Things you need to know
- We are now in the second half of 2022….177 days until ChristmasT
- Stocks expected to continue to struggle in the month ahead
- Treasuries suggesting that the FED will choke now that the Atlanta GDP report has gone negative in the 2nd qtr.
- It is a long weekend – I would be surprised if we saw any kind of a rally
- Try the Short Rib, Ground Chuck Cheeseburger for the 4th.
Good morning, good afternoon, and good evening – It is July 1st, the start of the month, quarter and second half of the year….and US futures are lower this morning….…. this after the indexes all ended the 1st half of the year lower as well.
By now you know – the market has had a tough time – the indexes down more than 20% from their highs – putting them well into bear market territory….., inflation is at levels not seen in 40+ years, interest rates have been held at artificially low rates for much too long, the global economy is under stress, Moscow has invaded Kvyv and disrupted the energy and food chain across Europe, oil is trading at $108/barrel and is ‘rumored’ to trade as high as $200/barrel (RBC estimate) before this is over. US Treasuries have spiked higher taking 30 yr. mortgage rates with it and that is now taking its toll on the housing market. Restoration Hardware (RH) is the first company to paint the picture…. Gary Friedman – CEO at RH had this to say –
“With mortgage rates double last year’s levels, luxury home sales down 18% in the 1st qtr., and the Federal Reserve’s forecast for another 175 bps increase to the fed funds rate by year end, our expectation is that demand will continue to slow throughout the year.”
**Just a note – RH is down 72% off it is November high – when the FED made it clear that 2022 was going to see a change in monetary policy….
Europe (and the US) are bringing coal fired power plants back on line and that is driving the ‘left’ insane while sending coal stocks surging, 2nd qtr. earnings estimates are being revised lower, GDP was negative in the 1st qtr. and as of yesterday is now negative in the 2nd qtr., the macro-economic data is weakening the global supply chain is now under pressure – not because of Covid, Delta or Omicron, but because of workers now demanding higher pay to counteract higher prices and they are prepared to ‘walk off the job’ until they get what they want….….. and now we are seeing the seeds of stagflation taking root…….
United Air was the first airline to concede and offer 14% increases to the pilots union over 18 months, and word is that American Air is about to concede and give a 17% increase…..Recall I pointed this out in Wednesday’s note….Delta pilots picketing yesterday as they prepare to walk off the job if they don’t get a significant increase now…..What happens when the flight attendants union and baggage handlers union join the fight? And then think about all the other unions that are out there…… UAW, Teamsters, Teachers, Pipefitters, Federal workers – oh boy……, This is a classic Econ 101 lesson…it’s called Wage/Price Spiral Inflation……and describes a perpetual cycle where rising wages create rising prices -or rising prices create rising wages – makes no difference how you tell the story – the answer is the same – in the end you have inflation that spins out of control…..
And now we are hearing about companies announcing layoffs (NFLX, COIN, Klarna, HOOD, Conde Nast, PTON, TSLA…) while others are slowing down hiring….FB – announcing this morning that they are cutting the 2022 hiring targets for engineers – while also telling the media that they are sure there are people that ‘shouldn’t be here’…..as they move to ‘clean house’…… Zucky telling us that they are preparing for a ‘leaner second half of the year’ in what he describes as ‘the worst downturn in recent history…’ Get ready for the headlines because you know they are coming – Remember, earnings start in 2 weeks……
The FED and the other central banks all have their backs against the wall – investors and consumers holding them responsible for this mess and while it is clear that something has to change – there are still those that are singing
“Do not Take Away the Music…. Tavares – circa 1976….
(https://www.youtube.com/watch?v=-Gi4tOrKphw) Just look at those outfits!
Markets struggled all day – limping into the close of the quarter – the Dow losing 255 pts, the S&P down 35, the Nasdaq down 150, the Russell lost 12 and the Transports gave back 65 leaving investors and traders bruised and beaten up….and if that was not enough…
The Atlanta FED GDPNow forecast – which has been revised lower during the quarter has officially gone NEGATIVE for the 2nd qtr.…..coming in at -1%……(that’s not good) but it’s even worse when you combine it with the NEGATIVE 1st qtr. read of -1.6%…which now gives us 2 consecutive quarters of negative GDP growth (or lack of growth) and you know what that means? It means that we are now officially in a recession – but before you go and light your hair on fire – understand that the current members of the administration are scrambling to ‘re-define’ what an official recession is and suddenly the OLD definition isn’t acceptable in the 21st century….You see – 2 consecutive quarters of negative growth is SOOOOOO last century….It’s so not relevant today….I mean how can it be….the Dems – don’t want it – so guess what they did? They CANCELLED it! They cancelled the very definition of what it is the same way they cancelled Dr. Seuss – Poof! You are gone…. just like that….
