Retailers unite – Housing under pressure, stocks up

• Stocks notch another good day, this morning they are churning.

• Oil and gold lower, Treasury Yields higher, Curve inverted (still).

• WMT and HD due out pre-open…. more tomorrow and Thursday.

• FOMC tomorrow – will they suggest a pivot? 

• Try the Pork Chops Benevento Style.

Stocks were lower in the early hours (pre-mkt) on Monday – setting up what many thought might just be a small pullback – or digestion of the surge higher.  But that was not going to be the way it turned out……. while stocks did begin the day in the red – they rallied then sold off and then rallied again – suddenly waking up at 11:45 am and rocketed higher…. blasting up and thru the unchanged line and ending the day higher.  The Dow + 150 pts, The S&P + 17 pts, and the Nasdaq +80, the Russell + 5.  Only the Transports ended the day lower – but not significantly at losing 50 pts.

Oil was down, gold down and treasury yields up slightly but remain completely upside down and inverted.
Overnight we learned that China reported disappointing macro data… Industrial output and retail sales missing expectations and that sent out a message that the Chinese economy may be stalling……In addition the PBoC cut interest rates to try and stop the bleed in the real estate market  - whatever….I don’t pay that much attention to what goes on in China – because I don’t believe it…  But the oil traders took it all to heart – suggesting that if China is slowing – then demand for oil will HAVE to collapse – I mean – oil goes as China goes? Is that the game now?  In any event – they sold oil off on the back of this news…. They also sold oil off on news that the Saudi’s have suddenly decided that they can ramp UP production if the gov’t asks them too…this after they just cut their global demand estimate last week.  So again – conflicting, confusing data points.

And then at 8:30 we got a very weak Empire State manufacturing report that fell by 42 pts  (vs. the expected loss of 16 pts) giving fuel to the recession story….In any event – the trader types thought that maybe they should ring the cash register take some profits after the recent surge higher in stock prices, so they did…. .and then the rumors started again…with such a weak manufacturing report – how could the Fed possibly even consider being aggressive in September?  Why would they raise rates by 75 bps when the data is suggesting a slowdown and the treasury yield curve remains inverted for the 8th week now…. suggesting that a recession is not only coming but coming quickly.  (You know me – I think it’s already here, but that’s another story).

And the algo’s went into overdrive…. taking stocks up ending the day about 0.5% higher across the board.  9 of the 11 major S&P sectors ended the day higher with defensive sectors leading the way…. Utilities – XLU and Consumer Staples – XLP (always considered boring) rose 0.8% and 1% respectively.  But remember what I have been saying for 6 months now…. Boring can be beautiful….in an anxious environment.  Utilities are up 8% ytd (which is a win) and Staples are off 1% ytd. Energy – as you might expect got slammed on the China news and the Saudi news…the XLE lost 2% on the day – but still leaving it in the lead for 2022 – up 38% ytd.  Financials and Basic Materials also ended a bit lower – less than 0.1% while the rest of the group ended up about 0.4%. 

Retail names ended essentially flat…the XRT up 0.08% as we wait for a slew of retail earnings today and this week.  This morning we will hear from WMT and HD…..now this is an interesting contrast – because one is a big consumer staples destination while the other one is a consumer discretionary destination….right – You need food and clothing every day (think WMT)…you don’t need pipes, wallboard, lumber, cabinets and appliances every day (think HD)……but both are very popular stocks and destinations.

Now remember – WMT cut estimates 3 weeks ago and offered up sobering guidance – and the stock got clobbered,  and last week they announced layoffs ….so it will be really difficult for them to ‘miss’ the new lower estimate and announce anything much different than what they prepared us for –  really difficult…..so I think the stock rallies….…but I guess anything can happen.  WMT is down 8% ytd, but was down 18% at the lows of May and June – holding the $118 line….It has since rallied 12% off of that low – leaving it kissing resistance at $132….if the report is what it is – all of the negative news is priced in and I suspect they will buy it. 

Now HD – on the other hand is a different animal – but one that investors love.  The stock is down 23% ytd, but it was down 35% only 6 weeks ago….it has also rallied over the past 2 weeks and has taken back 17% of those losses….leaving it above both the 50 and the 100 dma……it feels like it wants to go higher….and I think it will unless they surprise us with some negative news – which I do not think they will do….because in this environment – if they had negative news – they would have revealed it weeks ago – just like WMT and TGT did….It would be suicided for them NOT to have pre-announced if the data was negative which leads me to surmise that they will provide at least a meet if not a beat…..the focus as usual will be on margins, top and bottom line revenues, net sales, online sales, same store sales, consumer sentiment blah, blah, blah…..….Will we see them raise their dividends or announce new stock buyback programs?  WMT is expected to repurchase $10 billion worth of stock in 2023 on top of the $10 billion they are buying in 2022.  The dividend yield is 1.7%. HD is in the middle of a $20 billion repurchase plan and has a 2.4% dividend yield. 

The question now is – was the recent rally in both of these names (as well as the other names in the group) be a ‘Buy the rumor/Sell the news’ event?    Could they report positive news and see traders sell the stock to lock in those double-digit gains over the last 2 weeks?  Sit tight – its about to get exciting….
Later in the week – we will hear from LOW, TGT, TJX, BJ’s, KSS, TPR – I suspect the guidance will be the same…. ‘Caution Ahead – Floor Slippery When Wet’.

In any event – stocks have taken a real hit this year – many think the worst is over and that it is only up from here….I am in the other camp…while I think the bottom is in – 3600 on the S&P, I do think we can retest lower in the weeks ahead…somewhere in the 3800/4000 range – which would represent a 6% - 11% move lower from here.  And that’s only because I don’t think we have priced in the coming earnings revisions for the 3rd and 4th qtr. yet…. Those will start in the next month or so…. In addition, I also think the market is overconfident in thinking that JJ and the FED are going to pivot and be less aggressive. 

