PPI Hot, FED says ‘it’s transitory’, ARM is hot and the UAW walkout/Try the Ropa Vieja

Kenny PolcariUncategorized

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–         PPI is hotter too, but don’t worry – the FED has it under control.

–         Retail Sales surge – why?  Higher prices

–         Oil pierces $90/barrel – expect transportation costs to surge and then what?

–         2’s now yielding 5.03%, the 10’s are yielding 4.31% – hello? 

–         ECB hikes rates and signals – what?

–         Try the Ropa Vieja

IT’S TRANSITORY!   Stocks surge, Bonds fall/Yields rise, Oil trades up and thru $90/barrel, The ECB raises rates to combat rising inflation across the zone,  the VIX plunges, inflation here hotter than expected – PPI surges by 0.7% m/m – and 1.6% y/y and if you take out food, energy AND trade y/y – it rose by 3% – above the +2.7% estimate and above the REVISED read last month – which went from +2.7% to +2.9%…  Retail Sales also rose better than expected – +0.6% vs. the +0.1% estimate but when you take out autos and gas – the number falls to +0.2%……Suppliers (manufacturers) are facing rising prices…..and those increases should find their way into CPI next month and when they do – inflation at the consumer level should continue its turnaround….and push higher (something the FED would rather not see) …..Remember – retail sales is about what consumers are spending and an increase in retail sales right now just suggests that you and I are spending more money on the stuff we need to buy (think energy/gas/food, utilities) – But don’t worry, it’s transitory. 

The algo’s and traders couldn’t get enough……worries that the hotter reports over the pasts 2 days – CPI and PPI  would force the FED to reconsider their ‘pause decision’ fell on deaf ears…..You see, the FED tends to ignore rising energy prices – because they tend to be volatile, so if they just ignore rising prices in this sector – they can pretend it doesn’t exist and if that’s the case – then they can stand tall in their decision to pause.  The latest data suggests one more hike this year (likely November) and then a hold at these higher levels until May 2024…. which would suggest that the FED is expecting a (major) downturn by late winter/early spring…. …..….. As a result – we saw the Dow gain 332 pts or 1%, the S&P up 38 pts or 0.9%, the Nasdaq gained 112 pts or 0.8%, the Russell added 26 pts or 1.4% and the Transports added 140 pts or 1%.

Now – what was a bit confusing – airlines were under pressure – UAL -0.8%, AAL -0.4%, DAL – 0.6% yet cruise lines were one of the day’s BEST performers – CCL +4%, RCL + 2.5% and NCLH added a whopping 5.6%……which seems illogical to me – why?  Because rising energy costs tend to hit the travel industry (as well as the transportation industry) hard – thus the weakness in the airlines does make sense…but the surge in cruise lines?   Well, apparently – Booking.com (+2.6%) is seeing lots of action – consumers are not sitting still – if they are employed…. they are spending their money where they see experiences…and unlike the airlinescruise ships themselves ARE an experience….and there you go….

Now – of the 11 sectors – we saw strength in every one of them…. Real estate seeing the most action…. XLRE +1.8% followed by who? (And don’t say tech…)  Utilities – XLU gaining 1.5% (why? they are so boring…) – I explained that to you yesterday…they have been the years worst performers – yet they got to a place that suggested they were overdone – and as such became a ‘value play’  and if the FED is assumed to be done – then we will see money move back into the sector – and that is exactly what we have been seeing – that sector has rallied by 6.4% in the past 7 days…not so bad for a ‘boring’ sector. 

Following utilities were Communications – XLC added 1.4%, Basic Materials – XLB +1.4%, Energy – XLE + 1.2%, Consumer Staples – XLP +1%, Consumer Discretionary – XLY, Financials – XLF and Industrials – XLI all gained 0.95% – leaving Tech – XLK +0.7% with healthcare carrying up the rear – XLV +0.3%.

Further down the line – Retailers – XRT +2.3%, Home Builders – XHB +1.1%, Disruptive Tech – ARKK +0.4%, the value trade – SPYV + 1%, the growth trade – SPYG + 0.7%, Metals and Miners – XME + 3.4%, Cybersecurity – CIBR + 0.6%, Aerospace & Defense – ITA + 0.5%. 

Where did we see weakness?  The contra trades of course – PSQ, DOW, SH & VIXY all lower. We also saw weakness in the auto’s (F & GM) think the UAW strike – which is now live…since no deal was reached…. more on that below. Although the EV makers all rose – because they are NOT unionized and the UAW strike has no bearing on them – so TSLA + 2.1%, RIVN + 3.7% and LCID +2.4%. – But remember – to charge your car you need energy and energy just got more expensive…but hey – what do I know?