And so….do not expect to hear anything about this….do not expect to hear anyone on the left even acknowledge it…. if they ignore it – then that must mean it is not happening. Keep the focus on Trump – because that will surely help……talk about how California Governor Gavin Newsome is giving away $1050 ‘inflation relief’ checks to Californians as he attempts to position himself for the 2024 Presidential election – taking on the current occupant of 1600 Pennsylvania Avenue. Keep the chaos alive……
This morning – US futures are lower…. Dow futures down 35 pts, the S&P down 2, the Nasdaq off by 15 and the Russell is flat. 10 yr. Treasuries prices have surged as investors try to find stability in the ‘safety trade’….and this has caused yields to collapse – this morning 10 yr. yields are once again sub 3%…and all this means is that investors are making a bet that the country has now entered a recession and that will cause the FED to blink – and stop raising rates or at least slow the increment at which it has indicated it will raise rates…..Ahhh…..I am not sure about that…..although Fed Fund futures are now pricing in a 50 bps rate CUT in 2023…..
IF the FED changes course now – they might as well, turn off the lights and go home…they will lose all credibility. JJ (Powell) told everyone when he was on the Hill 2 weeks ago and he told everyone at the ECB (European Central Bank) forum on Tuesday that – inflation is his priority, that Americans should prepare for some pain, that it would be challenging to avoid a ‘hard landing’, blah, blah, blah… So, tell me – how could he possibly blink now?
Eco data today includes S&P Manufacturing PMI – exp of 52.4 – inching ever closer to the neutral line of 50 and the ISM Manufacturing report that is expected to show a reading of 54.5. These will be key data points to watch – as they have been down trending for months now……a breach of 50 will put us into ‘contractionary’ territory….
I would not put too much weight into todays or even next weeks activity….it is the 4th of July – Monday is a holiday – markets are closed and for many – next week is a big vacation week…. we are now in the Dog Days of summer – volumes typically retreat. Portfolio managers leave ‘good til cancelled’ orders both above and below current market levels to take advantage of any outsized swings as they enjoy the sun and fun of the beaches, oceans, and lakes across the country.
European markets are up small…. Eurozone inflation soars to a record high of 8.6% up from 8.1% last month…. analysts pointing to the ongoing war in Ukraine for driving up food and energy prices.
The S&P closed at 3,785 – down 21% in the first 6 months of the year. The path of least resistance is lower…. look for support at 3600 level on the S&P and if we get there and it does not hold then expect the algo’s to go into overdrive – sending stocks lower as they try to shake the branches to see who falls out…
Stay focused…. This is not the time to get rattled…. continue to put money away in tax advantaged accounts….you can keep it in cash and be patient if that makes you comfortable or you can continue to put it to work – taking advantage of dollar cost averaging…..I remain cautious but not hysterical – keep the prize in your line of sight….I expect that we will re-test S&P 3600 sooner vs. later.
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Short Rib, Ground Chuck Burgers
Ground Chuck Burgers mixed with shredded Short Rib meat- This is crazy…… This is a bit of work – but if you have the time and you really want to impress – go for it. Refer back to the Short Rib recipe* (see below) – Make 1/2 dozen ribs – the night before……cool and then shred the meat off of the bone…. Now – mix the cooked short rib meat with the ground chuck for the burgers……form the burger and cook on the grill. Top with sautéed onions and Monterey jack and serve on a butter toasted Brioche bun to complete. Outstanding.
*Braised Beef Short Ribs –
You will need 6 beef short ribs (as they shrink when cooking), carrots, celery, onions, garlic, tomato paste, red wine, beef broth, s&p, olive oil….
Preheat oven to 325 degrees.
Start with the ribs at room temperature. Rinse and pat dry. – season with s&p on all sides. In a large frying pan – add the olive oil turn heat to high until the oil gets hot…. add ribs – turn heat to med/med high and brown the ribs on all sides. Place ribs in a large baking pan – on their side – just line them up. Next – chop – not mince – but rough chop, onions, carrots, celery, and garlic. Do not be afraid to use garlic….it just gets sweet. Cover the ribs with the veggies.
Back to the frying pan – add beef broth – tomato paste (1/2 small can) and your favorite red wine. Bring to a boil and then simmer until the sauce reduces to 1/2. Once done – pour the juice over the ribs in the baking pan. Make sure you make enough juice so that the ribs are bathing in the juice. Do not cover the ribs in juice – just let them bathe. Cover tightly with tin foil. Place in oven and bake for at least 4 hrs….the longer they stay tightly covered the softer and juicer and tender they will be.
Buon Appetito.
