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Direction, Getting Lost, Crossroads, Confusion

Things you need to know 

  • Well – the issues are causing global investors to reconsider the outlook.
  • Oil continues to push higher, and some are calling for $200/barrels
  • US Treasuries now trading at 1.617% – how fast before we hit 1.8%?
  • Demand Pull or Cost Push – it CAN be both….
  • Try the Russian Potato/Onion Soup – just to fill your belly.

Issues?  What issues?   That was the question I asked on Friday morning… investors appeared to push all of the concerns aside – choosing only to focus on all of the ‘better than expected’ earnings (I think the terminology was robust results) along with decent forward guidance….and that was enough to send investors on a buying rampage….stocks ended the day and the week higher as we get ready to enter the second week of earnings which are also expected to ‘better then expected’. 

Eco data during the week also helped to soothe investor angst with Friday’s advance retail sales knocking the cover off the ball…. expectations of a weak number (-0.2%) was replaced by a surprising strong number of +0.7%, Ex Autos and Gas still produced a ‘robust’ number at +0.7% vs. the +0.4% that we expected.  U of Michigan Sentiment and the 5 yr. inflation outlook both slightly weaker while the 1 yr. inflation expectation was slightly elevated.  But that is no surprise, or at least it shouldn’t be…. prices are skyrocketing all around us… Leaving us to ask – Is this a Demand-Pull cycle or Cost Push Cycle?

Demand Pull Inflation is when the aggregate demand for products is MORE than the supply – ‘pulling’ prices higher –   vs. Cost Push.   This is when demand remains constant but supply falls…. ‘pushing’ prices higher.   So, I must ask – is it increasing demand or is it a shortage in supply?  It is BOTH…. because we are seeing an aggressive consumer pushing demand up, but we are also seeing the impact that covid has taken on the global supply chain pushing supplies down….and this is not good…because when you have both forces working in tandem – the result will not end up being very pretty….  Hello – just to be clear – Demand is UP, and Supply is DOWN……It is not either/or!

Just look at the oil market…do I need to say more?  Let’s be clear – there is plenty of global supplies (supply is NOT the problem here) ….in fact the US WAS the swing producer, and a large exporter – beating out the Saudis by millions of barrels a day…. helping to keep the Saudi’s and OPEC+ in check and energy prices at historic lows…. – so much so that the Saudi’s were so upset – they flooded the oil markets back on April 20th, 2020 – sending the oil future’s markets into ‘negative’ territory – causing WTI May futures to lose $55.90/barrel to settle that day at ($37.63/barrel).  Do you remember that?

Do you remember the hundreds of oil tankers anchored off the coast because they had no place to put it?  We were awash in oil……and the Saudi’s were angry….   But now as the world reopens…. demand for energy is skyrocketing yet the Biden’s have choked off US supply and the Saudi’s along with OPEC are doing little to help resolve this problem.   This morning there are calls for $100 oil by the end of this year and $200 oil by this time next year.

West Texas Intermediate which rose by 3% last week is trading up another 1.25% at $83.30/barrel this morning. …. Power generation companies abandoning expensive gas and coal in favor of oil/diesel to generate power.  Look – easing global covid restrictions along with colder temperatures in the northern hemisphere are only expected to worsen the supply shortage and with OPEC+ not in a rush to help ease the issue – then expect to pay more for energy…because I don’t see solar, or wind power coming to the rescue anytime soon.  Unless of course we all sign up for rolling power outages like they have in California…. Whatever – that is another story…. In the end – the Biden administration must take their stranglehold off the US oil industry…if they want to stop this madness.  The Saudis could easily fix this issue by flooding the markets with supply like they did in April 2020…but don’t hold your breath…. they love to see oil at $85/barrel on its way to $100…. holding us and the world hostage….

This morning though – apparently global investors ARE concerned about the issues…. China reported a drop in 3rd GDP – coming in at 4.9% vs the expected 5.2% while Industrial Production rose 3.1% vs. the expected 4.5%….and that started the week off in mostly negative territory…. Japan, China, South Korea, and Taiwan all ended the day in negative territory while Hong Kong and Australia managed to eke out slight gains.

