Railroad Strike? China Protests and More Hawkish Talk Send Stocks Lower – Try the Shells

Kenny PolcariUncategorized

Free illustrations of Cyber monday social media post

Things you need to know ~

  • Joey calls on Congress to avert a devastating strike by the rail unions
  • China clamps down harder – Police rounding up phones to track where ‘you’ were
  • Oil falls then rallies after OPEC+ considers what?  Production cuts!
  • Consumers spent $11.2 billion yesterday! A new record for Cyber Monday
  • Try the Shells with Sweet Sausage, Pancetta, and beans.

So much for the Thanksgiving rally!  Stocks plunged and ended the day lower on Monday…The Dow losing 500 pts or 1.5%, the S&P down 62 pts or 1.5%, the Nasdaq fell by 175 pts or 1.6%, the Russell lost 40 and the Transports gave back 300 pts  – both measures down more than 2%.

A looming rail strike just one of the issues that had investors concerned.  By now you know that the deal reached prior to the election was nothing but a sham, ( Joey telling us it was done while the unions said that they did not support it, but would continue to try and hammer out a deal).  It was a way for the current administration to look as if they had succeeded in averting a potentially crippling strike just days ahead of the mid-terms.  Now we are left with a potential strike just days after the mid-terms that threaten to upend the economy. (think $2 billion/day)  Recall that the railroads move 40% of US long distance cargo – including feedstock, lumber, construction material, water purification supplies (chlorine), coal (think energy) etc., so even a short strike would lead to an economic calamity.

Yesterday – Joey reached out to congress – calling on them to pass legislation and imposing the contract that 4 unions have rejected. Biden telling the press

“As a proud pro-union President, I am reluctant to override the ratification procedures and the  views of those who voted against the agreement, but in this case – where the economic impact of a shutdown would hurt millions of other working people and families – I believe Congress must use its powers to adopt this deal.

Pelosi – not wasting a minute – said the house would vote this week on that request. Understand that there is reluctance on both sides of the aisle to step in. The Dems don’t want to be seen as telling labor unions what to do, while Republicans oppose gov’t intervention in private contractual negotiations. And so, the clock ticks.

Then we have the ‘unrest in China’ over citizens wondering why the rest of the world has returned to normal and they are being locked into their houses – as strict covid policies continue to fail….the protests – which took on a new life over the weekend – subsided a bit when Xi Xi launched  heavily armored police forces across the major cities that are seeing the most pushback (Beijing and Shanghai)…..scenes of police beating protestors were all over Twitter and some of the major news stations….

As this spins out of control – Xi Xi finds himself in between a rock and a hard place…..but chose to tighten controls ‘dispatching phalanxes of police’ to ‘prevent’ more protests. And don’t kid yourself – all they have to do is check phones (and they are) to see where people were at any moment….because that is some of the data that China collects every day – and anyone found to be at or near the protests are sure to get a visit by the gov’t. The fear is that the  crackdown will most certainly create more economic problems for China and the world. (Think supply chain and demand for energy).  In any event – it is what it is and while politics will create all kinds of drama, it won’t price stocks in the long run.

Remember – the world is partly responsible – we allowed this to happen by allowing China to become the manufacturing hub of the world. Watch what happens when Beijing takes Taipei. That won’t be a political issue – that will be a global security issue – in fact it already is.

And then we heard from not one but three FED heads…St Louis’s Jimmy B – who said that markets are underestimating the ‘chances of higher rates’  (remember the 5% – 7% comment?) while NY’s Johnny Williams reminded us that ‘more work’ needs to be done to curb inflation and that the fight could go into 2024, and then Vice Chair Lael Brainard chimed in saying that the ‘string of supply shocks is keeping inflation risks elevated’. – All very hawkish statements – and by the way nothing really new….(if you’ve been listening). But on a day when the tone is negative then the more hawkish commentary plays right into the weakness.

Then a team of Morgan Stanley analysts (who are calling for S&P 3200 before this is over) reminded us that if you think rate hikes are an issue – you better start focusing on Quantitative Tightening (QT)…which is contra to Quantitative Easing (QE).  Remember – QE and zero interest rates were the reasons stocks and a host of other assets went decisively higher…..so it only makes sense that QT and rising interest rates are going to be the reason that stocks and other assets ‘re-price’ or ‘adjust’ or ‘go lower’.  Think – QE adds money to the system while QT takes it away. This team is calling for the S&P to drop by 8% from current levels to end the year at S&P 3650 ish. Now to be clear – there are many different opinions on this matter….so each bank will talk their own book…. Even Goldy slashed their year-end target – going from S&P 4300 to S&P 3600.

So investors have a lot to consider – do they put more money to work now or do they just let the cash pile up and wait?  And speaking of cash – early results are suggesting that Cyber-Monday – just may have been the biggest shopping day ever!  Early reports show that we spent $11.2 billion yesterday…. A rise of 5.2% over last year…..so is it that demand is strong or is it that the markdowns are so significant that consumers just ‘can’t leave it on the shelf’!  Which really doesn’t matter – the fact is that we spent $11.2 billion dollars in one day….add that to the record spending on Black Friday and it’s hard to see how there are any concerns at all.  Dana Telsey of the Telsey Advisory Group – telling us that consumers were ‘very civilized’ and that retailers have to offer value and is once again picking the big discounters as this season’s winners….Names I noted yesterday…TGT, TJX, WMT, BJ, KSS, ROST &  COST.

