Things you need to know ~
** I will be travelling tomorrow morning early – so next note is on Wednesday. **
- So? Will the FED change the narrative?
- BIG, BIG earnings week – strap in for 30% of the S&P to report
- Xi Xi is now China’s ‘forever’ leader– Stocks in Hong Kong plunge
- Mid-terms are heating up…. Nancy tells us that it’s not inflation that’s the problem – it’s the ‘cost of living’!
- Oil under pressure on the ‘demand destruction’ story (again!)
- Try the Stuffed Cubanelle Peppers
Good Monday morning….and what a week it as last week – stocks were all over the place but ended the week on a very high note…..as the indexes rebounded – leaving them all up better than 2.25% across the board on Friday.…..The Dow gaining 750 pts or 2.5%, the S&P up 87 pts or 2.4%, the Nasdaq ahead by 245 pts or 2.3%, the Russell up 38 pts or 2.2% and the Transports up 265 pts or 2.1%.
Why, you ask? Earnings are mixed at best, Forward guidance is getting more cautious, the big banks and the credit card companies are building large loan loss reserves for what is expected to be lots of credit defaults, the economy is predicted to struggle, the UK is in chaos, Russian/ Ukraine battle continues and the Chinese have just awarded Xi Xi- dictator for life….which only solidifies a move by China on Taiwan in the months ahead……dragging America into what is sure to be a mess…..
But – none of that mattered at all, and here is why – it’s pretty simple… You see – WSJ writer – Nicky Timiraos spilled the beans….or rather – ‘leaked the story’ the same way he leaked the story when the FED suddenly moved off of 50 bps hikes to 75 bps months algo – preparing the markets for a change in the narrative….….you see – Nicky boy – is a mouthpiece for the FED – he isn’t deep throat – that’s someone else – Deep Throat is someone on the inside at the FED – (my guess is Minneapolis’s Neely Khashkari) the one that the FED chooses to ‘leak’ the information to the media – in this case Nicky – then they instruct him to write a story that will reveal what’s going on behind closed doors to test the temperature of the investing public…
The headline says it all
“Fed to Raise Rates by 75 bps and Debate the Size of Future Hikes – some officials are signaling greater unease with big rate rises to fight inflation…”
And that is it – plain and simple….you see – for weeks now – the narrative was all about how committed the FED was to fight inflation…..how they weren’t going to veer off course UNTIL they saw a significant move lower in the monthly CPI, PPI and PCE reports….Every one of them supporting each other in that narrative – all while some of the brightest minds on the street began questioning the FED. 76 yr. old Wharton Professor Jeremy Siegal taking the initiative and talking to anyone that will listen is calling the FED out on their game plan – Suggesting that the impact of interest rates moves takes time to work and is working its way thru the system – and if the FED keeps going down this strict path – then they would likely ‘overshoot’ and break the economy…..And this raises just a number of issues – but the one that really concerns me is this – Why do we need Jeremy to challenge the FED? Don’t we have THE smartest minds already ON the FED? Hasn’t the FED already considered that argument? Isn’t that the point? That the members of the FED are the best and brightest –
In any event – that story hit the tape at about 10 am on Friday….and BAMMMM! The algo’s went apoplectic……cancelling all inline sell interest – leaving a void in prices, while generating massive buy orders to take advantage of the change in the narrative…..You see suddenly – Vice Chair Lael Brainard, Chicago’s Chucky Evans and San Fran’s Mary Daly are now growing more uncomfortable with the pace of hikes and the frequency of hikes, word has it that even Jimmy ‘B’ – St Louis’s FED President – who has been the most hawkish and pushed for a 5% terminal rate has suddenly turned dovish……….so they leak the story to the WSJ, who then publishes it and then the 4 of them come out hiding and express concern over the economy as the reason for this ‘possible’ 180. Notice that JJ has not been attached to this drama – this way he can remain ‘outside of the narrative’ and deny the change IF necessary.
And to prove the point on October 5th Mary Daly said
“What the FED does see, is that inflation is problematic, and we are committed to restoring price stability by raising rates to limit the demand for goods, services and labor that is fueling inflation.” (That was the narrative that they all supported)
And then on Friday she said
“While acknowledging that high inflation made it really challenging for the central bank to step down from its rate hikes, the time is NOW to start talking about stepping down, the time is now to start planning for stepping down.”
So, the crack it the foundation is now visible…..all of that talk over the last 6 months – is now starting to change….and we have NOT even seen a slight decline in the CPI or PPI….remember – two weeks ago – both of those reports were higher….suggesting that inflation is not responding to the moves – keeping inflation at 40 yr. highs…….but if enough ‘smart people’ start calling the FED out, then I guess the cracks start to appear….. I mean look, this is not a complete surprise – it was just a matter of time before someone caved….
And so – stocks surged higher as wave after wave of buy orders overwhelmed the system…leaving many investors happy going into the weekend.
Every S&P sector was higher…. Basic Materials up 3.5%, Financials, Tech, Industrials, Energy and Consumer Discretionary all up `~2.9% on the day…. Healthcare up 2.2%, Utilities and Consumer Staples up ~1.7% while Communications and Real Estate added about 0.7%.
Housing stocks – XHB rose 3.4%, Retailers – XRT rose 2.5%, Semi’s rose by 3.7%, Artificial Intelligence – BOTZ rose by 2.1% – all of these groups down more than 35% ytd… The growth trade – SPYG – gained 2.5% – leaving it down 40% ytd, while the value trade – SPYV gained 2.2% – leaving that down 12% ytd.
