Things you need to know –
– The march higher continues as they try to change the narrative
– CPI due out in 2 hrs.…. Will it be the surprise that the algo’s expect?
– The 2022 underperformers are 2023’s outperformers (so far!)
– Oil up, Gold up, Copper up,
– Treasuries remain inverted
– Try the Italian Style Sweet/Sour Chicken
And the march higher continued – as the bulls were banging down the door on Wednesday as the algo’s are making a bet that today’s CPI data is going to be weaker (better) than the expectations and that will force the FED to go into neutral mode after the February meeting…..something I do not believe at all….I am not convinced that the Fed is going to change the narrative at this point even if the data is better today. I think they have the information that they need, they have been very clear about the policy and unless the CPI falls off the cliff – which I don’t see happening….I am in the camp that they will stick to the plan – which I believe is 3 – 25 bps hikes that takes us to the May meeting.
The pause – if there is one – will happen then. Look – yes we are trending lower….that’s great…but my sense is the 3% that we have already taken out of the CPI number was the ‘fluff’ – the next 4% is the ‘dirty part’, the tough part….thus why I am not convinced that anyone is changing anything just yet.
Now that doesn’t mean that the naysayers will stop trying to get the FED to pivot, they won’t, but if JJ does what he says he is prepared to do – then my gut says brace yourself…in fact- while he was in Sweden on Monday – he told the conference that ‘stabilizing prices requires tough decisions that can be politically unpopular’…..My only complaint about that is why wasn’t he as definitive in April 2021 when the CPI shot up and thru his 2% target? Why was he and the committee so cavalier about inflation then? Why did they keep saying it was transitory when clearly it was NOT…..so many questions and not enough answers…..In any event –
By the time the closing bell rang – the Dow added 270 pts or 0.8%, the S&P gained 44 or 1.1%, the Nasdaq advanced by 190 pts or 1.75%, the Russell added 21 pts or 1.2% while the Transports raced ahead adding 250 pts or 1.8%.
Every sector of the S&P was in the green – the 2022 underperformers are seeing the most action……(not difficult to understand why..) racing ahead…..as investors go looking for bargains….Communications – XLC which got clobbered in ‘22 rose by 0.7% yesterday but is now the years TOP performer – up 7.5% ytd…. Consumer Discretionary – XLY – another underperformer – rose by 2.7% – taking that group up 7% ytd…..Real Estate – XLRE, Basic Materials – XLB are also higher by 6.7% respectively. Financials – XLF are up 4.6%, Tech – XLK is up 3.8% ytd.
When you move to other sectors –we see the pattern continue….the worst performers in 2022 are this year’s best performers – acknowledging that it is only the second week of January – but the point is that investors will go looking for the beaten up names that will bounce fairly significantly IF they believe the worst is behind us and they can scoop up quality names that were arbitrarily dislocated as the angst took over the investing psyche.
Housing is up 9% ytd, Retail – XRT +8%, Semi’s +8.5%, Artificial Intelligence +7.25% and the airlines…..oh boy that is up 12.6% ytd. Disruptive Tech – ARKK has tacked on 11% and Gold I sup 15% off the November lows and the gold stocks that I have referred to last week – they are outperforming as well….NEM + 11%, Gold +11%. Coal stocks also continue to move ahead and copper – which is up 12% since January 1st has copper stocks running away as well. FCX is up a whopping 19% ytd. Which only makes me remind you that – there is opportunity in the markets, if you look in the right places.
Now some of last year’s better performers are underperforming so far this year…Energy – XLE – which was up 55% in ’22 is only up 0.7% so far this year, Consumer Staples – XLY – they were off 3% in ’22 are only up 0.6% so far, Healthcare – XLV – which was down 4% in ’22 is off another 0.4% in ’23 and Utilities – which were flat last year are up 2.2% ytd. Aerospace and Defense which was up about 8% last year is +0.8% so far this year. And the contra trades – the ones that get you short the indexes – that had a good ’22 – are all lower so far….….DOG -2.4%, SH -3.3% and the PSQ -4%.
So, let’s unpack it – the CPI is out at 8:30 am….Now, they tweaked it a bit yesterday and here is the deal.
CPI m/m expected to be -0.1% (it was flat), Ex food and energy (core rate) +0.3%, CPI y/y expected to be +6.5% and Ex food and energy of +5.7%….Now, these are good numbers – because they continue to trend lower…..but, like I said above – now we’re getting into the ‘meat and potatoes’…this is when it’s gonna get tough….
So – what happens if the CPI read y/y is less than the expected 6.5%….the market rallies….and if it comes in at +6.3% or less it rallies even harder….the algo’s will go bonkers and I wouldn’t be surprised to see a knee jerk rally of 3+%… Now, if it comes in at 6.5% – on target, I think the market churns….nothing dramatic in either direction….but if it comes in stronger – a number that is greater than 6.5% then I the market sells off and if it comes in at +6.7% or greater then it sells off even harder – that is where I would not be surprised to see the market retreat by 3+%… So, sit tight….because even if they tell us that its coming in – you have to look at what is coming in…..Used cars? Great! Can you live in them? Can you eat them?
Rental rates? Ok – that’s good, but let’s be honest – rental rates are still out of control…. $4k/mo for a 600 sq ft apt in NYC that has one small closet? Or $8k for a 2 bd in Battery Park City, NY. Lucky if you have a kitchen with cabinets that actually hang on the wall…. $1600/mo for a studio in Chicago with ½ closet? $3000 for a 1 bd – 800 sq ft apt in Boston?, $8k for a studio in Miami Beach? $5k for a studio in West LA? Yeah, rents are coming down…. that’s good.