Now – AI and the Semi’s were clearly in focus with the IPO of ARM Holdings – which opened up 11% and then proceeded to advance another 14% to end the day up 25% at $63.49.  Remember – there is not a lot of ‘free float’ out there…so moves will be more exaggerated.  And that excitement helped the Semi’s – SOXX advance by 0.7%, NVDA +0.2%, QCOM + 1.2%, AVGO +2.2%.  But in the end – you can credit some of the broader market move to that excitement as well – because every major listed company has exposure to or is using some aspect of AI in their business already….and so the excitement in the specific semi and AI space extends to everyone….

This morning many now see ARM as the future and  without it – there’s no AI – which I would argue is a bit of a stretch….Valuation for ARM is stretched at the current price and you can argue that the IPO price had it fully valued, but – in my opinion –  the hysteria over AI is ‘mispricing’ this stock at the moment as the individual investor can’t get enough…..(Data shows that the most retail buy orders came from Fidelity’s trading platform).  I would say – sit back and let it trade for a while…there will always be an opportunity…. I just don’t think it’s right now.

And the UAW – yup. They made good on their threat to strike at the stroke of midnight.  Targeted strikes are how it began – 13k workers now walking the picket line……but Fain assures the automakers that if he doesn’t get what he wants – then the strikes will move to more facilities.   Currently the fight is over wages and the work week….…. Fain wants 36% wage increases (down from 46%) while the automakers are offering 20%…. Fain wants a 32-hr. work week but get paid for 40, Automakers say ‘not happening’ so Fain says ‘no deal’….

Now, what I don’t understand is this – When GM’s Mary Barra – reported the latest earnings report – she was giddy with excitement – beating estimates and raising guidance etc.…. and I then said in my note the next day – I hope she is ready to negotiate with the UAW after that stellar report…. I hope she understands what the demands will be.  Which leads me to now ask – how did we get here? What were GM, F and Stellantis thinking? (They had these demands for 6 weeks now….)   Could this all have been avoided?  Even Jo Jo (the President for the Unions) couldn’t help in his last minute attempt to push this along – unable to recognize that surging inflation under his watch has brought this to a head – autoworkers can’t keep up……….Fain saying that he is prepared to push harder – the workers say they are too….let’s see.

US futures are mixed…. Dow futures +85, S&P’s up 4, the Nasdaq down 10 and the Russell up 3……  Oil is up 40 cts at $90.53/barrel, Gold is trading up $6 at $1939/oz, while the dollar index is trading at 105.28.  Eco data today includes Industrial Production – expected to be +0.1% and Capacity Utilization of 79.3% (remember 80%+ signals building inflationary pressure) and the usual U of Mich surveys.  1 year inflation expectations are now +3.5% with the 5 – 10 yr. rate expected to be 3%…..and that just suggests that since the survey is not expecting inflation to be anywhere near 2%, the FED will most likely consider raising their inflation expectation from 2% to 3% – this way they can show that they succeeded. 

European stocks are all higher…. up more than 0.7% across the board….The ECB raised rates by 25 bps yesterday – taking their terminal rate to 4%…..traders betting that the hiking cycle is over after the governing council said that ‘key levels’ have been reached and now the focus turned to the length of time they will keep rates at these elevated levels….. – while Christine Lagarde – says not so fast……Inflation for 2023 is expected to be 5.6%, for 2024 3.2% and for 2025 2.2%.  They also revised economic growth lower as well.

The S&P ended the day at 4505, up 38 pts.  We busted up and through trendline resistance at 4480 and will now test the September high of 4550.  The hotter CPI and PPI figures did little to rattle investors and the sense that the FED is holding rates steady for now with a cut expected next spring appears to be fueling the market move.  Ok, but I still think investors are tiring a bit – so I am not chasing…but I am not selling either…. I’d rather be a buyer lower and will remain patient.  If the market surges, I’m good – why?  Because I’m in and you should be too.  

Take good care.

Chief Market Strategist

“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.

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Ropa Vieja –

Literally means “old clothes”..…it describes the shreds of beef, peppers, onions, carrots that reminded someone at some point long ago of shredded clothing…..this is a staple in the Island Nation of Cuba…and although my wife hails from Puerto Rico – she makes an incredible Ropa Vieja –

You start with Flank Steak – that you braise in a pot for about 1 – 1 1/2 hrs.  with water, carrots, onions, celery, s&p.  Remove and let cool – strain the liquid – making sure to press on the veggies to release the last bits of flavor…. return to pot and reduce to about 4 cups of liquid.  With 2 forks – shred the flank steak – pulling it apart and leaving it stringy.

In a heavy skillet – sauté julienned red & yellow peppers, onions, & garlic, until soft – add the shredded beef, a can of tomato sauce (not paste) and one cup of the braising liquid.  Add frozen peas and pimento stuffed Spanish olives (cut in half).    Season with s&p, and a bit of oregano.  Cover and let simmer…. You can feel the sand between your toes…. the Ocean splashing you in the face……

This dish should be served over rice – either plain white rice or yellow rice….

Buen Provecho!  Which literally means that “you deserve to eat well” –