Things you need to know ~

• 8:30 am – The monthly NFP report- just 4 days ahead of the Mid-terms
• US Futures are UP this morning (relief)
• Is the new terminal rate above 5% – Yes it is – and is now somewhere between 5.10% – 5.25% – and likely going even higher
• CPI and PPI out next week – 2 days after the mid-terms
• Shorter Duration bonds now yielding 4.75%
• Try the Deep Fried Turkey

So the hysteria created on Wednesday was a bit muted on Thursday…and while stocks started out weaker – they did find buyers and attempted to rally a bit only to come under pressure again as the algo’s continue to sell them off….And while there are plenty of buyers – they are not the kind of buyers that need or want to be aggressive at all, they are just responding to the tone and the anxiety set by the sellers.  If the sellers won’t quit – then the buyers will move lower – at some point – demand will meet supply and the markets will find stability.   Nasdaq and hi growth names continue to get clobbered- some do deserve it while others are victims of circumstance – because higher rates will continue to take its toll on this sector….and when the tone is negative EVERYONE in the sector gets dragged lower – and therein lies the opportunity….

Money continues to move out of tech – down 31% ytd and communications – XLC down 42% ytd  and Consumer Discretionary – XLY down 33% ytd, Semiconductors – SOXX – 42% ytd, Artificial Intelligence – BOTZ down 47% ytd and of course Disruptive Tech – ARKK down 62% ytd….Toss in Housing  – XHB – 35%, Retailers – XRT – 32% and Airlines – JETS -18%.

So, you ask – where is it going?  Well, some of it is going into the short duration bond market – think 1 yr. now yielding 4.5% or the 2 yr. – yielding 4.7%.  CD’s are making a comeback as well at your local bank with some now yielding close to 4%.

Some of it is going into the ‘contra trades – the ones that get you short the markets like  – DOG + 9% ytd, SH + 22% ytd and PSQ + 40% ytd or HDGE – Advisor Shares Equity BEAR ETF + 29% ytd.  And while these are good hedging type trades – they are NOT long term holds at all, they are used strategically to help offset the losses seen in your ‘long portfolio’.

It is also going gangbusters into Energy – XLE +64% ytd.  In this case – Fossil fuel type of energy – think XOM +86% ytd,  CVX +54%, BTU + 136%, CRK + 120%, SLB +72%, HAL + 61%, BKR + 18%.

Still other money is starting to find opportunity in the high quality names that are big, boring yet beautiful that offer large cap protection and steady dividend income. Industrials XLI – 11% ytd, Healthcare XLV – 7% ytd,  and Utilities XLU -6% ytd, Metals and Miners – XME +3%….…..Financials XLF – 14%  are trying to make a comeback as well. Basic Materials – XLB remains pretty much on the fence at down 19% ytd.

After JJ’s Wednesday’s speech – it is clear that rates will continue to move up – whether it’s 75 bps or 50 bps or even 25 bps. Remember –  JJ made it very clear that ‘over tightening may be a less costly option than doing too little.  This morning Fed Fund Futures are now pricing in  a terminal rate of 5.14% by summer of 2023.  (Yesterday I told you I thought 5.25%  would ultimately be the terminal rate- and I still continue to believe that to be the case.)

So, the fact is that rates are moving up and will continue to do so until the FED has conquered inflation – only means that we can expect 1, 2, 5 and 10 yr. yields to continue to move up as well…..and that will continue to be a headwind for stocks…..….something that we have been talking about for months now.  And remember – there are some economists out there who think the FED must raise rates ABOVE the CPI rate to kill inflation…..and while JJ didn’t say that – you know damn well he understands it……He’s just hoping he’ll get lucky – which I don’t think is gonna happen.  So,  If that is the case,  then we have a way’s to go….Currently, CPI is running at 40 yr. highs and is expected to clock in again at +8.4% next week…slightly higher than the October report and that is not helpful when FED Funds are tracking at 4%.  Capisce?

In any event – the  weak action of late is direct result of investors/traders and algo’s coming to terms with the fact that JJ is in fact going to stay strong…he is not serving up the punch bowl any longer – at least for now. And while this action has also been bad for stock and bond prices – it has super charged the yields that investors can now get in the bond market allowing some investors to sleep better at night.  As noted above – the 2 yr. is yielding 4.7% – the highest level in nearly 15 yrs.  In hindsight – earning 4.7% is better than losing your shirt – even if only for a short while.

And today’s NFP report will be the next data point for investors and algo’s to consider…you see – IF we get a stronger report than what we are expecting then it pins JJ up against the wall even more….because what JJ wants to see is a deteriorating jobs climate not a robust healthy one…I know that sounds opposite of what you would expect, but in this case – JJ is trying to force the economy into a recession and as long as employment report remains strong – then he is not successful – you see – he needs to break it…to fix it….Capisce?

