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Money, Burn, Dollar, Waste, Finance, Fire, Investments

Things you need to know 

  • CPI is as HOT as it was in 1980 – yet yields didn’t move???
  • PPI is due out any moment – will it pierce 10%
  • The Dollar index falls, helping to send oil and other commodities higher
  • Earnings season officially starts tomorrow…. Financials in focus
  • Talk of 4 rate hikes is NOW the norm….so hold on.
  • Try the Chicken Soup and Chicken Salad

Inflation remains RED HOT – CPI y/y is up 7% Ex food and energy of +5.5%…. all while REAL Avg Weekly and Hourly earnings FELL by 2.3% and 2.4% respectively…. So – make sure you understand this…. prices rose and wages fell…. how’s that working for you?  Expect workers to demand even higher wages to reverse this phenomenon which will cause businesses to raise prices even more to pay for those higher wages and so we have the Wage/Price spiral form of the late 70’s type of inflation……something I have alluded to in many of my prior notes.

We are back at inflation rates that were alive and well under another Democratic President – Jimmy Carter…. remember him?  Inflation peaked at 14.8% in 1980, The Dow was trading in the high 800’s, the oil market was controlled by the Saudi’s, and the Iranian Revolution held 70 Americans (and the country) hostage for 444 days…remember that?  Then Fed Chair Paul Volker pushed interest rates as high as 19% to try and crush inflation……which then caused a deep recession, which caused stocks to plunge, but we ultimately saw both inflation and interest rates fall sharply by the summer of 1982 and the greatest bull market this country and the world has even known was born on Tuesday, August 17th, 1982.  I was 20 yrs. old and a summer intern working on the floor of the NYSE…. I will never forget that day….it was ‘incredible’.  (Call me to get a firsthand account of what THAT day was like…. The Dow rose by 4.5%, or 35 pts, and volume quadrupled from 30 million shares on Monday to 138 million on Tuesday!)

But I digress…back to 2022 – the CPI revealed that prices for nearly everything are going up and that is driving the inflationary surge higher…. add in the supply chain issues and it only gets worse.  Wall Street is parading every economist around the street to try and ease the talk of ‘out of control prices’ while the FED keeps telling us that they expect inflationary pressure to ease as supply bottlenecks clear……Great…. the only issue with all of this is that no one is putting a time frame around it – other than to say, ‘we expect to see inflation fall’ (in 2023/24).   And after the whole ‘transitory call’ many are now questioning the FED think…..not paying attention to what the FED has to say…because the conversation in 2021 proved to be a massive mistake…..they kept telling us there was nothing to worry about, that they had it under control and that it was just ‘transitory’……they missed the boat, the signs were flashing, but they kept feeding the beast even when the group think was telling them their ‘academic’ thinking was wrong.

Well, look how THAT conversation has changed in a very short period.  We dropped transitory – because ‘Americans didn’t understand the word’ (remember when Jay said that?) and suddenly go from a gradual tapering and then a consideration of possible interest rate increases and then finally in 2023 we could talk about balance sheet reduction… EVERYTHING has to happen at the same time because inflation is spinning out of control, oh and btw – expect at least 4 rate hikes in 2022 – up from what was maybe 2 to possibly 3 has now turned to 4 and the increment of the increases is now in question…..25 bps is NO longer the default move……and THAT is KEY.

The Growth trade under pressure and that makes some sense, while the Value trade is alive and well and that too makes sense…. Cyclical and large cap value names are the place to hide.  High beta names continue to be sold – some off as much as 70% yet are not finding many buyers and continue to move lower….and that makes sense….  My question is – when will the broader market begin to reprice?  With all the talk of 4 rate increases, and a swifter balance sheet reduction – stocks should be under a bit more pressure….is the market telling us that it doesn’t believe what the talking heads are saying or is the FED continuing to stimulate by going in the back door?

At the end of the day – the Dow added 38 pts, the S&P’s up 12, the Nasdaq gained 34 pts, the Russell gave up 18 pts while the Transports lost 20 pts. The 10 yr. treasury curiously ended the day yielding 1.75%, when it should be much higher by now with all the talk of 4 hikes and bigger increments…. The VIX (fear index) is closer to the lows, which means that investors are unfazed by all this talk.  Have they convinced us that the economy is so strong that there is nothing to worry about?

4 hikes were not the norm until the Goldman piece hit the tape on Monday morning….and now – look how many FED members have suddenly embraced that mind set – it’s incredible really…. last week they were cautious to say 3, but after they got Goldman to produce that latest research piece and put it out there, they are now finding cover for the more hawkish, aggressive stance.  Powell, Bullard, Mester, Harker, Daly, Kashkari, Bostic, Brainard & Waller to name just a few.

