Things you need to know
- Chaos in the oil markets
- Dollar surges to 2 yr high, commodities come under pressure
- Everywhere you look – you see signs of a RECESSION
- Try the Veal Scallopine
Where do I begin…… (to tell the story of how great a love could be, the sweet love story that is older than the sea…. Where do I start?) Love Story – Andy Williams February 1971
https://www.youtube.com/watch?v=w6w0cy_1HY4
So, I ask again – Where do I begin to reveal the complete chaos yesterday? Everything is flashing ‘RECESSION’! Stocks, bonds, commodities, housing, precious metals, and the Atlanta FED! The markets are caught between lower growth and high inflation…. a place where we may not want to be but will surely find ourselves for a bit longer….
And as discussed last week – economists are now actively working to ‘change the definition’ of what a recession is…. Suddenly the 2 negative quarters of growth that defined it for decades – NO LONGER defines it….
Stocks came under early pressure falling 2+% across the board as Americans came back from the long holiday weekend….before finding support and rallying into the end of the day….the erratic trading emblematic of a world gone wild….Algorithms now in control – driving prices down and then up all in 6 hours….At the end of the day it was falling bond yields that was credited to help save the day…..– The Dow ended down 130 pts (which was a win – considering the 700 pt. loss it suffered by 11 am…), the S&P gaining 6 pts, the Nasdaq – the real winner added 200 pts, the Russell gained 14 pts while the Transports gave back 75 pts.
Oil – plunged by 11% – falling more than $11 barrel to end the day below $100/barrel – slicing through 2 trendline supports – it’s 50 and 100 dma’s – as supply disruptions hit the North Sea, China goes into ‘covid lockdowns’ (again) and the real fear of a recession sent traders into a tailspin….causing demand destruction discussions and supply chain disruption discussions all day….the WSJ defined oil prices being ‘pulled lower’ – I would dare to say that prices ‘collapsed’ under the weight of soaring inflation and the fear that every central bank has lost control….Prices weren’t pulled lower…… – buyers stepped aside leaving a void in demand and that caused prices to plunge….
Remember when oil prices went negative? April 20, 2020 – when Covid hit – they blew thru $0 on their way to negative prices…. when nobody could drive, or go out of their homes – when the world stopped spinning…when big cities turned into ghost towns do you remember that?
Negative prices are like having Bloomingdale’s PAY YOU to take clothes off the racks……And then when the world re-opened – Demand soared, life came back….and oil went from negative to positive and more positive and more positive- surging to a recent high of nearly $140/barrel…. demand surged and Joey- as promised in his campaign – elected to change US energy policy vowing to put the fossil fuel industry out of business – limiting US production in order to ‘go green’ to satisfy the ‘left’ all while OPEC + cut back on production – reducing supply forcing prices even higher…..as the Saudi’s (and others) needed to ‘balance their books’. Remember, the covid destruction caused all kinds of financial difficulties for them.
And then in February – Vlad decided to cause even more trouble – forcing the West to impose sanctions on Russian oil – taking even more supply out of the global chain – sending prices even higher….(but the sanctions did little to hurt Vlad – he just sold all of his oil to China and India – at slightly discounted prices to continue to fund his economy and war on Ukraine and just to be clear – Vlad is selling more oil now than before his invasion).
Goldman, RBC and JPMorgan all telling us to prepare for higher prices still while Citibank is at the other end of the spectrum – telling us to expect to see prices collapse to $65/barrel by Christmas….and you ask – What happened?
And while all of this was going on – the CPI in the US – blasted up and thru 2% in May 2021…. the level that the Fed promised was the turning point – but proved to be nothing other a data point that the FED chose to ignore. With every month – prices rose putting more and more pressure on the FED and other central banks to do something to stop rising inflation…. but they didn’t do anything – in fact you could argue that they only helped to further ignite the flames as they continued to stimulate the economy past the point needed.
And so – here we are…. finding ourselves in way over our heads…. rising prices around the world, now taking its toll on the global economy all while central banks hint at ‘big changes ahead’ in monetary policy……. causing all kinds of disruptions and mis-pricings in assets around the world. And that could not be more obvious than in equity prices, bond prices, (soon to be housing prices) and crypto prices….we have seen them collapse this year…Tech – taking it from every angle….the Nasdaq down 27% ytd (individual names down even more) ….while the S&P, Dow, Russell and Transports are not far behind….Bitcoin and Ethereum also getting whacked – falling more than 70% from their highs seen in late 2021. And NFT’s – oh right – those things…. they have evaporated – Poof! Gone – just like Dr. Seuss….