Inflation is still running at 8.5% y/y…. that is 4x’s the target of 2%.... we have heard from multiple Non-Voting Fed Member tell us that inflation is the number one concern.  We have heard Jimmy Bullard- St Louis FED and a Voting member tell us that he is expecting to be at 4% - 4.25% by year end…. We are currently at 2.25% - 2.50% - so you do the math…. Can the FED pivot if that is the goal by December?  Hardly…. And so, I just think this rally might be a bit long in the tooth.

This morning US futures are churning as we await both the eco data and the earnings data….at 5 am- Dow futures are up 3, S&P’s down 1, Nasdaq down 10 and the Russell is up 1. 

Eco data today is about Housing…. Housing Starts expected to be down 2%, Building permits down 3.3%, 30 yr. Mortgage rates now running at 5.6% and likely going higher…. (Yesterday the Home Builders Sentiment Index registered 49 – the lowest reading since 2007….) Industrial Production +0.3% and Capacity Utilization of 80.2%.... remember – a number greater than 80 suggests building inflationary pressures….

Tomorrow it is all about the FED – we will get the FOMC mins and what will we learn?  In my opinion – nothing new…. inflation will be the focus…. there are two things of interest - What will they do….50 or 75 bps?  The other is will we start to reduce the balance sheet by $90 billion/month starting in September.  (My guess is that we might find a passing reference).

Oil which traded lower yesterday is holding the line at $88.50/barrel….it is now below all 3 trendlines….further weakness could see it trade to $84 ish…..Levels last seen in February…..We know the recent weakness is about China and the Saudi’s ramping up production, but the 3rd argument is about the recession (that doesn’t exist) but continues to weigh on prices….China economic weakness once again spurring renewed concerns over a global recession that will destroy demand for energy….I’m not buying that argument….I’m just not…..I mean - the US is in the middle of a ROBUST economic expansion – just ask Joey, Brian Deese, Karine Jean-Pierre, Nancy Pelosi, Chucky Schumer and Jared Bernstein…… and a robust expansion demands energy to thrive….no?

European markets are slightly higher…all up about 0.4%. Spain the outlier – up more than 1%.   

Joey is expected to sign the Schumer/Manchin Tax and Spend Bill today….and oh, remember when Chucky told Joe Manchin that if he signed on then Manchin would get what he wanted in energy demands?  Yeah – how’s that working?  The Progressive Left – which was noticeably quiet during those negotiations – has suddenly chimed in now that Joey Biden is going to sign the bill….and guess what?  They have no intention of supporting any increases in energy production that Manchin put forward…. ZERO….so Manchin got taken out to the woodshed and got spanked!  Without the support of all members of congress – his proposal goes nowhere…. Capisce? So, we got higher taxes, more regulation, more IRS agents (to go after the working and middle class) and less energy to help make us energy independent.

Just to be clear – the CBO told congress that the IRS expects to rake in $20 billion from the UNDER $400k demographic – the exact demographic that they told us was off limits. 

The S&P ended the day at 4297 up 17 pts.  I think this rally is a bit long in the tooth, but that doesn’t mean it can’t go higher…..In any event – I think we are in for more chop in the weeks ahead…September and October tend to be volatile months and the final two weeks of August tend to be lower volumes causing exaggerated moves in both directions. … (think big vacation weeks across the US and Europe).    We remain in the 4115 / 4335 trading range – Watch the retailers to see what they report and what they say about the consumer and forward guidance.  Remember – the Jackson Hole Kansas City Fed boondoggle is only 9 days away. There is sure to be lots of speculation around what we are expected to hear.  In any event – sit tight.

Benevento style pork chops 

So, Benevento is a city in the region of Campania in the Southeastern region of Italy. Benevento is 50 km northeast of Naples. and sits atop a hill with a beautiful view of the valley below and is at the cross section of the Sabato and Calore Irpino rivers.  It borders Molise and Puglia and is fairly mountainous, providing some unbelievable photo opportunities.  It is also a region of that country where so many Italian Americans can trace their heritage - It is off the beaten path but well worth the visit if you happen to be in the area. 

Fennel is the key ingredient in this dish, and it grows like wildfire in Campania and so you will find so many of their cooking to reflect that.

For this you will need:
1 in thick pork chops, s&p, flour, olive oil, fennel seeds (about 1 tblsp), garlic, dry white wine, water and a beef bouillon cube.

Preheat the oven to 300 degrees.

Season the chops with s&p and then dredge in flour. 

Now in a large sauté pan and one that can go in the oven - heat up [ the olive oil - when hot - add the chops browning on both side - maybe like 1 min per side.   Next - remove the pan from the heat and sprinkle the fennel seeds on one side of each chop then turn and repeat. - now place the chops and the pan in the oven for about 12-15 mins. 

When done - remove the pan from the oven and place the chops on a large serving platter.  Cover with foil to keep warm. 

Now place the sauté pan back on the stove over med heat - add 2 crushed garlic cloves and cook until just brown.  Now add in 1/2 cup of the white wine and 1/2 cup of water- being sure to deglaze the pan and scrape up any of the browned bits on the bottom.  Now crumble the bouillon cube into the pan and stir - until the sauce has reduced by 1/2.  Remove the garlic and spoon the sauce over the chops and serve immediately. 

Enjoy this with a large cold mixed green salad with red onion, tomatoes.  Dress with s&p, oregano, fresh lemon juice and olive oil.  Toss and serve.