CPI was not what it appeared, banks kick it off

• Was the CPI all that it appeared?

• Stocks did move up, but today they are moving down.

• Banks kick it off – and guess what? The are beating on top and bottom lines.

• Oil kissing $80, Gold kissed and pierced $1900!

• Oh, and China oil demand – expected to be ‘strong’.

• Try the Pesce Spada all Siciliana.

And it happened…..the gov’t reported CPI that was IN LINE with the expectations…not better, not worse – but directly on target – but when you pull back the sheets – you saw something very different….Services +7.5% (vs. the expected +7.2%), Ex rent of shelter services was +7.4% (vs. the expected +7.2%), Medical Care services were +8% y/y vs. the +7.6% last month…..and do you see the common denominator?  ‘SERVICES’….and considering the US economy is 75% a SERVICES economy -then the report doesn’t look wine and roses – the way it seemed.

Now - futures which were up in the moments prior to the announcement – went negative in the minutes after – only to go positive then negative then positive again….by mid-afternoon – all the indexes were higher (something I had not expected) but they were.  Comments by Philly FED President Patty Harker seemed to give the impression that the FED might be softening…he said – and I quote.

“Rate hikes of a quarter-percentage point will be appropriate going forward.”

And that means what?  It means nothing….First of all – Patty Harker is NOT a voting member -and while we do respect Patty, he doesn’t get a vote!  So he could say anything he wants but it doesn’t carry any weight at the voting booth.  Additionally – I’m not sure why this is such a bit deal – the market has been pricing in a 25 bps move for weeks now….while we discussed 50 – the reality is that the FED and the market has been pricing 25 bps…so this is not a ‘mind blowing’ observation – at all.

Then we got a range of comments from street analysts/portfolio managers – who also were looking for the services part of the CPI to be weaker…. For instance – Tommy Costerg – Sr. US economist at Pictet Wealth Management (in Geneva) was looking for the ‘trend in services inflation to be abate’ – which would then cause the FED reconsider their narrative…..…to which I might add – Clearly – That was not the true – the report revealed that services inflation was UP and that makes up 2/3rd of the index…..In addition to the stats above – just think about this – restaurants are paying dishwashers $30/hr. UNDER THE TABLE (which equates to about $60/hr. for a New York dishwasher if you had him on the payroll or $38/hr. for a Florida dishwasher….(In NY – you have to pay everybody plus the FEDS, so in order for the guy to end up $30/hr. - you have to pay him $60 and then he has to take $30 (50%) to pay the federal, state & local taxes…In Florida – there are no state and local taxes – so the cost to hire that same dishwasher and put him on the payroll is less.) .

But the point is that ‘services’ inflation is NOT going down….Dishwashers are part of the service economy, waiters and waitresses are part of the service economy. Higher food prices and higher costs to employ people to work are all part of the services economy and it IS ‘sticky’ inflation….   Hotel maids are part of the services economy – have you seen hotel rates recently?  The Holiday ‘Garden’ Inn on Wall St has a 300 square ft room, with a sink that you can’t wash your face in, and a bed that fits the room wall to wall, along with only 1 bath towel and 1 face cloth, NO closet – just a hook at $389/night plus another $125 in various fees and ‘resort’ taxes ( yes that is correct – NYC collects a ‘resort tax’…LOL) ….so that totals $520….Restaurants and Hotels are part of the ‘services’ economy….so tell me -what part of the services economy might they be talking about?   And forget the about the cost of the food at those restaurants and hotels….that just keeps getting more expensive as the cost of food is NOT coming down at all – but thank god that used car prices are in decline….Now, that’s something to write home about~!

Now – to be sure – and fair – the top line inflation number is in decline….going from 1.6% in winter of 2021 – to 9.1% by summer of 2022 to 6.5% by winter of 2023….but like I said yesterday – the 3% that we have taken out of the report was the fluff – the easy stuff – the next 4% is the ‘meat and potatoes’. 

Here is the link to my appearance with Charles Payne on Fox Business yesterday where we discuss this very point. (In addition to ‘generational opportunities).

By the time the closing bell rang – we saw that all of this seemed to mean nothing to the traders, algo’s and investors…. the Dow added 216 pts or 0.6%, the S&P gained 14 or 0.3%, the Nasdaq advanced by 70 pts or 0.6%, the Russell added 32 pts or 1.7% while the Transports added 100 pts or 0.7%.

My friend Ron Insana points out (on Twitter - @rinsana) that the 3 month and the 10 yr. treasury spread is now 1.25% taking us ‘deep in early 1980’s territory’ causing him to suggest that ‘something has to give – the FED perhaps?’  

The responses were varied as you might expect – but the overall tone was basically –‘not yet’.  Which has also been my stance for months now….I do not believe that the FED is going to change the narrative just yet….and while they may pause in May – that doesn't mean – that they won’t begin hiking again if the data doesn’t cooperate?  And if the data does cooperate – it doesn't mean that they will begin cutting either….JJ and his team have been clear – inflation is in the bullseye…..2% is the goal – and we are at ~6% currently….that’s a 4% difference…..and that 4% is what is going to be tough to conquer.

Ok – that was then….today, it’s about earnings….and at 6:26 pm – we heard from Blackrock – BLK and as you might guess – they BEAT ON THE TOP AND BOTTOM LINES          ……$8.93/sh vs. $8.08,  Revenues $4.34 bil vs. the estimate of $4.25 bil,  4 qtr. long term inflows of $145.6 bil vs. the exp of $124.4 bil.   JPM is due out at 7 am….What will they do.