The triple levered S&P – SPXL gained 7% while the contra trades – DOG, PSQ and SH all lost – about 2.5%.
Gold rallied by 1.5% to end the day at $1656/oz, the Dollar index fell by 0.9% to end the day at $112.01 and Oil gained 0.7% to end the day at $85.05.
The VIX (volatility index) fell by 0.9% to end the day at $29.71……
Overnight – Hong Kong stocks fell out of bed…down 6% on the back of the close of the Chinese Communist Party National Congress’s weeklong election event – that now solidifies Xi Xi’s position as Dictator for life…. Stocks in Hong Kong reflecting Xi Xi’s grip over the ruling party – as he stacked leadership ranks with loyalists rather than ‘reformers. This will most likely show a continuation of ‘zero covid policy’, and ‘unfriendly market’ policies…. thus, the pressure on Hong Kong. For me, just another reason to avoid China – as there are too many other places to invest your money.
In addition, it also heightens the concerns over what will happen to Taiwan now that xi has cemented his role. Recall – he has made it very clear that Taiwan is part of greater China and is not an independent country and he will look to retake control of the island nation confronting any country that intervenes. And this has massive implications for US diplomatic policy, global trade, and the global semi-conductor sector. Remember that the majority of global semi-conductor manufacturing takes place in Taiwan, so just think about what a Chinese takeover of Taiwan might mean. It’s kind of like how Germany ceded control of European energy supplies to Russia – How’s that working out?
European stocks have gotten off to a slightly better start – with the exception of the UK. Political upheaval in that nation has them on edge – Rishi Sunek is now expected to be the next Prime Minister of the UK – after BoJo pulled out of the race last night. The final call comes on Friday.
This morning US stocks are lower as investors try to price in the latest rate hike narrative while also assessing the resilience of the economy in light of all the headwinds. Dow futures are down 125, S&P’s down 15, the Nasdaq down 70 and the Russell down 9. It is an important week ahead – think tech earnings – GOOG, MSFT, META, APPL…….30% of the S&P will report this week representing 47% of the index’s value… including 6 of the largest 10 US stocks. 17% of the 30% will also speak to the health of the consumer, so get ready to hear from KO, F, XOM, HAL, CL, NEP, X, MRK, MCD, MA, V, HON, BMY, BA, GD, CB, GM, CMG, 3M,
Oil is under a bit of pressure – falling 2% or $1.76 to $83.28. The media this morning is suggesting that the focus returned to the coming recession that is sure to destroy demand and the close of the Communist Party Congress in China. Whatever! Not sure why the closure of that event will cause oil to decline – China isn’t going anywhere and remains the world’s largest importer and consumer of oil. Oil remains firmly in the $82/$90 range. Remember – the Saudi’s wanting to see $90 oil….
Eco data today includes Chicago Fed Survey – expectation of -0.1, S&P US Manufacturing PMI of 51 – leaving it kissing the neutral line….US Services PMI of 49.5 – leaving that in contractionary territory.
The S&P closed at 3752 up 87 pts…. All a direct result of the WSJ article that lit the fuse on a softening FED…. Expect lots of discussion over the Friday move and the new FED narrative– especially if the PCE comes in hotter than the expectation on the 28th. Earnings will dominate the other half of the conversation…
Now while the Friday’s move was dramatic – we have seen that before….and I am not convinced yet that the volatility is over just yet….I guess we have to wait and see if Goldman confirms what the WSJ reported – because you know Goldman is the other ‘canary in the coal mine’…..if they suddenly publish a report this week that supports this new narrative – then you know that the narrative is not only being discussed, but has been decided.
Many will now use Friday’s action to call the bottom, I am not. I expect a retest of the October low (3490) before this is over…and depending on what this week brings will help to determine where we go from here.
Sit tight as a long-term investor – stick to the plan…. take advantage of dollar cost averaging (DCA) and dividend reinvestment programs. Overweight the big boring names and buy the stuff that people need (STPN). Consumer Staples, Utilities, Healthcare, Energy…. while underweighting (not eliminating) Tech, Basic Materials, and Communications right now.
Take Good care
Chief Market Strategist
kpolcari@slatestone.com
Stuffed Cubanelle Peppers
This is a great Thanksgiving vegetable side dish. Just one of many to come.
You need: Cubanelle Peppers, Italian seasoned breadcrumbs, olive oil,
Put the breadcrumbs in a bowl and add some olive oil – enough to wet them but not enough to soak them… mix well…
Now – using a teaspoon – carefully stuff the pepper – pushing the breadcrumbs deep into the pepper with your finger if you need to. Once stuffed – place in a baking dish – alternating ‘head to toe’.
Preheat the oven to 375 degrees.
Now drizzle the peppers with a bit of olive oil – not too much – they will make their own oil…
Now cover with foil and place in the oven – bake for about 40 mins. Now remove the foil and let them brown a bit… if there is too much oil, just take a spoon and remove some it.
Let them brown for about another 10-15 mins or so. Remove and let stand while they cool. Now – if you overstuffed them – then expect to see some of the stuffing come out of the pepper – no problem – It’s all good. Serve alongside the other veggies at your Thanksgiving table.
Buon Appetito.
