Things you need to know ~
- This week marks the ‘unofficial end’ of the Economic and Fed year.
- Lots of eco data and lots of central bank commentary and policy announcements
- CPI is due tomorrow…. FED on Wednesday
- Oil under pressure – but why? Demand is everywhere….
- Try the Stuffed Calamari – Recipe #5
Good morning – wherever you are in the world……Stocks got punched in the face on Friday….The Dow falling 305 pts or 0.9%, the S&P lost 30 pts or 0.75%, the Nasdaq gave up 78 pts or 0.7%, the Russell lost 22 pts or 1.2% while the Transports gave back 45 pts or 0.35%.
The PPI (Producer Price Index) which was the big thing gave us a mixed review. On the m/m reads – the PPI was stronger than expected….Final demand m/m was +0.3% (vs. the +0.2% expectation), Ex food and energy of +0.3% (vs. the expectation of +0.1%) – so that was a bit negative….yet y/y figures – while not as great as expected – were better than last month – so to be fair – that is a positive. Y/y figures for final demand came in at +7.4% – down from 8%, but higher than the expected 7.2%. Ex food and energy came in at +6.2% – down from 6.7% but greater than the expected +5.9% – so while not a disaster at all – it was not what the market or investors wanted to hear as we move into the final 3 weeks of the year.
Stocks which had been higher in the pre-mkt turned lower on the release and then struggled once the bell rang at 9:30 am. While they did lose value on the opening trade – investors/algo’s and traders tried to make sense of what it meant – taking stocks higher only to struggle and then as morning turned to afternoon – the tone weakened and stocks got punched – all the indexes ended the day on their LOW – which usually means a second day of weakness, so let’s see what happens.
Now look, some analysts think the recent pullback has left the S&P trading at forward valuations approaching the pre-pandemic norms. In fact Bloomberg Intelligence goes way out on the scale telling us that the market is trading at 13.8 x’s forward earnings….- -well that’s if you think 2023 earnings are going to be $283! I think that is quite aggressive – considering the 2022 final year estimates are running at $210/sh and 2023 ‘consensus’ estimates are $235/sh right now – (that’s consensus – which means there are lower and higher estimates) and we know that can change….usually change lower. So no, I don’t agree…..
Right now – the market is trading at 18x’s 2022 estimates and 16.7 x. 2023 estimates – levels that some think are still too high considering where we are in the economy…Now if we all think the market will struggle a bit in the new year – then I would argue that we should see the market multiple come down to the 15/16 x’s and that would put the S&P between 3525/3760. (The pandemic low was 14.6 x’s and I would argue we are not in a pandemic state of mind any longer). Remember – both Goldy and Morgan Stanley think we have another 15% – 20% move lower from HERE before this is over. Now while valuations are moving lower – they are not below the norms yet, but higher interest rates and an uncertain outlook for 2023 EPS growth will keep driving the multiple lower…Now if we get a ‘pass’ on higher rates in the spring of 2023 then we will see a change in market multiples….but that’s a story for later.
The two biggest losers on Friday were Energy – XLE lost 2.5% and Healthcare – XLV that lost 1.3% – the winner? Communications – XLC gained 0.3%. The other 8 sectors were lower by less than 0.7%.
Now we discussed this….the communications sector is the cheapest sector in the S&P – down 36% ytd…Consumer Discretionary -XLY is next at – 32% ytd followed by Tech – XLK – down 25% ytd…so watch what happens and what investors think…..If you are betting on a recovery in 2023 – then you would expect money to pour into the most beaten up sectors….as they provide value and opportunity….but beware…just because they are the worst performing sectors in 2022 – doesn’t guarantee their outperformance in 2023 at all….but it does give you an edge – if the economy turns….which is why I say – build a balanced portfolio -include the broad range but weight them appropriately – based on what the economy is doing, what the FED is doing, what the other central banks are doing…
Outside of the broad 11 S&P sectors we saw continued weakness in Semi’s – SOXX – 0.9%, Cybersecurity down 1.4%, Metals and Mining – XME down 2.4%, Housing and Retail both lower by 0.8% and 2% respectively. The value (SPYV) and the growth trade (SPYG) also both went lower – falling 0.7% Value down 6% ytd while growth is lower by 27% ytd. The contra trades – as expected – do well in a declining market….the DOG +1%, the PSQ +0.5% and the SH +0.8%. – leaving those contra investments up 4%, 28% and 15% respectively.
