Things you need to know ~
- Stocks got walloped, election confusion and a meltdown in the crypto world
- 4 states hold the country hostage- AZ, NV, WI and GA
- GOP takes the House, the Senate still in limbo and will remain so until early December
- FTX circles the drain and has an $8 billion ‘issue” – will this change the narrative at the FED?
- Try the Seared Scallops Bathed in Vermouth
OUCH! Stocks took a beating on Wednesday – after the election produced less than spectacular results….the Tsunami turned into a ripple and some of the winners in this race reflect a country that is not only deeply divided but can’t seem to get out of its own way….Here we have the economy in a tailspin, we have inflation at 40 yr. highs and likely NOT going lower anytime soon, we have a FED that completely dropped the ball and is now forced to ‘overreact’ in order to try and tame inflation, we have political division – the likes not seen in my lifetime (61 yrs.), we have an open border that has seen millions just walk across the Rio Grande and ‘become American citizens’.
We have an election which has come down to 4 states And while we knew that some of the races were close – the polls suggested one thing and reality produced something very different. Now while the GOP appears to be taking control of the house – the Senate is very much in flux….GA is official – they are going into a runoff on December 6th, AZ, NV and WI remain 3 of the wildcards that will upend the complexion of the US gov’t for the next 2 yrs. And to make it even more dramatic – some of those states can’t finish counting ballots fast enough and have warned that it could take ‘days’ as mail in ballots are still being counted and will still be counted if delivered by Saturday as long as they have a post office stamp dated November 8th. In the end – just like 2020 – a GA runoff in early December will seal the deal – so in reality we won’t know what the final tally is until that runoff vote.
And while markets opened weaker in the morning – something that was not necessarily a surprise – they got even weaker as the sun moved across the sky…and day turned to night. Word that cryptocurrency exchange FTX was circling the drain only adding to the angst – Binance – (another crypto exchange) walked away from a deal to rescue FTX – leaving FTX with an $8 billion ‘liquidity’ problem – in fact, this statement about says it all
“In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.”
It is the ‘beyond our control’ part of that statement that suggests when you pull back the sheets – you are not excited about what you see!
FTX’s CEO Sam Bankman-Fried (SBF) saying and I quote “I f* ed up” as he begged his backers to help out. Those backers include Sequoia Capital, Blackrock, Tiger Global, and Softbank – and it is unclear what the next step will be or if they are choosing to ‘help out’. On the back of this dramatic news – Bitcoin plunged to below $16k (-16%) and Etherum kissed $1100 (-17%) – leaving both currencies down more than 65% ytd. Stocks that had any ties to the crypto industry also suffered – COIN -9.5% and HOOD – 14%.
And to add more noise to the conversation – Minneapolis’s FED President Neely Kashkari slammed the crypto currency world saying that is the ‘wild west and chaos all rolled into one….it is 99% noise, hype and confusion and that he has yet to see anything useful coming out of cryptos’.
Some are quick to blame a tightening FED for this latest event – something I do not agree with – when an event like this happens it is always easy to try and find a scapegoat – in this case – the cause of this problem is no one but SBF , FTX and the crypto industry. But, that doesn’t mean that investors aren’t wondering what else lurks beneath the surface. Surely there will be more analysis as this event becomes a Harvard Business School Study. And look – this story is far from over – over the coming days we will learn who else is impacted and what effect that will have on markets and investor psyche. In the end it will be another chapter in the crypto playbook. Where is Mikey Novogratz or the ‘Mooch’ during all of this chaos? Weren’t they the ones telling us that you better get in now on bitcoin (when it was trading at $50k) otherwise you’ll miss the move to $150k! How’d that work out? Last sale in Bitcoin this morning is $16,352 and likely going to $10,000 before it goes to $20,000.
By the end of the trading day – we saw the Dow give back 645 pts or 2%, the S&P lost 80 pts or 2.1%, the Nasdaq choked up 265 pts or 2.5%, the Russell lost 50 pts or 2.7% and the Transports gave back 342 pts or 2.5%.
In the end – it is still all about the economic data and the FED and today we are about to get more economic data….the CPI (Consumer Price Index) and that is expected to remain elevated…..now the official estimate is for top line CPI to come in at +0.6% m/m which is up from last month…..y/y estimates are calling for a reading of 7.9% which would be down vs. last month….but the ‘guesses’ are all over the place….Morgan Stanley is looking for an 8% read while Goldman is pushing for 7.8% – and while that doesn’t seem like a big difference – it is….IF the CPI suddenly dips to a 7 handle – then expect the celebrations to kick off – with many saying ‘Look, it’s working….inflation is subsiding…the FED has managed a soft landing….’ Blah, blah, blah…… while an 8 handle would confirm that inflation is becoming more entrenched and more difficult to tame.
In addition – we will also get news on ‘real avg hourly and weekly earnings’ y/y. No one is expecting to see those earnings rise faster than inflation – in fact remember last month saw avg hourly and weekly earnings fall by 3% and 3.8% respectively.
