Eco data strong, Algo's panic, stocks get smashed

• Eco data suggests that the recent rate hikes may not be working as expected.

• Markets sell off hard – as the algo’s take control.

• In the mess is opportunity – stick to the plan.

• Everything got hit, nothing was saved, stocks, bonds,  oil, gold etc.

• Try the Linguine and Lobster Sauce.

Bam!  Stocks got slammed yesterday.  Now you ask why?  Because the economic data is not responding to the recent rate hikes…. ISM Services PMI rose, S&P US Services PMI rose,  Factory Orders UP, Factory Orders Ex Transports UP, Durable Goods Orders are higher too!  Now you’d think that strong economic data is good and you’d be wrong.  The last think JJ wants is for the economic data to be strong……he wants it to be weak, he wants (and needs) to see a weakening economy IF he is to succeed in killing inflation ……Remember - inflation is running at 40 yr. highs – currently 7.7%  - the strong data will only keep demand strong which will feed the inflation monster and force the Fed to be more vigilant. 

And that caused the algo’s to panic!  Remember – the algo’s can not ‘understand’ the conversation or the headlines – all they do is react to words in the conversation…Is it a negative word or is it a positive word – they can’t determine the tone of the words or how they are spoken – and that once again leaves us held hostage to the machines….  The WSJ – this morning proves that point – the headline says

“FED to Weigh Rates Higher than 5%” 

THAT is not new news…. they raised that expectation 2 months ago…when they suggested that the terminal rate could be anywhere between 5% - 5.25% up from 4.75%.  In fact it was October 18th, 2022 – Reuters runs with the article that had this headline
“Fed May Need to Push Policy Rate Above 4.75% - Kashkari” 

Do you remember this?  The FED – in quiet mode ahead of the early November meeting sent Kashkari – a non-voting member out to drop that bomb….and ever since then we have all been talking about the terminal rate now being 5.25% or at least we have been preparing for it.  I mean it’s simple math….right now the fed funds range is 3.75% - 4%....and we are going up 50 bps next week – which means the range goes to 4%-4.5%, then another 50 in January – and that means 4.5% - 5% and then at least 25% in March – which equates to 4.75% - 5.25% - and there it is 5.25%.....so why exactly did we have a meltdown? 

Because after the strong data on Friday – think NFP and then the strong data yesterday – it is now clear that the most recent rate hikes may NOT be working the way they all thought – which now brings us to what St. Louis Fed President Jimmy ‘B’ told us 2 weeks ago – before the quiet period - ……FED Funds rates could be anywhere in the 5%- 7% range.  Do you remember how the market reacted to that statement?  It sold off – hard….(down 6% in 2 days) but then – a range of analysts and strategists managed to talk every one of the ledge saying that he was being ‘extreme’. (recall that I said – it was deliberate – that the FED put it out there in the public square so that they could always point to it and say – ‘we told you so’).

They said there was no need to take rates that high, that the recent hikes were doing the job etc.….and the algo’s bought into it and took stocks higher again… in fact – they took the S&P up 12%  after that pullback…..And then we get the most recent eco data and the algo’s throw a fit….Which is fine if you have money to put to work….because that is ridiculous – while uncomfortable – it does create opportunity….

By the end of the day, after the dust settled, investors assessed the damage – everything got slammed (except the contra trades)….. the Dow lost 485 pts or 1.4%, the S&P down 75 or 1.8%, the Nasdaq down 221 or 2%, the Russell lost 55 pts or 2.8% while the Transports gave back 475 pts or 3.25%!

Sector performance – Energy -XLE lost 3% (up 60% ytd), Consumer Discretionary XLY lost 2.9%, Financials – XLF lost 2.5%, Basic Materials – XLB lost 2%, Real  Estate – XLRE -1.7%, Industrials – XLI – 1.7%, Tech – XLK -1.6%,  Communications – XLC – 1.5%,  Consumer Staples – XLP – 1.3%, Healthcare – XLV -1%, Utilities – XLU -0.6%.
Housing XHB gave up 2.3%, Retail – XRT – 2.5%, Metals and Miners – XME – 4.3%, Cybersecurity – CIBR fell 2.2%, Semi’s – SOXX lost 1.3%, the Value Trade – SPYV lost 1.6% while the Growth trade – SPYG gave up 2%. 

The contra trades – were all higher….VIXY +2%, SH + 1.8%, PSQ +1.7%, and the DOG +1.4%. 

In the end – the story is the same…..one day it’s all roses while the next day it’s all doom and gloom…..which is why I keep telling you – to stick to the plan….and this morning what do you think happens?  The FED enlists the help of Goldman Sachs….and they put out a note late last night that said – that the worst of the inflation monster is OVER – but that while that may be true – the FED needs to continue down this path of higher rates for a bit longer….re-iterating the theme I discussed above….Investors should expect a terminal rate of 5.25% by March and then we should see the FED pause (not pivot) until they can assess more data…Now, that’s all good for today….but as we move thru the month and into the new year – we will get hit with more eco data that will tell the story…so while I would love to agree with Goldy – I am not convinced yet…which doesn’t mean I’m running for the exits, it just means I am playing it safe and building those positions in the safety trade…which might include – short term bonds.