In any event, it is what it is…and today we are about to get hit with the PPI (Producer Price Index) report….and the estimates call for +0.4% m/m and 0.5% ex food and energy m/m, while y/y numbers are expected to be 9.8% and 8% respectively…. 9.8% is very close to 10% – a double digit number that should shock the markets – if we get it but expect that the talking heads will try to divert the conversation, blame it on covid and the supply chain and then try to move on…. Just as they did yesterday……telling us that the CPI report was ‘generally in line’ so no surprise….….so the clock is counting down…. We are also expecting reports on Initial Jobless Claims of 200k and Cont. Claims of 1.73 million.

DAL just reported earnings…the stock is up 2% after reporting a beat on revenues and profits and re-affirming bright forward guidance…. more to follow.  Just another thought…does anyone find it curious businesses are having a hard time getting workers, yet airlines and hotels and vacation spots are on fire because Americans want to ‘get out’?  So, you’re happy to travel and expose yourself to all kinds of crowds, yet you can’t go to work, because you’re afraid of getting covid…. seems to me that there is a disconnect – but that’s another conversation.

US futures are flatlining ahead of today’s PPI report- Dow futures up 40, S&P’s up 2, Nasdaq is flat, and the Russell is up 1.  Lael Brainard is on her way to Capitol Hill to appear before the Senate confirmation committee and no one expects that she will not become the next Vice Chair at the FED.

Healthcare was the only sector that ended the day lower yesterday – XLV falling 0.3%.  The best performer was Basic Materials – XLB rising 1%, Consumer Discretionary – XLY rose 0.7%, Tech – XLK, Industrials – XLI and Financials – XLF all rising 0.4%.  Growth – SPYG was up 0.5% while the Value trade gained 0.1%.  Disruptive Tech – high beta names – continue to get hammered – with ARKK down 2.8%….

The action today will be about the PPI and much more about the FED’s response – if the PPI pierces 10% (and there is a very good chance that happens) then expect the conversation to really heat up about the pace of tightening….and then maybe, just maybe, the broader market will see some repricing. Tomorrow is the official start of earnings season…. Financials are the first to take to the runway….and financials are expected to be one of this year’s top performers…

In any event – for anyone not to expect valuation models to change is short sighted…. So, stick to the plan, look to invest new monies into sectors that will provide some safety and defense.

Oil is trading at $82.60 up again….part of this is demand and part of this is the collapse of the dollar.   Yesterday saw the DXY fall 1% and today it is down again…. testing the intermediate term trendline….at 94.65   Remember – a weaker dollar results in higher commodity prices….and higher commodity prices means more inflation…. And there it is – again…. another log on the fire….
Crypto’s are finding stability…. This morning – we see Bitcoin trading at $43,600 while Ethereum is trading at $3,350.  But do not expect the volatility is over…. if today’s PPI report sees the market come under pressure, then expect money to move out the crypto space as well.  Again – if you are in it for the long term – then it is an opportunity, you must decide what level of risk you really want to take.

European stocks are a bit lower this morning…. as those investors digest the latest CPI report…. they too await this morning’s PPI report.  Earnings also begin across the region….

The S&P closed at 4726……. the PPI report is only an hour away……. if it is hotter, then I would expect yields to move up and stocks to come in…. but I guess what happens will depend on how they spin it…while HOT, it will surely be described as ‘LESS HOT’ than it could have been and that will be the silver lining….in the end – watch the 10 yr. yield……

Earnings season will help to change the conversation and while it is expected to be strong, it will not be as strong as last quarter……But we know that…. again, it’s all about the guidance…….

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Take Good Care

Chief Market Strategist, Consultant

Chicken Soup and Chicken Salad Sandwich

And here you go: You need 2 Bone in Chicken breasts – skin on, 4 bone in thighs – skin on, 2 large Spanish onions chopped, bag of shredded carrots, a full celery stalk – chopped, s&p, 2 packs of chicken bouillon and water.

Put it all in a big enough pot – fill with water almost to the top.  Bring the heat to hi and bring to a rolling boil – season with s&p, turn it down to simmer and let it simmer for about 2 hrs.…. add a full glass of water after about an hour – as some of it steams away and you want to replace it.

Turn it off after 2 hrs. – remove the chicken and allow to cool.  Then take the skin off, remove the bones and shred the chicken.  Using both the white breast meat and the dark thigh meat.  Put half of the shredded chicken back in the soup and use the other half to make homemade chicken salad.

Chicken salad –

Season that with s&p, add mayo and a tablespoon of whole grain mustard.  You can dress it up with diced carrots, red onion, and celery as well.   Make yourself a soup and sandwich for lunch.

Buon Appetito.