Now they are hitting the stalwarts – Getting closer to the end

• Dow Slides More than 1100 Points in Worst Day Since 2020 = wsj.

• Stock Rout Deepens as Economy Concerns Pile Up – Bloomberg.

• Stock Futures Fall After Dow’s Worst Day Since 2020 – cnbc.

• TGT, WMT’s Inflation Warning Bad Omen For Stocks & Economy – Fox Business.

Inflation is now officially out of control and investors are betting that the FED has LOST control…Gas prices hit a new record high, JPM cuts US GDP estimates for both 2022 and 2023, all while mortgage demand plummets as 30 yr. rates pierce 5.6%.  – Stocks get decimated…..nothing was safe – even the big ‘safety names’ got gutted…..Consumer Staple names – which have held up during the turmoil suddenly collapsed….the headlines say it all….after two major retailers TGT (lost 27% yesterday)  and WMT (down 6%) confirmed our worst fears….high costs, supply chain worries and ‘sluggish sales’….and that was enough – that’s all the algo’s needed to hear….the bell rang and stocks started to sink and then sink and then sink again…by the end of the day – the Dow gave up 1164 pts or 3.6%, the S&P lost 165 pts or 4%, the Nasdaq gave back 567 pts or 4.7%, the Russell fell by 66 pts or 3.5%, and the Transports got absolutely creamed – choking up 1080 pts or 7.41%!

Recall what I said on Tuesday – after the Monday rally…. (Which made no sense….)

“Nothing has changed other than the day….Inflation is still running at 10% at the producer level, 8.5% at the consumer level, 1st Qtr. GDP is still negative,  the FED remains confused while rates are expected to continue to rise swiftly, the war in Ukraine continues as Finland and Sweden now move to join NATO, China is only beginning to roll back major lockdowns across their biggest cities, the supply chain is still backed up…..”

Eco data on Tuesday showed that Retail Sales rose – which you would think was bullish…..well it might have been if inflation wasn’t an issue….because while it rose – what it details is the fact that consumers are actually getting LESS for their money because prices are rising….so they are paying MORE and getting LESS….mmmm – not so bullish…in fact you could argue that’s bearish…. And the canary in the coal mine?  Capacity Utilization…. remember we talked about this.  Capacity Utilization measures the percentage of a company’s potential output vs. its actual output….so 70% means that a company is using 70% of their capacity…. easy right?  

It is historically anywhere between 73 – 78 in a healthy well-balanced economy. A number below 73 would suggest an economy that is sick and struggling.  And - a number at or greater than 79 suggests the potential for an economy to overheat and inflation to spin out of control…. on Tuesday, the reading came in at 79% vs. the expectation of 78.2% and it has been on an upward trending path for months now….so it confirms what we now know…. inflation isn’t going away and may still have room to rise even more…. In fact – inflation is hitting everything, and consumers are starting to consider and reconsider buying some items that they would typically buy and that suggests that consumers are wearying of rising prices and that will filter its way through to corporate earnings….

Then on Tuesday afternoon – JJ took to the podium promising to do ‘whatever it takes’ to kill inflation – a direct reference to the now famous  Mario Draghi statement to do ‘whatever it takes’ to save the European Union during the height of the Great Financial Crisis……and while Draghi’s statement meant that the ECB (European Central Bank) would open all the spigots – stimulate the economy, print euros and buy all kinds of bonds to save the Union, JJ’s comments suggested that he would close all the spigots…..withdraw all the stimulus that has gone on way too long and raise rates to tame inflation that is now clearly out of control.

His comments were seen as the most hawkish to date and suggest that even he is frustrated with the state of the union – a state though – that he and members of the FED fueled for months and months after it was clear that they should have been slowing down way back in the spring of 2021.

Adding to the angst are 2 full generations of people who have no idea what an ‘inflationary environment’ looks like.  The last time we saw inflation running at these levels was in 1979 – 1982 – some 40 + years ago – so anyone younger than 50 doesn’t really have a clue (recall they would have been about 10 yrs. old at the time – and most 10-year-olds aren’t paying attention to macro-economic data).  And that is not meant to be an insult, it is meant to suggest that they are about to get an education on the ravages of inflation. 10 Yr. US Treasury yields ended the day yielding 2.88% - down 10 bps as investor dollars searched for anything considered ‘safe’.  This morning yields are down another 5 bps at 2.83%. 

The VIX – rose by 18% to end the day at $30.98 and this morning it is up another 5.8% at 32.76……. Recall that so many analysts have been calling for the VIX to get to 40 before we might see complete and total capitulation in stocks….so the question is – Is there more pain to come?  My sense is that yes, there is – so as I have been saying – there is no need to rush in, patience is a virtue, it is ugly and painful but, in this action, there is opportunity for those with a strong stomach.

