Things you need to know.
– Bam, Pow, Bang, Ouch – Reminds me of Batman & Robin
– Neely Kashkari calls for MORE regulation and higher rates
– Financials/Banks get smashed
– Retail Sales up….so are prices….
– Asia under pressure as China circles the drain….
– Try the Mussels
Investors got punched in the face or kicked in the gut on Tuesday…. Stocks declined as concern about the state of the global economy hit home sending the algo’s into a tizzy. Toss in some negative comments from Minneapolis FED President Neely Kashkari about the need for MORE regulation around regional banks and the implied threat by Fitch to downgrade some of the country’s biggest banks and you have a recipe for disaster. The eco data was…. about the consumer and Retail Sales….and those numbers were quite strong…or at least on the face of it they looked strong – as if the consumer is alive and well…..Retail sales m/m +1% vs. the expected 0.4%, Ex autos and gas of +1% also vs. the expected 0.4% – but listen –Let’s be honest – all that tells you is that the consumer is spending MORE to buy LESS….that is what the increase in retail sales means…..Don’t kid yourself – remember prices are still going UP not down….and that is the issue…..and then the state of manufacturing in NY? It plummeted – falling 19 pts vs. the expected -1 pt….
As the day wore on – stocks sank further into the abyss as the sell momentum gained steam. At 4 pm – the Dow was down 361 pts or 1.1%, the S&P lost 51 pts or 1.2%, the Nasdaq gave up 160 pts or 1.2%, the Russell lost 24 pts or 1.3% while the Transports gave back 285 pts or 1.8%.
So, let’s break this down…the global economy – you know about that, no? I laid it out in yesterday’s note…. it’s China, it’s Russia, it’s Argentina, it’s Europe and the UK, it’s the US, it’s about global interest rates and the path forward. It’s about the seasonality – August/September – which is usually a weak time of year. It’s about the recent FOMO rally that has taken stocks up strongly (maybe too strongly) since June 1st – when we saw the tech rally begin to broaden out to the broader market as asset managers and retail traders who had stepped out of the market decided that they needed to get back in…..….taking SMIDS, Industrials, Basic Materials, Healthcare, Energy, Financials etc.…all higher….. leaving some investors feeling like they got had…the minute they jump in, the tone changes and the market turns south…..…..Which is exactly why – when you trade your investment account – you usually end up losing as you try to pick tops and bottoms, going in and then out only to go back in again…. vs. when you invest your investment account and design a portfolio that represents you, your risk profile, your age, your time and grade and your needs. You pick names, you pick entry points, you create the ongoing plan that includes dollar cost averaging and dividend reinvestments and then you stick to it… Period.
And then we had the brain surgeon, former GS VP, former Asst Treasury Secretary under Hanky Paulson during the GFC (Great Financial Crisis) and currently the President of the Minneapolis FED – Neely Kashkari – come out and say that he favors MORE regulation around regional banks saying that he doesn’t think the current proposals that set higher capital requirements for banks with more than $100 billion in assets goes FAR ENOUGH. He cites the SVB crisis earlier this year, what he failed to say though was that it was exactly the REGULATORS that FAILED in their duty to protect not only that bank, depositors but the system as well. So now he wants even more regulation – as if the regulators played NO role in SVB’s demise. Come on! Really. And then – as if no one was listening – he slipped in the fact that he thinks ‘inflation is still do damn high’ suggesting that there is at least one more hike to come….
Then Fitch raises its head again threatening to downgrade some of the country’s biggest banks – due to the industry’s ‘health’ – now what is interesting is that Fitch did downgrade the ‘score’ for the industry (in June) to AA- and this went unnoticed because it did not trigger a downgrade on the individual banks….BUT they are threatening to downgrade the score again from AA- to A+ (it goes from a double A to a single A – see how that works?) and if that happens then they would ‘recalibrate all financial measures which would translate into negative ratings actions’.
Now – both of these headlines caused the whole sector to move lower…the XLF fell 1.8% while the Regionals – KRE fell by a whopping 3.3% – this directly tied to the Kashkari comments…..and this puts a new round of pressure on the names in this group….so proceed with caution…..Some of the names are solid, but the headline will put pressure causing some investors to bail…..note – WAL – 4%, NYCB – 3.8%, RF – 2.7%, ZION – 4.5% – and all that means is if you are sniffing around – sit tight….no need to chase these names at all….Every time Neely opens his mouth – the waves of selling wash over the marketplace.
And then the eco data – did you see that, and did you see how they want you to consume it? Retail sales came in well above the expectation of +0.4%…..in fact it came in at + 0.6% better – ringing the bell at a full 1% increase – the media trying to tell us that the consumer is STRONG and that the consumer keeps spending….so, there is nothing to worry about…..Ok – let’s discuss. Retail sales tracks consumer demand for finished goods by measuring the purchases of durable goods (cars, stoves, dishwashers, ovens) and non-durable goods (food, fuel, clothing, shoes, cosmetics, cleaning products etc.). Both sectors have seen big increases in prices….so it makes sense that you spend more causing retail sales to increase (even as you buy less). It’s semantics…capisce?
And speaking of retail sales…. It’s a big retail earnings week…. Yesterday we heard from HD and – Yes, they beat the number…. coming in at $4.65/sh vs. the expected $4.46/sh and yes, they announced a $15 bil stock repurchase program and yes, they admit that sales are ‘sliding’ (down not up) as consumers do what? Pull back – especially on big ticket items…. Although they re-affirmed their full year outlook…In the end – the stock traded up 2.5% on the open only to lose it all and then some by noon before settling in at +0.6%.
