Things you need to know.
– Oil surges – The Saudi’s make good on their threat of supply cuts.
– Oil Surges – the Russians make good on their threat of supply cuts.
– Fed Governor Waller – plays on both sides of the fence – Hardly helpful.
– Fed Funds Futures now pricing in only a 7% chance of a hike – be careful what you wish for.
– Try the Garganelli in a Tomato Cream Sweet Sausage Sauce
Oil shoots higher (think Saudi/Russian cuts)….The dollar index shoots higher (think rising rates), Gold tumbles (think stronger dollar/rising rates), Treasury yields spike up/prices decline again (think rising rates and more supply) – the 2 yr. now yielding 4.95% up from 4.88%, the 10 yr. is yielding 4.25% up from 4.18%….and stocks sell off (again think rising rates & seasonal trends). There seems to be a common theme to yesterday’s action…. Do you see it?
Now the talking heads will tell you that it was the billion-dollar corporate bond deals that hit the market yesterday that drove prices down and yields up…. ok…let’s run with that….in any event – treasury yields spiked.
Stocks struggled all day – attempting to buck the trend that left Asia and Europe in the red…. but in the end – failed to do so… At 4 pm – the Dow gave up 200 pts or 0.6%, the S&P’s lost 18 pts or 0.4%, the Nasdaq gave up 11pts, the Russell gave back 40 pts or 2.1% while the Transports also took a hit – falling 345 pts or 2.2%….
Then:
Oil continues to move up… as the Saudi’s and Russian’s are hell bent on creating more global inflation and more pain for global consumers…. The Kingdon announcing that they will hold output at 9 million barrels/day – the lowest it has been in several years….And then Vlad’s sidekick – Alexy Novak (Deputy Prime Minister) announced that they too would continue to hold back production by 300k barrels/day – making it very clear that The King and the Dictator are in bed together….….All while Jo Jo sits back to tell us that ‘everything is good, nothing to see here..’ Now to be clear – the chart goes straight up – so yes…you can argue that we are in overbought territory and that it should retreat (called a technical correction) but don’t expect it to go back to $65….as the outlook is for global energy (oil) demand is expected to continue to increase in 2024 and just fyi – while the supposed macro China story suggests a slowing Chinese economy – make NO mistake – China continues to be a big importer of oil….Don’t let them fool you!
Brent pierced $90/barrel all while WTI trades at $86.50…after the Saudi’s and the Russians confirmed that they are extending their production cuts through December 31st……..Now – they were extending cuts month by month…but yesterday – they announced the news that they are moving in 4 month cycles…so that takes us to the new year….and the algo’s went nuts….sending wave after wave of buy order into the markets to scoop up all of the big oil and exploration companies….the XLE – energy etf – rose 0.5% and some of the bigger individual names rose more…HAL + 2.25%, EOG +1.8%, DVN + 1.1%, CVX + 1.3%, MPC +0.75%, BKR +0.7%.
Then:
Word that the US deficit is about to double this year is also making the headlines…the Committee for Responsible Federal Budget now projects that the federal deficit will come in at $2 trillion on Sept 30th (fiscal year end) this as Jo Jo tells us that he has cut the deficit by $1.7 trillion … Now before you go yelling at me…It was the Washington Post that broke the story on Sunday….referring to it as a ‘stunning figure’ – then going onto say that such huge spending imbalances will lead to higher interest rates for you and me and higher interest costs for the US gov’t (and that is an issue)…that should concern everyone.
The eco data did not help….Factory orders came in weak – down 2.1%, Durable Goods orders down 5.2% – on top of the 5.2% decline last month and Cap Goods Shipped came in at -0.3% vs. last month’s -0.2%…so yes, the data is weakening….but the labor market is not and neither is inflation….yes, it has come down but it appears ready to turn back up…..the most recent PPI and PCE reports verify this fact…both were higher than the previous month and that doesn’t include the recent 12% spike in OIL which affects everything – because as transportation costs rise (think gas/diesel) – where do you think manufacturers and producers are going to get the money from? Bingo! Higher prices…and that is what then becomes ‘entrenched inflation’ that will cause the Fed to remain more hawkish – which is why I still think rates will rise in September…I don’t see how they can explain away a pause – if the data suggests that prices are heating up again….It would be 1979/80 all over again……something that JJ has vowed he would avoid.
Then we heard from Fed Governor Chris Waller – who has been playing on both sides of the fence – one day suggesting we are good, the next day suggesting that maybe we need more hikes….and yesterday was just another day when he intimated that more hikes might have to be the answer, while holding steady might be the answer – saying it this way –
“The latest economic data show officials CAN proceed carefully with interest rate hikes – but there is nothing that is saying we need to do anything imminent anytime soon.”
Classic right? Do you see how played on both sides of the fence in one statement!
Now – while he didn’t say they are going to raise rates – he didn’t say they weren’t, he left it vague enough that no matter what they decide – he can hide behind this statement – saying that he never committed either way and that investors heard what they wanted to hear…When pressed – he went onto say that HE supports leaving rates alone…but he is just one voice and does not control the outcome…..
Now remember – this should surprise no one….many on the committee have been calling for higher rates (think 6% terminal rate) to make sure that they conquer inflation….and while they have managed to slow it down – the fact is – prices are still rising and the consumer is tiring and that is beginning to show up in a number of places. The latest data point that supports that argument is the uptick in Friday’s labor force participation rate – meaning more people are searching for work (or more work) and that speaks to the pressure that so many families are experiencing as we are now more than 24 months into rising prices….24 months of rising prices – with NO end in sight. It was after this interview that we saw the yields on treasuries move up while the dollar hit its highest level since March. This as the odds of a rate hike continue to plummet (which is illogical) – FED fund futures are now predicting only a 7% chance of a rate hike on September 20th. So, it remains confusing….and my gut says that if the FED pauses this month – it will be a decision that they regret.