Yesterday I noted that 1-month T-bills are yielding 3.9%, 2 yr. treasuries 4.3%, a 12 month CD can get you 4.5%.  Or maybe it is the STPN – Stuff that People Need - (big boring and beautiful – a theme I have been talking about all year - Utility names pay you about a 4% divvy on average and they are flat on the year….and the big consumer staple names do about the same….maybe pay you 3% and are only down 1% ytd.  Big industrial names pay you 2.5% – 3% and are down just under 5% ytd….And if you think this is all an overreaction….and that the market will recover early 2023 – then you can look to scoop up some of the biggest losers on the year….Communications – 35% ytd, Consumer Discretionary – 30% ytd, Tech – 24% ytd, & Real Estate -26% ytd.  Or how about those Semi’s? SOXX -30% ytd while NVDA is off 44% ytd.  Cyber names – CIBR -24% ytd while the Key player – CRWD is off 40% ytd.  I mean I could go on, but you get the picture – don’t you?

This morning – global markets remain under pressure…Asian markets all lower by about 0.6%, and early trading in Europe has those markets down more than 0.5%.  US futures were up but have now gone flat to lower….as traders, algo’s and investors weigh the prospects of a slowdown against an aggressive fed. At 6 am – Dow futures are – 33 pts, S&P’s down 3, Nasdaq – 2 and the Russell down 3.  Not a disaster at all, but not super excited either…In the end – it is what I think it is….the volatility is not over yet at all, inflation is not under control and the FED is not finished – so get over it and understand that investing is not for the faint of heart.  Talk to your advisor and build a portfolio that is appropriate for you – taking into consideration – all assets,  age, time, health, needs and risk tolerance.

Treasuries remain inverted with the 2 yr. now yielding 4.3% while the 10 yr. is yielding 3.56%.

Gold also came under pressure yesterday falling $28 to end the day at $1781 and this morning it is holding steady up $4  at $1785.

Oil – came under significant pressure yesterday when a broad shift away from risk assets – due to the latest interpretation of the eco data – saw oil plunge 3.8% to end the day at $76.93.  This morning oil is down 83 cts at $76.10.  Remember yesterday – we had the EU embargo on Russian crude along with the G-7 price cap on Russian Seaborne oil.  In addition – we learned that China is relaxing covid 19 regs and that should have helped the oil market – but again on a day when the eco headlines are negative – everything gets dragged down….  The key number to watch is $73.60 – the November low….a failure that could see oil push towards $70 – but remember, the US is standing there with an open buy order to buy oil at $72/barrel.

The S&P closed at 3998– down 73 pts…..4045 did not prove to be any support at all…..and now that we are below that the intermediate term trendline is the one to watch….3930  - something I think will happen before we make that end of year Santa rally back into the 4000/4100 range.  

There is no eco data today but on Friday we will get the PPI report….and that will be the next key inflation data point to consider.  Expectations call for PPI final demand y/y to be 7.2% down from 8% and Ex food and energy of 5.9% down from 6.7% - those would be significant moves lower which would negate all the negativity we saw yesterday….because if the PPI falls that much – then they will spin the story to say –‘Look, we told you so!’.  And then expect stocks to rally. In any event – it is what it is…..stick to the plan.

Christmas eve – fish dish #2 - linguine and lobster sauce

Now if you do not want the clam sauce – try the lobster sauce. 

You will need: 2 live lobsters, garlic, crushed tomatoes, onions, basil, s&p. 
Start with the basic marinara - Sauté crushed garlic in olive oil on med heat - do not burn the garlic… now add 2 large slice Spanish onions (or Vidalia if you can get them) and sauté until soft - about 10 mins or so...

At this point add 3 cans of kitchen ready crushed tomatoes - NOT PUREE - if you can't get kitchen ready crushed - then buy the plum tomatoes in juice and run them thru the blender or food processor - leaving a bit chunky... Bring to a boil - season with s&p, and fresh basil - stir.  Once it boils - turn heat down to med low and prepare to add the lobsters.

First rule - Always use live lobsters. (Should be like 1 1/2 pounders each). Rinse under cold water – Once you rinse him/her... remove the rubber bands and put in sauce claws/face first...now he/she may flap its tail - but that is only for a second or two... Add second lobster.  Stir and make sure that the lobsters are submerged in the sauce and turn heat to simmer... allow to cook for about 30/45 mins. Now if you are making this the day before - remove from heat, let cool and then refrigerate. The next day - take out of fridge and let come up to room temperature and then slowly re-heat on simmer… You can just smell the goodness and feel the ocean waves hitting you in the face...

Bring a pot of salted water to a boil - add the linguine and cook for 8 / 10 mins or until aldente. Strain - always saving a mugful of pasta water - and return to pot. Add back about 1/4 of the water and stir to re-moisten... do not soak... capisce? Now add 3 ladles of sauce and toss... Serve immediately - making sure that you have grated Pecorino Romano cheese on the table for your guests.  If you like - you can remove the tail/claw meat - shred and add to sauce or you can just present it on a plate for your guests to enjoy...