US futures this morning are trying to put on a happy face, as they are betting on a 7 handle story. With futures pointing slightly higher – you would be remiss if you weren’t a bit cautious….I’m in the 8 handle camp on CPI – remember oil moved up by 12% during the month and that is reason enough to think that CPI will remain strong- I mean I’m not sure what came down enough to offset the rise in oil…but we are about to find out…. In any event – the ‘rally’ this morning is nothing to write home about…. no real commitment – which really means any move up could be met with a swift move lower if the story is not what it expects this morning. – at 6:30 am – Dow futures are up 70 pts, S&P’s up 12, the Nasdaq up 56 and the Russell up 6
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…..Next week will also bring us retail sales, Industrial Production, Capacity Utilization, Housing Starts and Building Permits.
Look inflation is at the top of mind for the FED and for investors and will remain at top of mind until we REALLY see it start to fall. JJ has made that very clear – now what will be interesting is if we see a change in the narrative because of the crypto debacle….if we do, then we know there are bigger issues simmering under the surface… With rates expected to continue rising thru the Jan/Feb FED meeting – the market is prepared for a 5.25% terminal rate…A change in that narrative will certainly cause more angst…. In any event -the FED is expected to keep raising rates until they break something (or did they already do that?)
US treasuries remain inverted….no need to go there….nothing has changed….the 2 yr. yielding 4.62%, the 5 yr. yielding 4.27% and the 10 yr. yielding 4.10%
The dollar index – bounced off of support at 109.06 and is trading up 36 cts at $110.91. Resistance is at $111.28.
Oil extended its losses on Wednesday and again this morning….as more noise comes out of the world’s biggest importer of oil China. Renewed covid concerns weighing on the market…..Guangzhou – a city of $19 million just the latest to report more than 2,000 cases is under threat of another lockdown….In addition – US stockpiles rose by 3.9 million barrels last week – leaving inventories at highs not seen since July 2021. And that suggests slowing US demand – I am NOT buying that argument at all….
…..This morning oil is trading down 71 cts at $85.14/barrel. Now in the last week – we have seen it breach all 3 trendline supports – leaving it ready to test $80/barrel. Remember – the Russian oil ban takes effect on December 5th….but that’s another conversation….because does it really? Europe needs oil – if they don’t buy it directly from Russia – they will buy it from Russia via India or some other country that acts as an oil ‘launderer’. Kind of like money laundering. But that doesn’t mean oil is necessarily going lower – my sense is and has been that demand is alive and well….
European markets are lower – down about 0.4% across the board.
The S&P closed at 3748 – down 80 pts…..just off the lows of 3744. Uncertainty over the elections, and now concern over what the FTX blowup means for the broader market and for the FED (if anything) is now top of mind. Joey takes to the airwaves and tells us that what he can’t do is guarantee that he can bring down inflation (which is a change in his narrative from last week) ….of course he can’t – unless he stops the madness – think massive spending and free money programs, which is not happening….so it’s up to JJ and the FED to slam the economy into a longer and deeper recession. Talk of a 6% terminal rate is now being bandied about – but no one really wants to go there….at least not yet…
But we will hear from a bunch of FED heads today…and they include Lorie Logan, Esther George, Loretta Mester, Neely Kashkari and NY’s Johnny Williams. They are all just dying to speak…and I suspect that we will hear conflicting conversations about where the FED is headed.
With a split congress – we can expect less of the out of control spending, we can expect much less of the fringe narrative. And that is good for the country and for stocks and other assets. In the end – do not go and change you portfolio because of what happened yesterday. (unless of course you are overweight in crypto – oh wait – you’re not overweight anymore!) Let it settle in and let’s see how it begins to play out.
Remember – rates are going up and the FED has made it clear that they are not pivoting anytime soon. (Pivot here means a reversal in policy).
Again – I can’t say it enough…. stick to the plan – I suspect we will see that year-end rally that should take us to the 3900/4000 range…. 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.
Buy the STPN (Stuff that People Need). Energy, Healthcare, Consumer Staples, Utilities and some big megatech vs. the STPW (Stuff that People Want). Even bonds are starting to look kind of attractive if you buy and hold them – you can lock in 4.65% for 2 yrs.
Take good care,
Chief Market Strategist
kpolcari@slatestone.com
Seared Scallops Bathed in Vermouth
If you like scallops – you will like this dish… simple elegance.
You will need – olive oil, garlic, cauliflower heads, scallops, butter, shallots, dry vermouth, s&p, and fresh basil.
Start by heating up some olive oil in a sauté pan… add some sliced garlic – not too much – now add the cauliflower – season with s&p and cook until slightly browned- maybe 5 mins or so… remove and set aside.
Add a bit more olive oil to sauté pan – heat… when nice and hot…add the scallops – season with s&p – careful not to crowd – sear for about 2 or 3 mins… flip over and cook for about 2 min more. Remove and set aside.
Now, add butter and the sliced shallots – cook until soft and the butter begins to brown… not long… Add about 1/2 c of dry vermouth and scrap the bottom of the pan… add back the cauliflower – reduce heat to med and cover and cook for about 5 mins or until the cauliflower is tender… add the scallops to reheat only… no more than 1 or 2 mins… Serve immediately on a warmed plate – garnished with fresh basil. Enjoy a chilled dry white wine – nothing fruity…
Buon appetito