European markets are all lower this morning too…. reacting to the weaker Asian performance…and as we await the start of the second week of earnings…. Will this week bring the same ‘outperformance’? Will this week bring more ‘robust earnings”?  In addition, BoE (Bank of England) Governor Andrew Bailey warning that they need to respond to increasing price pressures.  Rate hikes are now expected in the UK – when?  Not sure, but you can bet it will be sooner vs. later. (And that will be a story that we are going to start to hear around the world). At 6:30 am all the European markets are down between 0.5% – 1%.

US futures are playing “follow the leader’ and are all pointing lower this morning.  Dow futures are down 100 pts, the S&Ps off 17, the Nasdaq down 72 pts and the Russell is off by 11 pts.  10 Yr. Treasuries which ended the week yielding 1.6% are yielding 1.617% this morning and that is only adding to the pressure.   Again – It is not if rates are going up, it is the pace at which they go up that will rattle the markets….

To be clear – rising rates will put a cap on any near-term attempts at a rally and if those rates spike higher (a la February) then expect to see stocks retreat swiftly (a la February) …. But if they can manage to control the narrative, they may be able to blunt any downturn…. I guess we must ask – Can they control the narrative?  We will see in the days ahead…. because now – even the Main St Media is beginning to call out rising price pressures….and acknowledging that something must be done.  Is anybody listening?  (By the way – the gov’t increases the COLA – cost of living adjustment – for social security recipients next year by 5.6%!  – and I say this because the rate of increase is usually 1 – 1.5% – Capisce?)

Eco data this morning includes Industrial Production of +0.2%, Capacity Utilization of 76.5%…. (It has to move into the 80’s before the gov’t will acknowledge a capacity issue…).  Later in the week – we will get building permits, Housing starts, Mortgage apps, the Fed’s beige book – which details the economic conditions in the 12 Federal reserve regions across the country.  At the end of the week – we will get Existing home sales and Manufacturing and Services PMI’s

It is the second week of earnings and we can expect lots of action…..names to watch – NFLX, IBM, VZ, PG, UAL, JNJ and STT to name just a few….Remember to pay attention to companies that report pricing power….in this inflationary environment……Consumer Staples comes to mind….XLP has bounced off of its 200 dma, pushed thru its intermediate term avg and is now about to pierce the final frontier – it’s short term average at $71.25….If it succeeds and many of the consumer names suggest pricing power – then watch as this group outperforms….Recall that PEP reported two weeks ago -beat the estimate and told everyone that they were raising prices on a variety of products across their portfolio of companies…Since then – Investors have taken PEP up nearly 7%.

Bitcoin – is trading at $61,000 and Ethereum is at $3775 – as the world awaits the trading of the first futures ETF tied to Bitcoin to start trading today.   – ProShares will the first out of the gate, – Ticker symbol BITO to trade on the NYSE Arca Exchange.   Invesco, VanEck and Valkyrie coming soon.  ……. this is a watershed moment for the industry, so sit tight…. now is not the time to sell your Bitcoin or Ethereum.

The S&P ended the day at 4471 up 33 pts…. but off its daily high…. This morning’s global weakness is suggesting that we will see all the index’s retreat.  4437 is the level to watch on the S&P…. and if we test and fail that level – then expect a test of 4370 to be right behind….

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Take Good Care

Chief Market Strategist, Consultant

Russian Potato/Onion Soup

It’s not fancy but when prices for food are soaring….it will fill your stomach……

For this you will need: 2 lbs of peeled potatoes, 2 lg Vidalia onions, butter, olive oil, beef broth, fresh grated parmegiana cheese, chopped parsley.

Begin by cutting the peeled potatoes into cubes and then rinse in cold water.

Next – melt a bit of butter and oil in a large pot…. now add the sliced onion and sauté until nice and golden brown- keep the heat on low and cook slowly – you want them to brown and not burn.

Now add the cubed potatoes and raise the heat to hi – you must keep stirring the potatoes and coat in the onions…after about 8 mins or so…. add in the beef broth – you want to make sure that the potatoes are covered and then some…. – bring to a boil and then reduce the heat to med low and continue to cook.  When the potatoes are cooked – you can remove a couple of ladles of the potatoes…. now with the hand blender – puree the potatoes in the soup…. if you think it becomes too thick – then add a cup of water.

Add back the potatoes, stir in a handful (or two) of grated parmegiana cheese and the parsley…taste for seasoning and then serve in warmed bowls.  Always have extra cheese on the table.

Buon appetit