know ~
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Now – try the Italian Wedding Soup for a Thanksgiving first course.
Yesterday I said that it was going to be all about the economic data….(now that we have the election behind us) and that data point was going to be the latest CPI report……there was speculation that it was going to come in with a 7 handle (I was in the 8 handle camp)…and that if it did, then we would see markets rally. We would see some analysts and members of the administration tell us how great of a job they are doing….that the Inflation Reduction Act was working! How great is that?
Well, the CPI did surprise and the m/m increase was only 0.4% (vs. the expected 0.6%) but was the same as last month and the y/y number came in at 7.7% (vs. the expected 7.9%) and was down from 8.2% last month…..next up was the avg hourly earnings y/y and average weekly earnings y/y – those reports showed earnings declining by 2.8% and 3.7% respectively…..and you would say – Hey, wait a minute….earnings are declining – how could that be good? – and the answer is: They are declining at a SLOWER rate….
Let’s just be clear – it was the used autos component of the CPI that fell, while everything else was UP…Energy up, food up, housing up, utilities up – so yes, the overall index fell, but when you pull back the sheets – you realize some of the more relevant components were anything but weaker….but if you focus on the headline number – what you saw was a decline…..Just sayin’…..
And then you had GS CEO Davey Solomon taking the stage singing the praises of the FED – saying that the tightening policy that they have engaged in, is beginning to work and prices are coming down…..Exactly what I said they would say – and the FED was sure to have Davey deliver that message…..GS is one of the banks that the FED uses to ‘tell the story’…..and the algo’s and trader types went berserk…..stocks traded higher like there was no tomorrow….in line sell orders suddenly disappearing – leaving the order books ‘empty’ on the way up…..forcing buyers to ‘pay thru the nose’ for the opportunity to buy stocks….remember – those buyers were all sellers only last week…. or maybe it was all of those short sellers that were betting on a higher CPI read that would have sent stocks lower – In any event – it was what it was, and markets were on FIRE.
As you might expect – it was the most beaten up indexes that performed the best and it was the most beaten up sectors that performed the best….by the end of the day – we saw the Dow gain 1200 pts or 3.7%, the S&P added 207 pts or 5.5%, the Nasdaq rocketed higher by 760 pts or 7.35%, the Russell added 107 pts or 6.11% and the Transports surged by 750 pts or 5.5%.
Sector performance saw Tech – XLK rise by 8.8% (recall it was down more than 30% ytd) leaving it down 24% as of last night, Consumer Discretionary – XLY added 7.3% (it was down more than 37% ytd) leaving it now down only 30.6%, Real Estate – XLRE added 7.6% (it was down 32% ytd) and is now down only 25%, Communications – XLC +6% (it was lower by 42% ytd) and is now down 37%, Basic Materials – XLB added 5.5%, Financials – XLF +5%, Utilities – XLU and industrials – XLI added 4.7% and 4.2% respectively. Consumer Staples – XLP, Energy – XLE and Healthcare – XLV all adding just over 2%.
Disruptive Tech – ARKK added 14% (it was down over 74% ytd) and is now down only 60%! Semiconductors – SMH or SOXX – which have also been smashed this year – gained 10+% – still leaving those sectors down 30% ytd…..The value trade – SPYV added 3.8%, leaving it down only 6% ytd while the growth trade – SPYG added 7.4% leaving it lower by 26% ytd. And the triple levered S&P long – SPXL gained a whopping 16% in 6 hours.
Treasuries prices rose sending yields plunging….the 2 yr. ended the day yielding 4.3%, the 5 yr. and 10 yr. both breached 4% ending the day yielding 3.9% and 3.8 respectively. (Remember only 2 days ago you could have locked in 2 yr. money at 4.7%.)
The dollar index – collapsing on the back of that better than expected CPI report – ending the day at 108.45 and this morning is lower again – falling 90 cts at $107.35. The reaction by the dollar telling you that the expectation now is for the FED to ‘pause’ and possibly ‘pivot’ sooner than expected.
OMG – really? Inflation is still near 40 yr. highs….the target according to JJ is to get inflation back to 2% – it is still at 7.7% (if you believe what they told you yesterday) – so I don’t see how anyone can say that the FED is about to pivot….JJ told you that the terminal rate target is 5.25%….currently we are at 4%….so how exactly are we going to get there if they pause or pivot? We’re not…..so slow down…which doesn’t mean don’t invest – what it means is don’t try to time the market with your long term money – invest it in a well-balanced thoughtful portfolio and then let it run…….Don’t look at every tick – as if it’s a day trading account, it isn’t…Focus.
Oil rallied yesterday and is higher this morning…..Up $3 to $89.55…..having bounced off of the trendline support at $85.40 taking it to test resistance at $90.30. The rally is twofold…..one is a falling dollar – that helps all commodities and the other is the ‘rumor’ again that China is (pivoting) relaxing covid 19 restrictions. Remember – this rumor came out last week and was quickly denied, well, it came out again today and in fact is being actively discussed in the media….Expect oil to rally on global demand….
And then we have the latest disaster playing out across the big screen – the FTX debacle and the complete collapse of the cryptocurrency asset class….Word that FTX is circling the drain and that CEO SBF is on the run was all the rage. The idea that FTX has a $9 billion hole in its books is leaving some of the world’s biggest investors with a headache…..Think Sequoia Capital, Tiger Management, Blackrock, Insight Partners, Paradigm, The Ontario Teachers’ Pension Fund and Softbank…What are they to do?
