Stocks advance, CPI and PPI due out this week

• Have stocks found a bottom?.

• What will CPI/PPI reveal this week? Does it change the narrative?.

• Oil up, Gold up, and Treasury yields up.

• Mortgages, HELOC’s and Revolving credit – Not enough chatter about those credit costs.

• Futures UP, Europe Up.

• Try the Roast Sirloin.

Good morning, good afternoon or good night – wherever you are in the world…. Today is Monday, September 12th, 2022, and on Friday I ended my note with this -

“The S&P closed at 4006 (on Thursday) – up 26 pts….... setting us up to challenge trendline resistance at 4020 – which it appears we will do on the opening bell if nothing changes…….”

And nothing changed….stocks rallied (as expected) and rallied hard…by the end of the day on Friday – all of the 11 S&P sectors ended higher….The Dow gaining 380 pts or 1.2%, the S&P up 62 pts or 1.5%, the Nasdaq up 250 pts or 2.1%, the Russell up 35 pts or 2% and the Transports added 335 pts or 2.45%.

There wasn’t any economic data to speak of that would have caused such a reaction, but there was some clarity offered by nearly all of the members of the FOMC (Federal Open Market Committee) and the central banker (JJ Powell) that helped to solidify the move up….which allowed US stocks to post their first weekly gain in over a month. Rates are expected to move up by 75 bps – period! They could not have made it any clearer and if anyone has misunderstood this, let me be clear once again…. Rates will rise by 75 bps on September 21st. Remember – investors have been skittish – fearful about what the path of monetary policy was going to look like. Many asking questions: Could we handle it? Was another 75-bps hike suggestive of a FED that was getting a bit anxious themselves? Would inflation respond or not? Well, we don’t know yet what any of those answers are – but JJ wants us to be ‘OK’ with the path they are taking – assuring us that this hike will be the last 75 bps hike we will see.

In any event – much of the buying late last week – was all about bargain hunting….Financials, consumer discretionary, tech & communications all leading the way higher…..And these are all sectors that are down fairly substantially ytd….As of Friday evening - Financials -12%, consumer discretionary -19%, tech – 21% and communications are down 28% - so when investors/traders and algo’s go bargain hunting – they all look for names and groups that have been under the most pressure….makes sense, no?

Now – investors had become very bearish – which itself is a contra-indicator…Bank of America suggests that their model – which that takes hedge fund activity and credit and equity fund activity – has hit ‘rock bottom’ – which suggests sellers are exhausted and the Citibank ‘Lefkovich Index’ fell to -16 – edging closer to -17 which is a level that suggests ‘panic’ – Both of these models leave the market in an ‘oversold’ position and that opens the door for buyers to take advantage.

And then there is the building concern that we are about to get a rash of downward earnings revisions in the weeks ahead – leading up to the next round of earnings reports which start in one month…. And that has helped to push stocks lower over the past couple of weeks…. essentially ‘discounting’ the bad news AHEAD of the bad news…so that, when the revisions come – the reaction won’t be so negative and in fact we could see buying!

Now much of that depends on where the FED pushes the economy….If they are able to prevent a recession (the way they tell us they can) then yes, the above the analysis would be correct – BUT if they can’t prevent a recession – and in fact push us into a deeper recession –then all bets are OFF! For now – it appears that companies appear to be weathering the storm……but you have to be a patient – and see how this plays out….and much of that will be dependent upon some of the macro data we will get this week.

And that macro data is inflation data….tomorrow bring us the August CPI (Consumer Price Index) report – which details inflation at the consumer level – and it is expected to come in at 8.1% y/y - which is down from 8.5%.....which is good (think the recent decline in oil and other commodities), but let’s be honest – it is still 8.1% y/y (and still 6% above the FED’s target) - still near 40 yr. highs all while prices of food, housing (rent) and electricity are still on the rise – which is why the FED cannot do anything other than stay firm…..Wednesday brings us the PPI (Producer Price Index) and that is inflation at the producer level….what manufacturers are paying for the raw materials that they use to manufacture the items that we buy.

Now this is important – because as the PPI goes -so goes the CPI….and the PPI is also expected to show a decline for August…. coming in at 8.8% - which would be down from 9.8%...a significant move lower…. (Which will be reflected in the September CPI report – Capisce?) The FED crediting the drop in costs to their very strong commitment to fighting inflation by raising interest rates…..but before you go out and buy a bottle of champagne – we still have to factor in all of the spending that the Biden’s are doing…..recall that we had not 1 but 2 fairly large spending packages here in the last couple of weeks and that data has NOT been reflected yet in the pricing chain….and that is why I say – and the FED says – not so fast….We have to see how all of this spending impacts the economy and by most accounts – the brain trusts on the left say it ‘doesn’t matter’ while the brain trusts on the right – say not only ‘does it matter – it is much more impactful than the left suggests’ and that my friends is about to be decided in November.

And while I am NOT playing politics – it is important to remember that politics do not price stocks in the long term, but they can cause havoc and chaos in the short term – creating opportunities……which is why I say – Not so fast big boy.

In any event – treasury yields remain inverted – this is now the beginning of the 13th week…. of an inverted curve…. which only means that a recession is coming – unless someone chooses to redefine what a recession is…. - the only question is to what extent?

30 yr. mortgage rates are now kissing 6% for conforming loans (up to $647k in most parts of the country, with more expensive markets (think NY, CA, HI, DC) having a limit of $822k) – if you go jumbo then you can be kissing 7% and that is causing the housing market to come under pressure….over the weekend – Bloomberg ran with a story that suggests we should prepare for double digit declines in prices…(which is a surprise, WHY?) And the longer the FED raises rates the higher mortgage rates will go…. I suspect that we could be looking at near 7% conforming loan rates by December.