If you remain concerned about a slowdown and you are in the ‘over 50 crowd’ – then overweight the STPN (Stuff that People Need) – Energy, Utilities, Consumer Staples, Healthcare while underweighting the others. Investors in the 25 – 50 range shouldn’t be as concerned – they should be a bit more aggressive – they have more time! In any event – there is no ‘perfect’ portfolio allocation that fits everyone….which is why you need to talk to your advisor.
Pay attention to the forward guidance during the January ‘beauty pageant’….Which begins one month from tomorrow….JPM set to announce 4th qtr. earnings on January 13th….and then it begins all over again…..Don’t pay that much attention to the earnings reports – (Unless of course they miss so badly..) – earnings represent ‘history’ – guidance represents the future, so listen to what the C – suite says about the next 6 – 12 months.
This morning – marks the beginning of the last week of the year that might be considered ‘important’…. We are set to get lots of eco data – After that – the last 2 weeks won’t be full of sparks and fireworks –
We are also going to hear from a range of central banks this week – with the FED, the ECB and the BoE at the top of the list….Other central banks that are due to present include Mexico, Norway, the Philippines, Switzerland and Taiwan.
The risk/reward calculation for the market right now is cautious….and yes, most likely, we will get that year end – Santa rally – as some asset managers try to pick up ‘cheap names’ in anticipation of the new year…but don’t be fooled or lulled into thinking that the worst is behind us….while it may be, it may not be….remember – JJ has told us to expect the FED to hold rates higher for longer and to expect higher rates in January and March – that would bring us to the 4.75% – 5.25% range….and if the 11 rate hikes that we will have seen don’t do it – then watch for more hikes to come….and that will put more pressure on prices and valuations….Remember – it is nothing more than a math problem…..
Now – what is the treasury market telling you? The GAP between the 2 yr. and the 10 yr. has grown – and that suggests more trouble ahead….The 2 yr. is yielding 4.32% while the 10 yr. is yielding 3.54% leaving the gap between the two at 78 bps….which is up from 25 bps only weeks ago….and the growing gap suggests that not only is the recession coming, but the market expects it to be deeper than current expectations.
Oil remains under pressure – this morning….down 20 cts at $70.84 which makes little sense to me – because the whole move lower is built on a slowing global economy (which I’m not sure I believe)….We have Vlad – threatening to cut production (supply) to punish the West for the imposition of price caps on Russian exports – in fact on Friday – he said that he would refuse to sell oil to any country that imposes a ’stupid price cap’ on Russian exports. We have the European ban on Russian oil that comes thru the Nord Stream pipelines (again – think supply), we have a re-opening of China (think more demand), we have ‘sky high’ demand out of India and we have the Saudi’s (OPEC+) that stand ready to cut production (think supply) at any time to help support the price – so – the decline in oil prices is a bit counter-intuitive – but it is what it is – and in my opinion creates a longer term opportunity. Now recall – that Joey did give complete and full immunity to the Crown Prince over the killing of WSJ journalist Jamal Khashoggi- so maybe the Saudi’s are giving him a bit of breathing room….and letting him buy oil on the open market to replace the millions of barrels that he released over the last 6 months. Whatever the reason – it is what it is – but I am in the ‘overdone on the downside camp’ and expect oil to move higher.
We are sitting right on a key technical level….a failure to hold here could see oil trade down to a low of $60/barrel….while a successful hold would most likely see it rally back to trendline resistance at $83. In either case – it will be an interesting time.
This morning – the global tone is lower….not a disaster but lower….Asian markets all closed down on Monday….with Hong Kong down 2.2%, China down 1.1%, and the rest of the region lower by 0.6% or so.