The bottom line here is what are the big banks allocating to ‘loan loss reserves’?  What will that tell us about what these banks think about what’s next… How deep of a recession are they suggesting or predicting…..Which bank will be the one to ‘miss’ the estimates?  Sit tight – because we are about to find out.

BAC reports and they beat on the bottom line and the top line….OMG – can you believe it.  Net interest income was $14.7 billion, Investment Banking Fees – slightly better than forecast but is a 57% drop y/y…(expected), and loan loss reserves?  INCREASED IT BY $200 MILLION VS. LAST QTR!  Is that clear enough?  4th qtr. Provision for Credit Losses is $1.1 Billion!

JPM BEATS on both the TOP and BOTTOM lines too!  Wow – what a surprise!  Loan loss reserves? 4th qtr. Provision for Credit losses:  $2.2 billion…..! 

DAL just announced and guess what?  Yup – they beat on both the top and bottom lines as well….funny how that happens – when they guide the street lower from earlier higher estimates.  Now they offer up guidance of 15 cts to 30 cts in the 1st qtr. which is lower than the original estimate and that is due to what they expect the pilot’s union negotiations to impose…think higher wages (to combat higher inflation) and better benefits….and this goes to my prior concern of spinning into that wage/price spiral inflationary cycle…. Higher inflation forces employees to demand higher wages, which forces inflation higher, which forces wages higher….It’s a vicious circle and one that can be stopped by ‘slowing the economy down’….and how does that happen?  Bingo!  The FED continues to raise rates.

How many more times are we going to hear this wage pressure story this quarter? So, again – brace yourself to get a bit more uncomfortable… Again – not a reason to abandon the ship – but it is something to keep in mind…..Capisce?

Ok – eco data today isn’t going to drive the action…..just fyi….U of Mich Sentiment survey – est of 60.7 which is up from 59.7.  1 yr. inflation expectations of 4.3%....with 5 – 10 yr. inflation forecast of 2.9% (again – you know how I feel about those 5 – 10 yr. estimates – USELESS).

Oil – is up 70 cts this morning – taking us to $79.10 – after kissing $79.30…inching ever closer to $80…..headlines suggest that OIL DEMAND in China will ‘hit a record’ – Oh, Wow!  Who would have thought?  Oil is now up and thru short term resistance at $79.05 and is preparing to challenge intermediate term resistance at $81.30…..Let’s see if what was resistance at $79.05 becomes support for a further move higher.

Gold!!!  Ding, ding, Ding…….opened at $1898 and blasted up and thru $1900 to trade as high as $1912/oz…..before retracing a bit to trade at $1905 at 6:45 am.

This morning at 7 am - US futures were lower and have turned even more lower….. Dow futures -100 pts, the S&P’s down 18, the Nasdaq is down 75 and the Russell is down 6 pts.  It’s all about earnings…and it’s all about the bank earnings…..lots of chatter about what these reports suggest about the future…..remember – the bar is LOW….so anyone that misses – expect them to get punished….but don’t be surprised if the group trades lower today – after the recent rally from December lows – XLF up 9% since then – JPM +9%, BAC +11%, BLK +10%, WFC +8%.

European markets are up across the board – all ahead by about 0.5%.

The S&P closed the day at 3983 up 14 pts –…..The CPI will be an ongoing discussion today – as a range of street analysts opine on what it all means….Was it good, was it bad?  Are rates going up, are rates going down?  And the Bank earnings…expect lots of discussion around the guidance and the ‘Provision for loan losses’.

If you’re a day trader – this is what you live for and if you’re a long term investor – look for the opportunity (if there is one) – and it might take a day or two to settle out….but look at your best holdings and add to the allocation….If it’s rallying - Don’t chase it, let it run,  but if some of your names are backing off – then consider adding a ‘bit more’.   A well-balanced core portfolio – is the goal - You can use cash to play around the edges and add alpha to your portfolio on names that become completely disconnected to current reality.

Again, I don’t think the FED’s narrative is going to change….…..I expect rates to continue to rise…until May. It’s now about what the earnings season is about to tell us….In any event – expect more volatility at least thru May….and then we can revisit…what the second half of 2023 might look like.  

Remember, the tone can change on a dime (and usually does).

Pesce spada alla siciliana – (Sicilian swordfish)

A great dish from this Island nation - well not really their own nation - but if you ask an “Italian”  - Sicilians are not Italians…They are Sicilians....Capisce?

For this you need:  Raisins, green olives, capers, pignoli nuts (pine nuts), tomatoes, garlic, onion, s&p, olive oil and the swordfish.

This dish is easy to make - it will tease your senses - and tickle your pallet - only takes about 15 or 20 min's to prepare and 20 min's to cook....enough time to set the table, pour the wine, light the candles, put on the music and dim the lights.

Preheat oven to 400 degrees (f) 

Season the swordfish with s&p.

Next soak the raisins in warm water for about 1/2 hr... drain and set aside.

Heat the olive oil in a sauté pan on med high heat.... sauté the diced onion and crushed garlic until soft. Do Not Burn.  Maybe like 5 / 8 min's.... add raisins, diced tomatoes, chopped olives (no pits!), and capers - like 1 tblspn.  (If you like capers feel free to add a bit more - but not too much as the taste will overpower the dish).  Reduce heat to simmer and cover...stirring occasionally....for about 15 min's or so.

Place the swordfish in a baking dish and cover the fish with the raisin/olive/caper/tomato mixture - bake for 15 min's or until the steaks are firm.

Present the fish on a warmed plate with steamed green beans and a large mixed green salad with red onions, cucumbers, grape tomatoes, maybe some fresh mozzarella....dress with s&p, oregano, a splash of fresh lemon juice,  balsamic vinegar and olive oil.