The markets have suffered a lot of internal damage over the past 7 months….all while everyone tries to handicap the next FED move….Multiples on the S&P have gone from 24 X’s earnings to 16 X’s earnings….and all that means is the prices have to adjust (lower)….and now we have ‘the recession’ knocking on the door – remember – it wasn’t supposed to knock until sometime in late 2023 – but like so many other things you can’t control – here it is…..And so, again I ask – Where do I begin?
10 yr. Treasury’s only adding to the angst….as investors pile into the safety trade sending yields into a tailspin. Yesterday they ended the day yielding 2.79% – this is down from the 3.3% only a few weeks ago. And Commodities? Yup, they have fallen as well…the BCOM (Bloomberg Commodity Index) has fallen 20% since June 1st – leaving it still up 17% ytd. The dollar index now trading at 2 yr. highs…up 11% on the year…. which is part of why we have commodities decline recently….as the dollar gets stronger – commodities should weaken – inverse relationship – like treasury prices and treasury yields.
In the end – much of what we are seeing is a direct result of investors trying to re-price these assets based on the current and future economic expectations…which isn’t unlike what it always does, but this time it’s a bit different….Investors have to grapple with higher cost of living expenses, higher interest rates, and lots of uncertainty surrounding economic and monetary policy. Expect to see more volatility and angst.
This morning – what do we see? Well – futures were weaker in the early morning but have since rebounded a bit leaving futures flat at 6 am.
Economic data today includes Mortgage Apps (this will speak to the housing market), but it also includes two key metrics…. S&P Global US Services PMI – expected to come in at 51.6 and ISM Services PMI – expected to come in at 54. Both trending lower over the past 6 months – getting ever closer to the neutral line of 50. We will also get the June FOMC minutes – where I do not think we will hear anything new…. but expect everyone to be sure to listen (just in case….).
European markets though are higher…. up about 1% across the board – after being 2% lower yesterday. There is nothing specific driving the action – just more thrashing around as investors try to price in what’s next.
And what’s next? Earnings…. they start next week, and they are keeping investors on the edge…Estimate revisions (lower) are now in high gear but remember – it isn’t the earnings per se that will drive the next move…Unless of course they completely miss the mark – but rather the guidance that the C suite offers – and this quarter that guidance will be even more important. If we are in a recession – what will the C suite do to manage it? And if we aren’t in a recession what will the C suite do to prepare for it? We are already seeing signs that companies are rescinding job offers and others that are signaling layoffs ahead. Rising input prices putting pressure on margins and that margin theme will be a big theme this quarter…companies that have pricing power will be able to maintain margins while companies that do not have pricing power will see margins get crushed and investors won’t like that at all.
And what will the multinationals say about currency conversions – a stronger dollar means that when foreign revenues get converted into dollars – they get less dollars – which to me – means absolutely nothing….because any good analyst should have already accounted for that and any good CFO should also have accounted for that and if you are an investor you should know that….so any dislocation created because of ‘a currency issue’ is a buying opportunity IF the broader fundamental story remains intact. So, do your homework.
The S&P closed at 3,831 up 6 pts on the day after testing as low as 3742. This morning futures are suggesting continued confusion…. The FED indicating that they are willing to accept a recession in order to prevent something worse……. a change in consumer behavior that will keep inflation alive, so consider yourself forewarned….and then move on.
Look for support at the 3600 and resistance at 4000 on the S&P. A failure to hold at 3600 will see a flush, while a surge up and thru 4000 – could see the S&P challenge 4200 fairly quickly. If neither happens, then we remain in purgatory between support and resistance.
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.
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Veal Scallopine in a Lemon Wine Sauce
For this you need: 10 pieces of Veal scaloppini pounded thin, s&p, flour, butter, oil, dry white wine, parsley – finely chopped, chicken broth, fresh lemon juice.
Take the pounded scallopine pieces and season with s&p – then dredge in the flour and shake off any excess.
In a lg sauté pan – melt ½ stick of butter and add in a splash of olive oil so that the butter does not burn. Brown the veal on both sides for about 2 – 3 mins. Remove and set aside.
Now in the same sauté pan – add in 1 cup of the white wine and 2 cups of chicken broth. Bring to a boil and then add the lemon juice and the parsley. Add the veal back to the pan and simmer for about 5 mins.
Serve on warmed plates with the vegetable of your choice. Always serve a mixed green salad dressed with olive oil, lemon juice, s&p, and oregano.
Buon Appetito.