The expectation is for us to have restored 200k jobs…with unemployment to come in at 3.6% – up 0.1% over last month….what JJ wants to see is for us to have lost jobs and for the unemployment rate to move up above 4%, he also wants to see Avg hourly and weekly wages to fall.

Because if he sees all of that then it means that the recent interest rates hikes are beginning to work their way thru the economy…..if not – then you can bet – the 75 bps December conversation is alive and well….  Next week will give us yet another clue on the rate of inflation – we are due to get both the CPI and PPI reports….and it is expected to be up again over last month – which speaks to why JJ is not backing down. You see – he knows it, they all know it – which is why he kept the door wide open….So, sit tight.

Oil is up 2.8% or $2.50 barrel to $90.67…..this as the dollar index retreats just a bit and talk of increasing demand dominates the airwaves.  The rumor once again that Chins is looking to ease up on covid restrictions helping to set the mood.  And with winter coming to the northern  hemisphere – demand is expected to surge – this isn’t rocket science, it’s just econ 101 – supply and demand.

Oil is now above all 3 trendlines resistance levels and could likely rally to the late August highs of $95/barrel.  If not – there appears to be plenty of support at $85.

US futures are up this morning…which shouldn’t really be a surprise after all of the sell pressure we’ve seen. Dow futures are up 105 pts, S&P’s up 15, the Nasdaq is ahead by 60 pts and the Russell is up 7 pts all as we await the sun to rise and the BLS to report the eco data.

Stocks in Hong Kong and China surged – rising 5.3% and 3.3% respectively – as rumors had it that Xi Xi is trying to ease up on their zero covid policy….remember – this was a rumor earlier in the week that was immediately denied by the ruling party – but here it is again – another unverified social media post….to remind you – I take everything out of China with a grain of salt and is why I do not invest any money in the region….it’s just too volatile and the rules can change on a dime with little to no warning…In my mind – there are plenty of places for money to go that don’t include China.

In Europe – markets across the region are also up….Gas and electricity prices also jumped (again) after France warned of more trouble surrounding their nuclear capabilities adding pressure to the energy markets – this as winter approaches. In addition – Europe is waiting for final Eurozone PMI data today.  At 5:30 markets across the region are up by > 1%.

The mid-terms are only 4 days away –

The S&P closed at 3719 – down 40 pts…. Could we see us test the October lows  (3490) again…possibly, depending on what the NFP, CPI and PPI reports reveal.   I think cooler heads will prevail and that investors have priced it in already….. but I could be wrong….let’s see how the algo’s react.

Sit tight as a long-term investor – stick to the plan…. take advantage of dollar cost averaging (DCA) and dividend reinvestment programs. Move some money into that safe 2 yr. if it give you comfort.   Overweight the big boring names and buy the stuff that people need (STPN). Consumer Staples, Utilities, Healthcare, Energy…. while underweighting (not eliminating) Tech, Basic Materials, and Communications right now.

Take good care,

Chief Market Strategist
kpolcari@slatestone.com

Deep-Fried Turkey!

Becoming a thanksgiving favorite… Now you hear horror stories of people deep frying turkeys at Thanksgiving – it can make a mess… so you need to be careful and make sure you have an adult present at all times.
 
For this you need: a Turkey – washed and cleaned void of pop up timers as well as the bag from the breast cage, Peanut Oil, a deep fryer (you can buy at HD – an NYSE listed company), poultry seasoning (or you can make your own).

First determine the amount of oil you need. You do this by placing the turkey in the pot and add water until the turkey is completely covered plus an inch or two. With the turkey and the water there should still be several inches of room between the oil and the top of the pot. If it’s a close call, then you need either a bigger pot or a smaller turkey. Remove the turkey and measure the water. This is the amount of oil you will need. Simple.

After you have washed and cleaned the turkey – let it air dry- or you can use a towel to dry it – as it MUST be dry… not a good idea to mix oil and water. Season the turkey, place on the Turkey lifter and let rest. The turkey should be at room temp when you cook him. Use the syringe to pump melted butter into the breast, legs and thighs… or if you prefer- you can use an Italian salad dressing to pump into the turkey – think of it as a Botox treatment… (makes it fun…)

Set up the fryer outside – AWAY from the house and away from the kids.

Dry the pot well and add the appropriate amount of oil and bring to a temperature of about 375 degrees. You should really get a good thermometer so you can get the temperatures right. Lower the turkey into the pot of very hot oil. The oil is going to splatter – So go slow. You need some very good cooking gloves.

Once the Turkey is in the oil, turn the heat up to get to a temperature of 350 degrees F. A deep-fried turkey cooks at a rate of about 3 to 3 1/2 minutes per pound. A ten-pound turkey should take 30-35 minutes.

Turn off the heat when done and slowly remove the turkey from the oil. Let the turkey drain a little bit and you are set to go. Take in the house – carve and enjoy… you will be amazed at how NOT greasy or oily it is… rather it is crisp and juicy…