Another thing – not too many people are talking about is the ‘reset rates’ that are about to happen for those people that bought homes with ‘adjustable-rate mortgages’ when rates were 2.75% - which causes me to ask – What were you thinking? Why would you have taken an adjustable-rate mortgage when 30 yr. fixed mortgages were that cheap? Who told you that was good idea? For those of you who don’t understand – let me make it clear…. A $500k 2.25% adjustable rate mortgage costs $1911/mo.…when that ‘reset’s to 4.25% the payment goes to $2460/mo. – a 28% increase….and in 2 more years – if that rate goes to 6.25% then the payment becomes $3080/mo. or a 61% increase over the original terms….this vs. locking in a 30 yr. fixed at the time might have been 2.85%.....for a payment of $2054 – FIXED for 30 years….Now remember – that does not include real estate taxes…which are only going up – year in and year out….but that’s another story.

And one other thing that I don’t think too many analysts are talking about is what ‘revolving credit’ is doing. Revolving credit – think Bloomies, Nordstrom’s, Lord and Taylor, Macy’s etc.…. are also all going higher…. on the back of what the FED is doing……and that will surely impact consumers in the future…. And I haven’t even discussed HELOC’s (home equity lines of credit).

OIL – yes that is up 50 cts this morning – trading at $87.31/barrel…..This even as China locks down MORE people to combat rising covid cases in that country….which suggests that oil markets are much more concerned about what is going on in Eastern/Western Europe and the coming winter….Oil – remains below all 3 trendlines but is nearing closer to its long term trendline which will act as resistance at $89.45. There are still calls for higher oil prices by year end with some calling for oil to be more than $120 barrel or a 37% jump from current levels.

Gold – is trading at $1735/oz after closing at $1728 on Friday. Investors in this space watching the inflation data to see if it changes the narrative….to which I say – don’t bet on that…. At this point – the CPI/PPI would have to collapse in order for the Fed to even consider changing the narrative….and that is not happening.

The dollar index continues to digest its recent move higher and is off 1.10 at 107.84…. the pullback in the dollar is helping the commodity space advance – think inverse relationship….as commodities are priced in dollars – as the dollar rises in value, commodities tend to decline and vis-a-versa – think oil, gold, silver, hogs, lumber, soybeans, corn etc.

US futures are up this morning…. – the Dow +180 pts, the S&P up 26, the Nasdaq up 105 pts and the Russell is +14. Traders and investors apparently are betting that inflation has peaked…or is near peaking – as the FED keeps up the very hawkish commentary. Remember – last week – Fed Governor Waller said he ‘favors another significant’ rate increase, St. Louis’s Jimmy Bullard said he was leaning ‘more strongly’ towards a 3rd 75 bps hike and Kansas City’s Ester George confirmed that there is ‘a clear-cut case’ for continuing to remove monetary support.

European markets are all a bit higher…. markets across the region are up more than 1.5% across the board. This after the ECB raised rates by 75 bps last week. Eco data this week in Europe include UK CPI on Wednesday and Eurozone CPI on Friday. But don’t kid yourself – they are waiting on what the US CPI and PPI reveal this week.

The S&P closed at 4067 – up 62 pts…. blasting right through trendline resistance at 4020 and 4031 – leaving us now in the 4020/4275 range. I suspect that we could see a rally this week – even with the coming inflation reports due out tomorrow and Wednesday. I remain cautious about the coming earnings revisions – Again, it will be interesting to see how investors/traders and algo’s respond. Was the selloff over the past couple of weeks enough to change the narrative or will the revisions be so large that investors need to re-assess once again? In any event – I would not be surprised to see us test lower again…...before this stabilizes. Which only means – stay focused, keep putting money away. Hold it in cash if you are nervous- but get your shopping list ready – remember you will never pick the absolute bottom - but you can stay in the game and build for the future.

Remember – in an environment like this – Big, Boring names are Beautiful….and offer some shelter in the storm. If you own good, solid US mega cap names that are decent divvy payers then sit tight take advantage of weaker prices that will bring down your average cost. Sectors to be overweight in? Energy, Healthcare, Utilities & Consumer Staples all fit that bill. But you have to balance that with where you are in the life cycle…younger = more risk, older = lower risk.

Roast Sirloin

Get yourself a nice sirloin roast - 5 / 6 lbs.… season with salt and let rest for 20 mins on the counter. While this is resting, slice fresh mushrooms, chop 2 lg carrots, 2 celery ribs, 1 large onion, select a nice bottle of red wine (I use a pinot noir), a can of low sodium beef broth and a can of tomato paste. Preheat your oven to 275 degrees.

After resting - season beef with pepper and sear it in a frying pan with Olive Oil making sure to brown on all sides even allowing a crust to form. When complete - place in a V rack in a roasting pan and place in the oven uncovered. Allow to cook for 2 1/2 to 3 hrs. or when ready according to the meat thermometer.

After putting the roast in the oven - return to the frying pan - add the chopped veggies to the oil and sauté until tender - 8 / 10 mins. Add tomato paste and mix… add 1c of red wine and stir - bring to boil and let the alcohol burn off a bit...3 mins. Add the beef broth and simmer - stirring occasionally. do not let it dry out… if necessary - you can always add a bit more broth. After about 30 mins… taste to make sure you like it. If so - puree 1/2 this mixture and return to the sauté pan. Turn off heat.

When beef is ready - take out of over and let it rest for 10 mins - covered in foil. Reheat the sauce… slice the roast and arrange on plate - top with sauce.