Things you need to know
- The rally faded and is showing signs of exhaustion
- The dollar surges, treasury prices decline, commodities under pressure
- Are Junk Bonds – THE canary in the coal mine? (Think leverage)
- Stick with BIG & BORING….
- Try the Shrimp Cardinale
Stocks tried to rally….really tried, but then got whacked before the clock struck 10 am…only to try to re-rally only to get whacked again…the S&P plunging right through that trendline that I identified last week…..3905 ish….trading down to 3886 before finding anyone who wanted to stand still and buy stock which sent the S&P up again only to close just a hair above that trendline at 3908…..but don’t go celebrating just yet…..it’s not gonna hold….(just sayin…)
The Dow ending the day down 175 pts or 0.5%, the S&P down 16 pts or 0.4%, the Nasdaq lost 85 pts or 0.7%, the Russell gave back 18 pts or 1%, and the Transports lost 74 pts or 0.5%.
Economic data showed us that the US Services PMI either rose or fell – depending on which data point you choose to look at – the S&P Global US Services PMI plunging even more than expected coming in at 43.7 – deep into contractionary territory – while the ISM survey reported that Services PMI surged to 56.9 – which would put us well into expansionary territory – so which is it? My guess is Door #1 – the S&P Global metric….
And then we had all of the drama on Monday in Europe and the Mid-East over oil and natural gas……OPEC+ cutting production while Russia halted Nat gas to Europe after the WEST imposed sanctions on Russian oil over his invasion of Ukraine….And now that winter is coming….Europe is the one that is about to suffer…..because leaders there got into bed with Vlad – leaving themselves vulnerable to his desires….and right now – he is not desiring Europe…..
The dollar index surged and is trading at 110.30 – that’s up 5.5% from mid-August and up 15.5% ytd…. and that sent treasuries spiraling lower….which sends yields higher – and the curve remains inverted…the 2’s yielding 3.5%, the 5’s yielding 3.45%, the 10’s yielding 3.34% and that helped turn one of the streets most fervent bears into an even more fervent bear……Mikey Wilson – Morgan Stanleys’ market strategist has now CUT his expectations for earnings growth for the balance of this year and next year….He is now calling for profits to fall by 3% in 2023 and has a 3200 target on the S&P and that’s without a recession……imagine what he is gonna do if we ‘really’ have a recession????
Many on the street now calling for new bear market lows – which means you can kiss 3636 goodbyes……. ‘guesses’ now range from S&P 3000 to 3450 ish…. before this is over….and if that is true – that’s another leg that could take us down another 12% – 23% from here…. recall that the S&P is down 18% ytd….
Remember –history tells us that a bear market usually suffers a 32% drawdown (on average) from the high and if that’s true – then the bottom should be somewhere around 3265 ish…. (4800 * 0.68)
And the financial pain is spreading into the junk bond market – which many on the street are now calling the ‘canary in the coal mine’…. – as rising junk bond ‘defaults’ are suggesting that interest rate increases are strangling the debt laden companies and that is suggesting a looming credit crunch….Defaults on leveraged loans hit $6 billion in August – $6 billion – and that is the highest monthly total since October 2020 – when the world was dark….and while some will say – $6 billion is nothing but a pimple on my A** considering the total market size is more than $1.5 trillion – I would say – strap in – because that figure is about to surge higher…. It’s just a math problem – right?
Interest payments on junk bonds ‘float’ – which means they are not ‘fixed’ (think revolving credit vs. a mortgage) – so the higher the FED pushes rates, the tighter the squeeze on the companies that borrowed billions at 0% because suddenly the rate isn’t 0% anymore…it’s 2%, 3% and going higher….so do the math….$6 billion at 0% vs. $6 billion at say 3%….(that’s a 4th grade math problem….just saying….) Think adjustable-rate mortgages that were at the core of the GFC (Great Financial Crisis) …. It’s all good until it isn’t….
Remember – corporate borrowers are at risk of the double whammy…..weaker earnings AND rising interest rates….and that will cause the credit agencies to issue a wave of downgrades…..making it harder for these companies to borrow even more money to fund growth or to repay current debt which will cause defaults to rise….so that idea of a ‘soft landing’ – yeah…get it out of your head. I have been saying – SOFT and LANDING should not be used in the same sentence ever again…
Now the same thinking goes for home loans of which there are already 5 million in default…….if a weakening economy and rising inflation causes the FED to push rates higher and higher (which it is) it will cause unemployment to surge as the economy slows – leaving many unemployed and unable to pay their mortgages – pushing mortgage defaults higher as housing prices retreat…….remember – it’s just a math problem.
Which makes me want to ask – what were any of the ‘ivy league’ bankers at the FED thinking? Were they thinking? What did they think was going to happen as they kept policy loose, kept interest rates at 0% all while stimulating the bond market WHEN the data clearly was screaming – STOP! What was the conversation behind the curtain when inflation spiked and kept spiking all while the current administration kept spending money like a drunken sailor? (Apparently there wasn’t) What are they teaching at business school? And now Joey wants US to pay for their educations? Is it me?
In the end – stocks around the world continue to come under pressure as worries about a looming global recession build. Period….Forget a soft landing, forget the idea that the ‘FED’ has it under control, forget the idea that it is all transitory….remember – I have been saying it for months now…..WE and every other major central banks have been stimulating the global economy since March 2009….by slashing global interest rates and supporting the bond markets – FOR 13 years…and now it has come home to roost….so anyone that thinks this is ‘under control’ needs to see a shrink…..this is not going to be over anytime soon….not next month, not next year….Just saying…..