Today we will get TGT and TJX -0.5% before the opening bell. What will they reveal about the health of the consumer?
TGT beats in earnings. But misses on Revenue and lowers full yr. guidance, but margins are UP…. ….and – traders take it up 4% in the pre-mkt…. remember – the stock is down 23% since June…. on a ‘sell the rumor/buy the news’ move.
All of the 11 sectors in the S&P were lower….Energy – XLE was down 2%, Financials – XLF -1.8%, Utilities – XLU down 1.6%, (think higher rates), Basic Materials – XLB -1.6%, Consumer Discretionary – XLY down 1.4%. Tech – XLK, Communications – XLC, and Healthcare – XLV down less than 1%.
The contra trades were the clear winners…DOG +1%, SH + 1.1% and the PSQ +1.1%. The VIX (fear index) which was up 11% sent the VIXY ETF + 5.5%.
This morning trading in Asia is still mixed – from Tokyo to Taiwan and Shanghai to Sydney the message was – ‘Get out of the way…..or risk getting run over’….as China reported that its home price index in now in contraction territory…..and all that is – is more negative Chinese data – and I for one couldn’t be happier (I don’t play in China)….Remember – China is a communist country, they don’t play by the rules so can you really believe anything they say… ? Now, Japan – that does play by the rules reported improving business sentiment – but no one seemed to care. Japan, Hong Kong, Australia and South Korea all lower by more than 1.5% while China lost 0.7% and Taiwan was flat.
European markets are churning….not really up or down, just churning….this as investors in the UK grapple with higher inflation numbers….which means that they can expect the BoE to raise rates yet again…..CPI in the UK rose 6.8% in July (– the expectation was for 6.7%) – remaining 3 times greater than the target (2%) and was the 5th time in 6 months that the CPI surprised to the UPSIDE…..In addition the markets are awaiting the second pass at 2nd qtr. GDP along with UK home prices.
US futures are up small – and this makes some sense after the beating yesterday….at 6:30 am Dow futures are +7, S&P’s +1, Nasdaq +12 and the Russell +1. Eco data today includes Mortgage apps, Housing Starts – expected to be +1.1% and Building Permits expected to be +1.5%. Industrial production and Capacity Utilization reads due out at 9:15. At 2 pm – we will get the July FOMC mins…. don’t expect to hear anything new. The FED has left the door wide open….to pause or to hike….and that won’t change today.
DXY is down small leaving the dollar at 103.06….
Oil has moved off its most recent high on the back of the negative China news…even as supplies are tightening… Yesterday it was down 1.7% to close at $81 and this morning it’s trading right there….The chart suggests that it should find support right here but if they continue to highlight a weaker China – then expect more downside pressure….until they get it where they want and then suddenly – the China story will turn from negative to positive and demand will surge and oil will resume its upward trend.
Gold is holding tight at $1937/oz.
The S&P ended the day at 4437 – down 51 pts – but futures are suggesting a lack of direction……which means – the path of least resistance is more likely lower vs. higher…..at the moment…..and that means – take your time…do not chase and do not rush…and don’t’ be emotional….My sense is that the trend is still lower and will remain so throughout the next 5 or 6 weeks.
Reach out to discuss – always happy to engage.
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
“The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kace Capital Advisors.”
Mussels Trieste Style
Trieste is a seaport in the Northeastern part of Italy on the Gulf of Trieste…. – way at the top. It borders the Adriatic Sea on one side, the country of Slovenia to the north…its history and culture have been impacted by Austrian, Hungarian, German, and Latin influences. It is the capital of one of the 20 regions in Italy – Friuli-Venezia Giulia. At one point it was the 4th largest city of the Austro-Hungarian empire and was known for its contribution to literature and music. After WW 1 and the collapse of the Austro-Hungarian empire – Trieste partnered up with Italy….and today is capital to one of the richest regions in that country.
Mussels prepared Trieste style are easy to make and easy to eat. You need: Mussels….2 doz… thoroughly washed off any sand. White wine, Clam juice, garlic, slice onion, olive oil, s&p, Fresh Bay Leaves and Toasted Italian seasoned breadcrumbs….
In a pot – heat the olive oil and sauté the garlic, add the onion, and continue to sauté. – do not burn.
Add 1 1/2 c of dry white wine – nothing fruity – stir and let come to a boil –
Add the small bottle of clam juice and fresh bay leaves. Season with s&p. Turn heat down to simmer. Now add the mussels to the pot and cover tightly. Cook until the shells open – should be maybe 5 to 8 mins more…. Discard any mussel that refuses to open. Now add a couple of handfuls of seasoned breadcrumbs and toss well so that the breadcrumbs mix with the wine and juice to create a thickened sauce…. You do not want too many breadcrumbs – so add one handful and then decide…depends on the quantity of mussels you are making…capisce?
Again – set the outdoor table with place mats, linen napkins, and wine glasses. – Hopefully there is a full moon to help set the mood. Present this dish in a large bowl with the mussels bathing in the sauce. This dish demands toasted garlic bread to dip in the sauce while you feast on the mussels. Serve this with chilled white wine – maybe a Fallenghina works for you.
Buon Appetito