It’s the stuff that you need everyday that remains elevated – have you been to the grocery store lately? Eggs – $6.99/doz, Land o Lakes Butter (4 sticks) $7, Milk $4.39 for a quart, fresh grated Parmegiana cheese? $11 for a small container!
Ok – Gas – that’s come down and that is good….and is helping a bit….but let’s not pop the champagne bottle just yet…there is still more work to do and that is exactly JJ’s point….While we are seeing price relief in some places – we are not seeing broad price decreases across the board……Have you tried to travel lately? Airline prices? Hotel prices? Restaurant prices?
In any event – if you are a long term investor – today’s CPI report is not a reason to buy or sell your stocks……Buying or selling is dependent on who you are and where you are in the cycle. Let’s not kid ourselves – there are some ‘generational’ opportunities out there…I mean – AMZN at $95/sh? AAPL at $133/sh? TSLA at $120/sh? Semi-conductors? Cyber Security names? (Especially after the disaster we all saw yesterday with the FAA and the antiquated computer systems that we depend on?). Healthcare – as the population ages, Aerospace and Defense names? (think an unstable global political environment – Russia/Ukraine, Russia/Europe, Russia/China, China/Taiwan, China/Europe, China/US) like President Reagan said – ‘Peace thru Strength’ which led to the modernization of the US military forces in 1982 – needs to be revisited in 2023….Just like the FAA computer systems need an upgrade – so think IBM, MSFT, GOOG, AMD, ORCL, PANW, VMW…..and the list goes on and on…. I mean all you have to do is look around you….and stick to the names that you know have changed and will continue to change the world.
Tomorrow also begins the beauty pageant…so sit tight – because that is sure to be interesting…..I mean the bar has been lowered so much, it will be almost impossible for reports to ‘miss’ the number…..but it isn’t the number you should pay attn to….listen to the guidance…what are they really saying about the state of the union? And it all starts with the banks…..what are they allocating to the ‘loan loss reserves’ account? Capisce? This will reveal what they really think is going to happen with credit defaults…..across the spectrum….To me, this is so much more important that sales and trading revenues……Loan loss reserves speaks to the broader economy….sales and trading is just about generating commissions – to me, that says nothing about the health of the economy….it might say something about GS or JPM or MS, but they can fix that by laying people off – OH, right – they are laying people off!
Oil rallied nicely and this morning is trading at $78.40 – up from $74.40 yesterday….It’s the China demand story today and yesterday….and don’t forget, we always have OPEC+ that can cut production at any moment to help keep oil prices at or near the $80 level. We remain in the $70/$80 range.
Gold is up $10 at $1888…..
This morning at 5 am – US futures are flat….…. Dow futures +1, the S&P’s down 1, the Nasdaq is down 11and the Russell is gaining 2 pts.
European markets are also up across the board – all ahead by about 0.5%…trading at the ‘highest’ levels since April 2022….they are expecting a softer US CPI number – but not sure just how soft…….and the clock ticks.
The S&P closed the day at 3969 up 50 pts –We are only 2 hours away from the December CPI report – you can feel the tension and the excitement. If you’re a day trader – this is what you live for and if you’re a long term investor – this will create opportunities for you. If we get a strong rally – I would say, don’t chase it, let it run, you are participating…unless of course you sold everything and are sitting in cash – then you become one of those ‘FOMO’ statistics…which is why I say – If you have a well-balanced core portfolio – you’re good…You can use cash to play around the edges and add alpha to your portfolio.
Again, I don’t think today’s report is going to change the FED’s narrative…..I expect rates to continue to rise…until May. And even that may not be a negative….you can make a positive argument out of that….and that would be that the FED is committed to control and destroy inflation….and that is the positive. Remember, the tone can change on a dime (and usually does) then watch out….the algo’s will go hyperbolic….and a 2% or 4% move up or down would not surprise me at all as the technology takes control.
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
Italian Style Sweet/Sour Chicken
Sweet and Sour (Italian style) Marinated Chicken Thighs (you could always use breasts, but the dark meat is always better.) –
This is not a difficult dish to make and once you simmer it – you have time to take a shower, set the table, break open the wine and enjoy the night.
You need: olive oil, s&p, diced onion, chopped carrots, chopped celery, plenty of sliced garlic cloves – 6+, ¼ c sugar, 1 c Chianti, ½ c red wine vinegar, ½ c orange juice with pulp, *sliced almonds – optional.
Season the chicken pieces with s&p – set aside. In a heavy frying pan – heat up some olive oil, – now brown the chicken on all sides. Remove and place on a platter.
Now add the garlic, carrots, celery, and onion – sauté for 10 mins on med heat…. Now add the sugar, wine, vinegar, orange juice, and almonds….bring to a boil – add back the chicken – skin side up. Place a lid off center and turn heat to simmer. Cook for about 30 mins. (This is where you run up and take a shower, get into something comfortable and kick back….)
Now remove chicken and place on a platter, – turn heat up to high and stir until it is nice and thick…not long…maybe like 4 mins max…..taste – adjust seasoning with s&p. Spoon the sauce over the chicken pieces and serve.
This dish works well with a green veggie – like French cut green beans or broccoli. Make a large mixed green salad with tomatoes, red onion and cucumbers. Dress in a balsamic Vinegar and Olive oil dressing. Keep it simple – as the chicken and marinade carry the dish.
Buon Appetito
