Things you need to know
- It’s a big week – Earnings, macro data points and the FED
- Treasuries remain inverted, Yellen says we are not in a recession, nor are we going into one
- Oil – remains in the $87/$100 trading range, while Natural Gas spikes
- China tells Pelosi to stay home – What will she do now? Where is Joey?
- Try the Grilled Pizza
Stocks ended lower on Friday but did gain for the week. Weak earnings reports being blamed for the Friday move. The Dow lost 140 pts or 0.4%, the S&P fell by 38 pts or 0.9%, the Nasdaq lost 225 pts or 1.9%, the Russell gave up 30 pts or 1.6% while the Transports lost 55 pts or 0.4%.
Analysts going back and forth about whether the ‘bottom is in’ or not. Some saying yes, while others continue to suggest not. Now – what you need to do is define what that means – because some would say, myself included – that the bottom is in……that the worst of this sell off might be over, which does not mean at all, that we will not test that bottom (again) in the weeks ahead. For me, it is S&P 3640 ‘ish’ – a level we nearly tested back in June – …. Now for others it is a different number – for example – MS thinks that we will be at S&P 3600 by year end, but not before testing S&P 3100 between now and year end…BAC thinks we could test 3000 and if we do – investors should ‘back up the truck’…..Now, let’s be honest – 3000? I mean it is possible, but is it realistic? Well only if the FED completely screws it up – which is possible.
The action being driven by the same factors – weakening earnings and more concerning – weakening forward guidance that is going to cause 3rd and 4th qtr estimates to be revised lower. Persistently high inflation putting us on the verge of a recession, (On Sunday – Janet Yellen confirmed that we are NO WHERE near a recession – so all of this talk is doing nothing but causing angst and confusion). Then we have the ongoing war in Ukraine, dramatic central bank policy moves – think rising rates – weakening macro data around the world and now we can throw in political uncertainty in Italy, the UK and even the US all as reasons for market uncertainty. Toss in the confusion in the energy markets with oil declining in value, while Nat gas and coal continue to surge….as winter approaches and Europe prepares to deal with less supply coming from Russia and it all makes sense.
Some will say – ahhhh, but do not worry…. just look at the improved sentiment…. the indexes are up over the past 3 weeks, earnings reports have not been horrible, forward guidance is cautious (rightly so) but that has not seemed to derail investors. And while I will agree that it feels a bit better – there is still lots of data and earnings to deal with. In addition to the many earnings reports, we have this week’s FOMC meeting where we fully expect rates to rise by 75 bps, but what investors will be listening to is what Jay say’s during the press conference on Wednesday afternoon.
And then we have the eco data…..and there is a lot of it….Housing price data, New Home Sales, Pending Home Sales, Mortgage Apps, Durable Goods, Capital Goods Ordered and Shipped, the second revision to 2nd qtr GDP – which is supposed to make a stunning turnaround – going from -1.6% to +0.5% – negating any talk of a recession, (that is both convenient and confusing – how could GDP make that kind of turnaround?) and then on Friday we will get the PCE Deflator- the FED’s preferred inflation gauge and that is expected to rise by 0.9% m/m and 6.7% y/y…- both levels that are higher than last month – and that would confirm what we heard in both the CPI and the PPI.
But then you ask, hasn’t the market already discounted so much of this? And the answer is yes and no, it has priced in what we know, but what it has not priced in are those surprise events that are lurking just ahead…. And we might see some of that this week……. We are about to get hit with 150 earning reports this week – and they include some of the big tech heavyweights…. Apple, Microsoft, Facebook (META), & Google. In addition, look for results from Archer Daniels, GE, KO, PHM KMB, Juniper Networks, BA, BMY, WM, SHW, HLT, TMUS, QCOM, ETSY and the list goes on…. what will these companies say about the state of the union in the US as well as around the world? What will the strong dollar do to those international earnings? What will guidance look like and what will happen to estimate for the next 6 months because this will determine the pace and rate of revised earnings estimates by analysts.
Now – on a side note – recall that our friends at Goldman cut the estimates on Apple at the beginning of the month…. Analyst Rod Hall is making the argument that we could see a 42% drop in Apple if the economic slowdown proves to be greater than expected – calling for Apple to trade as low as $82/sh if that happens. Apple was trading at $134/sh when he made the call, it is now trading at $154/sh up 18%. He also was ranting about HPE – estimating a 48% downside risk…. that stock is also up 17% since that call – but leaving it down 14% ytd.
Now, none of this should cause you to panic, but it should cause you to remain awake. Wednesday is setting up to be the most important day this week – because that is when we will get the next FOMC rate decision and their ‘forward guidance’. A 75 bps hike is priced in….(after the 100 bps panic that dominated the conversation post the CPI and PPI reports earlier in the month) – what will Jay say about September – are we getting another 75 bps or is he willing to say that his plan is working so he can release the brake a bit….and if he does – what will investors think? Wil, they think he is right or wrong and then how will they react.