The S&P is trading at 20.5 x’s 2023 expected earnings – which is a bit rich for where we are in the cycle…and is well above the historical average of 16 x’s. At these multiples – the algo’s are expecting a reacceleration of growth….something that seems to be a bit of a stretch…..we need to keep our eyes on the macro data – as softer/weaker data is not something I think is currently priced into the markets – which again doesn’t mean get out, it just means know what you own and why you own it. Consider becoming a bit more defensive- which can be boring – but it will offer you some stability in what could become a more volatile time.
Some street analysts are trying to tell us that just because the S&P had gained more than 10% ytd…that the ‘seasonal weakness’ that happens yearly won’t be happening this year…. OK – you run with that…. My gut says that we will have the seasonal weakness – the market will pull back into October (not crash) and then will rally into the end of the year – as is usually the case – ending up at S&P 4500 ish…. (Right where we are today). Now, if the FED pauses in September (prematurely) – that could change the mood temporarily (think rally) – but that’s when the we to consider what the next move will be in November (if the data suggests an uptick in inflation) and if they realize they made a mistake – that will disrupt the yearend rally…Capisce? And we know – they don’t want to disrupt the year-end rally going into a Presidential election year… I think if they are thinking of pausing – it should be a November pause and not a September pause – but remember – I don’t get a vote!
This morning we wake up and find out that European markets are all under pressure… In Germany – we have weakening macro data, stubborn inflation at 6.1%…..across the zone we have inflation running at 5.3%, and ECB that is leaning more hawkish and now they have rising oil prices and that is reigniting the STAGFLATION story……Recall that stagflation is defined as high inflation, high unemployment (currently 6.5% across the region) and stagnant demand…. And that is putting pressure on stocks across the region…. the FTSE -0.7%, CAC 40 – 0.6%, DAX – 0.3%, EUROSTOXX -0.6%, SPAIN -0.6% and ITALY -0.6%.
US futures are down as well…. Dow futures down 45 pts, the S&P’s down 9, Nasdaq is lower by 50 pts the Russell is down 2 pts. The weakness being fed by the spike higher in oil and the concern over what happens next…. Higher oil prices feed into the inflation story…which continue to cause pain for consumers – while the inflation story feeds right into what the FOMC members need to confront this month.
Today’s eco data include US services PMI of 51 (expansionary), ISM Services PMI of 52.5 (more expansionary) and the ISM Prices Paid Component….and that will be a key data point today. At 2 pm the FED will release their Beige Book – which details the state of the economy by the 12 FED regions around the country – Boston, NY, Philly, Richmond, Atlanta, Chicago, St Louis, Dallas, Cleveland, Kansas City, Minneapolis and San Francisco – that is if Mary Daly has any clue about what is happening in that part of the country.
The S&P ended the day at 4496 down 18 pts….…Like I have been saying, I think the moves higher over the past two weeks were a bit exaggerated, so a pullback would not be out of the question. I also think that the spike higher in oil will also cause that to pullback just a bit as well, before pushing higher into year end. Gold continues to thrash around below all 3 trendlines…and appears to be in the $1900/$1975 trading range. Much will depend on what happens next….
Remember – proceed with caution for now…..Understand that if the market comes under pressure – all of the high flying sectors will be the first to get shot….tech (+42%), communications (+40%), semis (+47%), consumer discretionary (+32%) and some of the individual big names that have rocked the world…One that comes to mind- NVDA +233% …. Don’t go chasing the names (sectors) that are stretched…. build some boring into your portfolio – because in a volatile market boring is beautiful. Energy – which has traded in a range of -8% to +5% has been a sector I have been telling you to get in on. Since mid-July it has gained 13% on both an increase in demand and a manufactured decrease in supply (OPEC+) – and my guess is that it will continue to push higher. Demand for energy is NOT going away so therefore it should be part of your core portfolio.
Don’t stress – stay focused, give me a buzz…. Remember – this is a long game and there is always an opportunity somewhere.
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.
Garganelli in Sweet Sausage, Tomato & Cream
This is such a great dish and easy to make.
Heat olive oil in a pot…add crushed garlic and one diced onion (Vidalia if you can get it). Sauté until soft and sweet, next add the sausage meat – which you have removed from the casing – until brown.
Next add 2 cups of dry white wine and let the alcohol burn off…. open 28 oz can of plum tomatoes and rough crush – so that it is a bit lumpy. Bring to a boil and then immediately turn to simmer. Stir and cover. Don’t go too far because you will need to stir again.
Now add 1 cup + a little more of heavy cream (you can use lite cream if you prefer – but heavy cream gives it a richer taste). Let simmer until thickens…only about 4 or 5 mins….
In a separate pot bring salted water to a boil and add pasta – You can use any type of pasta you like – typically a short pasta is better vs. a spaghetti or linguine for this dish.
Cook until aldente – 8 / 10 mins…strain – reserving a mugful of the pasta water…. Add the pasta directly into the sauce and stir – making sure to coat well. Add a handful or two of parmegianna cheese and mix. If it looks like it needs some more liquid -add a bit of the pasta water to moisten. Serve immediately – offering more grated cheese to your guests. –
It doesn’t get any better than this….
Buon Appetito