S&P sectors were all in the RED, but the ones that suffered the most – Consumer Discretionary – XLY – lost 6.5%, Consumer Staples – XLP lost 6.3%, Retail – XRT gave up 8.2%, Housing – XHB gave up 5.2%,  The Growth trade – SPYG fell by 4.7% while even the Value trade – SPYV gave up 3.2% leaving those two trades down 26% and 8% ytd.  The contra trades – allowing you to go short the market all rose – the DOG + 3.5%, the PSQ + 5% and the SH up 4%.  And if you played the market using triple levered ETF’s you were either very happy or very upset.  The SPXS (triple levered short) gained 12%, while the SPXL (triple levered long) lost 12%.

This morning – US futures are down again….as the pain trade continues…. Dow futures down 440 more points, S&P’s down 60 pts, the Nasdaq off 200 pts and the Russell down 26 pts.  Bets that some of the biggest, most highly capitalized companies would weather the storm is now very much in question after some of the ‘industry titans’ are now warning about the scourge of high inflation on earnings, margins, and consumer spending all while the FED reaffirmed tighter policy ahead. Talk of 1980’s style stagflation which was considered ‘ridiculous’ by some, is now much more of a reality as a recession looms large.  And if we do get into a stagflation situation – you could see the Nasdaq decline by another 30% while the S&P falls another 20%....

Now we haven’t spoken about circuit breakers for a while…..but just to remind you – the circuit breakers kick in and markets will be halted when the S&P falls 7% from the previous nights close…which means today – the S&P would have to fall 274 pts to shutter the markets (3923 * 0.07)….and while the circuit breakers have never been tested since they were born out of the ’87 crash – never say never….

Playing defense is smart…. eliminating the noise is also smart, the focus needs to be on quality, cash flow and dividends – do not go out on the scale looking to scoop up beaten up hi-growth names that look like bargains…because most likely they will get cheaper still.  Again – I am in the big, boring but beautiful mega cap, multinational names…..IBM is one of my favorites +3% ytd and they pay a hefty 5% dividend, AT&T +11% ytd is another one – they also pay a hefty 5% dividend, KO is up 4% ytd and pays a 2.8% dividend….JNJ + 4.8% ytd and pays a 2.5%. XOM is up 44% ytd and pays a 3.8% dividend.  Do you see the pattern? These are not ZM -78%, TDOC -85%, SHOP -80%, SPOT – 66%, COIN -82%, HOOD -88%…. They are the Big, Boring and Beautiful names that represent the best of America.

European markets are down 2% across the board…. it’s the same story…. inflation concerns causing the algos to go into reverse…...

Eco data today includes Existing Home Sales, and they are expected to be down 2.2% - don’t be surprised if that number is larger….

Oil which ticked as high as $115.70 on Tuesday has since retreated, gasoline prices at the pump continue to rise and that is causing consumers to go slow.  Trader types locked in profits on the recent spikes…. but I do not think oil is going to collapse and I remain a buyer.  I believe we remain in the $100/$120 range.

The S&P closed down 165 pts to end the day at 3923……after testing as low as 3911……Real support is more like 3850….and that is only support if the buyers choose to defend that position………If not – then we could trade as low as 3500…. which represents another 10% move lower…from here.  Is that out of the question?  Absolutely not……. The question going forward now is: Not if a recession is coming but rather just how deep could the recession get?

In the end expect more turbulence ahead…because stocks will continue to thrash around.  The risk to the downside is still very real. 

Classic Macaroni & Cheese 

This is one of those ‘feel good’ meals and considering prices are skyrocketing you should be able to make this for about $15…and there will plenty leftover…

For this you need:  2 c of whole milk, ½ stick of butter, 2 tbls of flour, s&p, shredded extra sharp yellow cheddar, 1 lb. of elbow and a handful or two of toasted breadcrumbs.

Begin by bringing a pot of salted water to a rolling boil and add the pasta.  Undercook it just a bit…so maybe 6 mins…. then strain.  

Preheat your oven to 400 degrees. 
Heat up the milk,

In a large sauté pan – melt the butter, whisk in the flour, and now add in the warm milk…. Whisk until it thickens – 5 mins or so. Remove from the heat.

Now add in the s&p, 1 c of the cheddar cheese, add the pasta and mix. 

Now put the pasta mixture into a greased Pyrex baking dish.  Add the remaining cheese on the top.  Place in the oven and cook for 10 mins…Remove and now sprinkle some of the toasted breadcrumbs on top and put back in the over for 10 more minutes.  When done, it should be a nice golden color.  Remove and let sit for 5 mins then serve.