This morning European markets are lower as well…off by about 0.2% as trading kicks off….the UK economy continues to struggle with many saying that the UK economy is in a full recession – with citizen’s feeling the pain of relentless inflation and rising rates..- crippling business and household spending. Look for the BoE to raise rates by another 0.5% on Thursday. No word yet on what the ECB will do, but it is widely expected to raise rates between 0.5% – bringing their deposit rates to 2% – hinting that future hikes will be in 0.25% increments. ECB President Chrissy Lagarde also making it clear that the ECB may have to ‘go beyond’ normal to take rates to a more restrictive policy stance.
US futures were lower overnight but have lifted their head at 5 am….Dow futures are now up 18 pts, the S&P up 4, the Nasdaq is +13 and the Russell is up 1 pt. The eco data starts tomorrow….with the CPI for November….m/m expectations call for a rise of 0.3%, ex food and energy of +0.3%. Y/y rates are expected to be +1.3% and ex food and energy of 6.1%……After last week’s PPI report – the sense is that the CPI report will be a bit hotter than the expectations…and this report comes one day ahead of the FED announcement where we are expected to get a 50 bps hike….and a press conference…..
In my opinion – no matter what the reports show – JJ needs to stick to the narrative…..He needs to stop the ‘back and forth’. He needs to remain very clear – leaving nothing to the imagination….at least until we get to the end of the 1st quarter 2023 – where it is widely expected that the FED is going to pause – meaning stop raising rates – just to see what the 11 rate hikes have accomplished. In my opinion (again) there should be NO veering off course.
But again – people hear what they want to hear…..dovish investors will try to hear dovish commentary while hawks will try to convince the trading public that nothing has changed – and that folks is what makes a market…both buyers and sellers…
The S&P closed the day at 3934 – after testing support at 3930 once again. We are sitting right on trendline support- so this KEY…failure to hold here will see us test the long term trendline at 3840…. while a push up will see us test trendline resistance at 4040…..In the end – I expect a Santa rally to take us to the 4000/4100 range by end of year.
Take good care,
Chief Market Strategist
kpolcari@slatestone.com
#5 – Stuffed Calamari
This is outstanding…you have to like Calamari’s because this one is a bit of work….but the result – to die for.
For this you need: Calamari bodies for stuffing – so you want the big ones… (You don’t need or use the tentacles so just specify “bodies for stuffing”), homemade Italian style breadcrumbs, wine, olive oil, toothpicks, homemade marina sauce (same as the lobster sauce w/out the lobster.) s&p.
So here is the deal – you order the calamari’s from the fish store – “cleaned”. This means that they trim the tentacles, and take out the membrane from the inside…..but here is reality…..you still to make sure that they are clean – so when you get home – you need to wash them and confirm that the membrane was in fact taken out. If not – you have to turn the calamari inside out – and then rinse well and then turn it back again – this is the trick…you have to be very careful as you do not want to rip the body otherwise you cannot stuff him. Capisce?
Now take a bowl of breadcrumbs – add enough olive oil to make them moist but not “wet”, now add a splash of your favorite white wine – not a chardonnay. Mix well. Can you make a ball with the breadcrumbs? Do they hold in place? Perfect.
Now – carefully stuff the calamari using a teaspoon and your index finger…. careful not to overstuff as they will explode in the sauce when you cook them. You need stuff them just enough so that you can pin them closed with a toothpick… Repeat until you have stuffed all of the calamari’s …(I usually cook about 6 lbs. of them on Christmas Eve so it takes a couple of hours to clean, stuff and cook).
Once you have stuffed them – drop them into the marinara sauce that you have prepared and turn the heat to simmer – DO NOT BOIL the calamari’s !
They will begin to plump up and turn white then take on the color of the sauce. They will cook in all of about 30 mins (max). Turn heat off and let rest.
Again – you should make this the day before and let it sit overnight. The next day – take it out of fridge and let warm up to room temperature Wand then heat up on simmer. When you are ready to eat them – serve them in a large bowl with plenty of tomato sauce. You can also make this and serve it over linguine if you prefer. The other option – if you make both the lobster and calamari sauce – then mix a couple of ladles of each and serve that over the linguine…..Yum, Yum, Yum….
Buon Appetito.