Are they going to let this blow up or are they going to be forced to come to the table and try to save it by pumping more money into it? I mean do they defend their investment or admit that they had NO idea what was going on at FTX and that the rumors that SBF was diverting some of the money to one of his ‘sister companies’ was ‘news to them’! And remember – the money that those asset managers invested was not THEIR money – it was investor’s money….Expect to hear much more about this in the day’s ahead….because FTX either has to raise the money or file bankruptcy – which they have already begun…..and then the industry will do what it will with SBF.
Recall – Binance almost saved the company but then walked away after looking beneath the sheets…..Saying that ‘the issues are beyond our control or ability to help’….(not good at all…..). This morning – Bitcoin is trading down 2.5% at $17,300 and Ethereum is off by 3% at $1,280.
And on the political front – we are a country that is still in the dark – the House is still in limbo – with the GOP having 211 seats and the Dem having 192 seats….the number to hit is 218 in order to take the majority….and while the expectations are for the GOP to take it, the votes are still not in yet….and the Senate is now down to 4 races…Georgia will already know is going to a runoff on December 6th while AZ, NV and WI remain in purgatory….unable to count their mail in ballots with any surety….(which says volumes about what the heck has been going on in those states – this is 2022 – we have self-driving cars and flying taxi’s yet we can’t count ballots?) In any event – even if the Dem’s remain in control of the Senate – the congress is now split….and that should create gridlock for the administration and the markets are ok with that, in fact – the markets perform better when we have a split congress….so don’t despair….It is what it is.
This morning – stock futures are up and up nicely…..Dow futures are up 140 pts, S&P’s up 18, the Nasdaq up 75 and the Russell up 10. The excitement continues – as Joey tells us that the plan is working…….but qualifies it by saying that while yesterday’s news was good, he cannot guarantee that it will ultimately succeed…but that he has a plan and that the new congress should work to implement his ongoing large fiscal (spending) packages in order to bring down inflation. Whatever….
Fed speakers yesterday were clear – they want to see ‘several consecutive months’ of lower inflation before they even consider changing the narrative….Websters defines several as more than three, but not many – which is defined as a majority or large number….so does that mean the next 3 reads on inflation which takes us to February? What happens if the December read is up – then we have to start all over again? It negates the ‘several consecutive months. I’m just saying that one month does not make a trend…..a trend is defined by months of data…the way we saw inflation rise for 11 months before they decided to retire the word ‘transitory’ or ‘temporary’.
Eco data today is about the U of Mich Sentiment surveys….all very nice but insignificant in my opinion…..The next data point to watch is Tuesday’s PPI (producer price index) report – as that details the cost that manufacturers have to pay at the ‘producer’ level…estimates also suggest that we will see a rise in the m/m top line and core line figures…and as you know – it takes about 4 – 6 weeks for higher prices at the producer level to find their way to the consumer level…..so if PPI is higher then the possibility exists that next month’s CPI will be higher….but we have time to consider that.
Next week will also bring us retail sales, Industrial Production, Capacity Utilization, Housing Starts and Building Permits.
European markets are up by about 0.5%. Investors in Europe celebrating the ‘weaker’ CPI read and the idea that China is easing covid measures. News that the UK is on the brink of a recession is all the rage after the preliminary estimates showed that the UK economy fell by 0.2% in the 3rd qtr. leaving the BoE to forecast the start of a long recession.
The S&P closed at 3956 – UP 208 pts…. Great day….but remember – inflation is still an issue…..and JJ has been very clear about the narrative. Talk of a 6% terminal rate is now being bandied about – but no one really wants to go there….at least not yet…Remember there are some economists who say that the terminal rate has to be higher than the inflation rate….and unless the CPI suddenly plunges then my guess is that the FED will keep pushing….
Again – I can’t say it enough…. stick to the plan –Look beyond the next 6 weeks and instead focus on the next 6 – 12 months…. Look at the mega cap, multinationals that generate good cash flow, pay nice dividends and can weather the storm. (Well balanced). Remember – Overweight the STPN (Stuff that People Need). Energy, Healthcare, Consumer Staples, Utilities and some big megatech and own but underweight the STPW (Stuff that People Want).
Take Good care
Chief Market Strategist
kpolcari@slatestone.com
Italian Wedding Soup
Start with the basic chicken soup – For this you need; 1 whole chicken, 1 beef shank, onions, carrots, celery, water, s&p
Rinse the chicken and remove the innards from the cavity. Rinse the beef shank – place both in the pot and fill with water. Now add the chopped veggies. Season with s&p and bring to a boil. Once it boils – turn the heat to med low and let it simmer for about 1 1/2 hrs. Turn heat off – remove the meat and allow to cool.
When cool – remove the skin and debone the chicken. – shred some of the chicken and add back – (while making chicken salad of the rest) Remove the beef from the shank bone and shred also and return to the pot. Now – place the pot in the fridge and allow to cool overnight – the fat from the chicken will rise to the top and form a ‘skin’.
Remove from the fridge and take the fat off and discard. Re-heat
Now make the meatballs for the soup -For the meatballs – you need:
1 lb. ground veal (or you can use ground beef) , minced garlic (2 cloves), chopped fresh parsley leaves, freshly grated Parmesan, milk, 1 extra-large egg, lightly beaten, s&p.
For the meatballs, place the meat garlic, parsley, Parmesan, milk, egg, s&p in a bowl and combine. Using a teaspoon, make small balls and set aside. Once completed – fry the meatballs and then add to the soup. Right before you serve the soup – add a bag of spinach and allow it to wilt.
Ladle into soup bowls and sprinkle each serving with extra grated Parmesan. A nice piece of garlic bread on the bottom of the bowl is always a favorite.
Buon Appetito.