And as you would expect – Energy got walloped yesterday…..falling to a low of $73.60 before rallying back to end the day at $76.50.  (For all the reasons cited above).  This morning – oil is up $1.80 or 2.5% at $79.20 and do you care to guess why? (Demand is one component).  Think hard – I told you it would happen last week…..OPEC + is said to consider more production cuts when they meet this weekend to offset the recent decline in prices…and since Joey announced that CVX can pump more oil in Venezuela (Yes! Venezuela) that will only add to the supply side of the equation….causing the Saudi’s to reconsider appropriate levels of production.  Recall – $80 is the floor that the Saudi’s want to maintain.

This morning – we see US futures on the rise (again not a surprise after the drubbing yesterday)…. And while they are up at 5:30 am….they are off their best levels overnight….currently we have Dow futures up 40 pts, the S&P +12 pts, the Nasdaq + 60 pts and the Russell +9.

Relative calm in China being cited as just one of the reasons.  Others include the fact that investors expect this week’s PCE to be weaker and next month’s CPI/PPI to show modest improvement as well – which plays right into the FED’s fight against inflation.   Consumers spending money like a drunken sailor over the weekend will also add to the feel good mood. Players on the stage have shifted….On center stage – today will be all about retailers… Stage left will have a range of analysts telling us what to expect from this week’s eco data and what yesterday’s FED comments mean for the markets while stage right will focus on China.

Stocks in Asia – (China and Hong Kong specifically) rallied hard…Hong Kong +5.25%, China +3%, Taiwan + 1%, Japan – 0.5%, Australia +0.3% while South Korea rallied by 1%.

The dollar index – tested and held support at $105.40 and is now trading at $106.25.   Gold is up $14/oz at $1769.

Stocks in Europe are mixed – for all the same reasons… The UK up 0.7% while Italy is lower by 0.1%.  Investors there watching the unfolding developments across China as well as digesting the recent ECB comments by Chrissy Lagarde yesterday.

The S&P closed at 3963 – down 62 pts.  Now while it was a dramatic day – Nothing really changed – we remain solidly in the 3790/4070 broad trading range.  3920 is the level to watch now…that is the next short term trendline…You want to see a test of that level and you want to see it hold – now if MS and GS are correct – at some point we are going to slice right through that on our way to S&P ‘3600 ish…’ – but I am not sure that will happen today.  Eco data today is about housing prices across a 20 city sample…and m/m is expected to show a decline of 1.2% while y/y is expected to show a 10% increase.  Neither data point is going to be a directional driver for investors.  Expectations are for weaker housing prices going forward…so the y/y data point is useless. Can you really sell your house up 10% from where it was last year?  No, you can’t.   And while they tell you that it is worth 10% more than it was last year – try to sell it for that number and tell me what happens…… Mortgage rates are up by more than 133%..

And Lonnie Musk is about to launch a new fight  – this one with Apple….after Apple threatens to remove Twitter from the app store.   Musk asking on Twitter if Apple ‘hated free speech’.  Some analysts saying this is a risky bet…pointing out that Musk represents risk and Apple isn’t going to play in that sandbox – but it is more complicated that just that….If Apple cuts ties with Twitter then some 1.5 billion users would be affected…..(bad for twitter) but Lonnie is good at rallying his fans and his ‘disdain’ for high app store fees – shared by developers, regulators and lawmakers (bad for Apple) – so this story is only beginning….Expect to hear much more in the days ahead….

As discussed – I think investors will continue to make the markets churn over the next 5 weeks…..I suspect that we will remain in the 3920/4030 trading range – support and resistance trendlines…. If the PCE, CPI and PPI suggest that inflation is falling faster than expected – then watch as investors/traders and algo’s take stocks higher with a test of the August highs in clear view.  If the data suggests anything else- then watch as stocks continue to struggle.

Stick to the plan…overweight the STPN (Stuff that People Need) – Consumer Staples, Energy, Utilities, Healthcare.  Look for the large cap, multinationals that have strong balance sheets and pay good divvy’s.  No reason to suffer from FOMO (Fear of Missing Out)  if you’ve paid attention and remained invested…..It is those that choose to try and pick tops and bottoms that feel the pressure of FOMO.

Take good care,

Chief Market Strategist
kpolcari@slatestone.com

Medium Shells with Sweet Sausage, Pancetta and Cannelloni Beans 

This is a great dish for a cold night…Light the fire, curl up on the couch……

For this you need:  2 cans of cannelloni beans, garlic, thick-cut pancetta, cut into small cubes, sweet Italian sausage, removed from casing, large sliced onion, olive oil, vegetable broth (I like to use chicken broth), water, s&p, finely chopped parsley, fresh grated Parmegiana, and a box of medium shells.

In a saucepan over med hi heat  – add some olive oil and the sliced garlic – sauté for 3 or 4 mins…now add the sliced onions and sauté until soft and translucent – careful not  to burn the onion…..When ready…add in the pancetta and sausage and allow to brown up nicely.  Using your wooden spoon – break up the sausage as it cooks.

Now add in the 2 cans of Cannelloni beans – juice and all and mix, allowing the beans to marry the other ingredients.  Next add the broth and the water at a 2:1 ratio….(2 c broth, 1 c water or 4 c broth, 2 c water…see the pattern?).  Let this simmer on the stove for 15 mins….stirring occasionally.

Now bring it to a boil (adding more water if you need to remembering that the pasta grows and sucks up the liquid) – toss in the shells  – you don’t need a whole pound here….the pasta grows and sucks up the broth – so maybe like a half pound – depending on how much you are making and cook until al dente – maybe 8 mins or so – adjust for taste and serve in warmed bowls – adorn with the parsley and if you like a drizzle of olive oil.   Have plenty of fresh grated parmegiana cheese on the table for your guests.

You can serve this with toasted garlic bread – traditional “Pane di Casa” is the perfect texture

Buon Appetito.