And this is exactly why we have been talking about taking new money and building a more defensive portfolio as the weeks go by…. overweighting healthcare, energy, consumer staples and utilities…. or what I like to call ‘Stuff that People Need” otherwise known as STPN! You need companies that pay hefty dividends and have good solid cash flow…..and you need to know what you own and why you own it….Because in the end – you don’t need HOOD, PTON, COIN or ROKU to name just a few….I can name more…but you get the picture…but you do need – UNH, CL, PG, CI, XOM, BTU, CRK, ED, DUK, AEP, you understand, no? And yesterday – was a perfect example…while 8 sectors were lower….4 ended higher. And what were they? Utilities, Healthcare – (STPN), and Industrials and Real Estate (good divvy payers and strong cash flows).
Gold continues to thrash around…falling $10 yesterday to end the day at $1712..and this morning it is up $2 at $1714….and remains in the $1700/$1760 range….the surging dollar putting pressure on commodities…and gold is a commodity….just like silver, platinum, corn, soybeans, lumber, coffee, sugar, lean hogs, cattle….yesterday the BCOM (Bloomberg Commodity Index) fell by 1.4% on the back of the stronger dollar.
Now oil is also a commodity – and that also came under some pressure due to the surging dollar as well as the continued Chinese lockdowns (which is chipping away at demand) and talk of a global recession…. This morning – oil is trading at $87.20/barrel – trading below the trendline but holding onto the recent lows. If it fails to hold right here – the chart suggests that $80 is the next level of support – but then you have to ask – what will OPEC do, then? Will they sit back and watch prices fall or will they announce new cuts to production as they try to defend the price of oil? Oh boy, it’s a tangled web we weave….
European stocks are trading lower…..Vlad blaming Europe for the current energy crisis – suggesting that demand for Russian oil and natural gas is at all-time highs but that sanctions and price caps are unfair forcing him to take control….and stop the flow of energy through the Nord Stream pipelines….(not the Nordstrom pipelines that Press Secretary Karine Jean-Pierre seems to think….she has oil & natural gas pipelines confused with the famous US clothing store – I mean you can’t make this up!) In addition – markets are lower as recession fears build and the ECB is about to raise rates again on Thursday (referred to a ‘jumbo rate hike’ of 75 bps) as Eurozone inflation hits a high of 9.7% and forecast to go even higher in the months ahead. At 5:30 am – markets across the zone are all down about 0.5%.
US futures are both up and down and at 5:30 they are struggling to stabilize and rise…. – the Dow +30 pts, the S&P up 6, the Nasdaq up 35 pts and the Russell up 1. The only eco data point is Mortgage apps, and they are due out at 7 am…. will they be down again this week or not?
We are also going to hear from 4 Fed heads today…. Barkin at 9 am, Mester at 10 am, Brainard at 12:35 pm, Barr at 2 pm. Tomorrow features JJ all by himself at 9 am. Friday brings us Evans at 10 am, Waller and George at 12 pm. Yesterday I told you to listen to what they say, the way they say it and the tone they use…. If they are changing the game plan – we are about to find out…– IF they are backing off, they need plenty of time to notify the markets so that it marinates among the paparazzi. Now remember – Every one of these people have been ‘aggressively hawkish’….so listen to the message they deliver.
And it is all about APPLE today….it is launch day – iPhones, iWatches, iPads, iEverything…… – ahead of the holiday shopping season…. this morning – Apple is quoted up $1 at $155/$155.30.
The S&P closed at 3908 – after trading as low as 3886 – as the angst continues…..traders and investors are pricing stocks ahead of what is expected to be a HARD landing and a deeper recession…comments that investors are fleeing stocks in droves is comical….yes, prices are down so that suggest that some investors are selling stocks – but remember – someone else has to be buying them…..so it’s just a transfer of risk…at lower prices….While you are selling X at $50, I am buying X at $50….you see weakness and I see opportunity…..Capisce?
In any event –September and October are full of angst and volatility – I suspect this year won’t be any different. Stay focused – put money into your account and keep it in cash if you must – but be prepared to put it to work at some point…I always say it is better to remain in the game than sit it out, but that’s me. You do you. Remember – in an environment like this – Big, Boring names are Beautiful….and offer some shelter in the storm.
If you own good, solid US mega cap names that are decent divvy payers then sit tight take advantage of weaker prices that will bring down your average cost. Sectors to be overweight in? Energy, Healthcare, Utilities & Consumer Staples all fit that bill. But you have to balance that with where you are in the life cycle…younger = more risk, older = lower risk.
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Shrimp Cardinale
This is a simple dish to make and is so rich and delicious.
For this you need: 2 lbs. of large, cleaned shrimp, butter, 1 lb. of linguine, ¼ c of Brandy, 1 c of heavy cream, marinara sauce, and s&p to taste.
Turn on the oven – Bake 350 degrees. Bring a pot of salted water to a rolling boil.
Melt a stick of butter in a large bowl – now toss the shrimp – season with s&p. Lay the shrimp out on a baking dish and bake in the oven for 5 – 7 mins… remove and set aside for a moment.
Put the linguine in the boiling water and cook for 8 mins or so.
In the saucepan – Over med heat – add in the brandy and allow it to burn off a bit – next add the heavy cream and about 3 or 4 cups of the tomato sauce. Reduce the heat to simmer and allow the sauce to thicken. Season with s&p. Add the shrimp and allow it to all ‘blend.’
When the pasta is done – strain (always keeping a mugful of the water) and add directly to the sauté pan and mix well. You can always add back some of the pasta water if it needs it. Serve in warmed bowls.
Buon Appetito.