Now what is also getting lost in this conversation is – What is the FED doing about the $9 trillion balance sheet? Recall that they were supposed to be reducing it by $45 billion/month thru August ramping up to $95 billion/mo beginning in September. Where are we with that? Notice how that part of the conversation has quietly been pushed to the back burner – no one is discussing it…. which is also a bit curious…No?
Surprise events that include further weakening earnings guidance which will cause even bigger downward revisions in estimates, weakening macro data, more hawkish commentary coming from the FED, the BoE, the ECB that will force global interest rates higher…..Recall- that inflation in this country is running at +9.1% (some would argue it’s higher), in the UK – it is running at near 10% while across the Eurozone it is running at +9% and central bank policies remain well below those levels.
Treasury yields across the curve remain inverted – not good. Oil holding steady at $96/barrel – leaving it in the $87/$100 trading range. Natural Gas is up 55% this month alone – with calls for further upside as winter approaches the northern hemisphere.
This morning US futures are up – reversing themselves from losses seen overnight. Dow futures +130 pts, S&P’s +18, the Nasdaq is up by 65 pts and the Russell is gaining 11 pts – the reversal being credited to the excitement building over the slew of earnings due out this week. As of this morning, 21% of the S&P has reported and 70% of those reports have beaten the expectations…. what will this week bring? In addition – the cautious guidance has not derailed desire – investors are smartening up and are putting money to work…. ‘strategically’.
Yesterday – the Chinese foreign ministry made it clear to the Biden’s that Nancy Pelosi has no business going to Taiwan and if she does – the rhetoric is suggesting that we could see a ‘possible military response’ – Now that’s interesting….but not unexpected – China has been making noise about taking Taiwan back – will Nancy be the catalyst that ignites this fire? While the market is not paying attention to this headline right now, expect that to change if she goes – because now she will put China into a position to respond – and the response will do nothing but create angst…think semi-conductor names….and other tech.
European markets which began the day weaker- have all turned up in the last hour as well. German business climate index for July fell to 88.6- the lowest level in 2 years – you can blame skyrocketing oil prices and expected natural gas shortages. But this is still simmering on the back burner – the current focus is on earnings and central bank policy statements… At 6:30 – European markets are up by about ½ of 1 percent.
The S&P closed at 3961- after trading in the 3938/4012 range. We remain above the trendline at 3920 and would look for that to offer support if we move lower. If we rally- then look for some resistance at 4000 – if we push up and thru that, then the intermediate trendline becomes resistance at 4130. We need to close the gap created on June 10th – which means the S&P has to trade up to 4018 in order to do this. It tried on Friday and failed…Will it happen today? Not likely – but keep your eyes on that level…. if it closes it – that will be a reason for further gains…If we keep failing – that suggests a test lower first.
We still have 3 weeks left in the earnings season…and we have the Fed announcement in 2 days…. along with a lot of economic data points and earnings….so it will be an interesting week.
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Grilled Pizza
Grilled Pizza – It is fun, everyone can join in and create what you want. Once you cook it up on the grill – you will find that you get a completely different texture – it comes out lighter, crispier and crunchy….delish!
When you doing pizza on the grill – there are so many things you make it with….the only important key is – whatever you decide to use – make sure you have it ready to go…so set up an outdoor table with your ingredients and get ready to rumble….You need a wooden pizza peel, the dough and toppings of your choice…
Today we will use everything from your garden….fresh garden tomatoes, basil, some grilled zucchini, caramelized onions and olive oil, s&p.
Allow the dough to come to room temperature before you even try to roll it out. If you buy a store-bought pizza dough – remove it from the package – flour it up and let it sit out on a plate – covered in saran wrap until it expands and is ready to go. Usually takes about 30 mins or so to come to room temp.
Light the grill – heat it up really hot – use your grill brush to clean it and then turn the heat to med…..If you have a brush – quickly oil the grate….(do not use a spray to oil the grill grates while the grill is on – Hello!)
Next – flour the counter and roll it out….. – flour the pizza board and place the dough on it. Transfer to the grill – that is right – just the dough – we have not added any ingredients yet. Once it is on the grill – Do not move it around. Using tongs – check it out once it starts to bubble. (Within 4 mins or so) The bottom should be crispy with nice grill marks.
Now remove and place back on the pizza board – cooked side up. Now – add the sliced tomatoes, caramelized onions, grilled zucchini and slices of fresh mozz…. return to the grill…once the cheese begins to melt – it should be done. Check it out with the tongs and using the pizza board – remove from the grill. – At this point if you want you can now add fresh chopped Arugula. Using a pizza knife – cut and serve.
Buon Appetito.
