Two PMI's – Two conflicting results, value down, growth up, Oil down, bonds up

•  Eco data suggests a slowdown – Is Bad news now Bad news for markets?

• 2 PMI’s both showing different results – How do you know which to listen to?

• Value or Growth – what do you do?

• Oil down, Gold Up, Bonds up, Yields down.

• Try the Roasted Pork Loin w/ Peaches and Honey.

The week started on a downbeat…. Eco data continues to be mixed, but they focused on the weaker parts to tell the story of a slowing economy in need of a rate cut….so you ask – then stocks should have rallied on that idea, no?  Lower rates, good for stocks?  Not this time…why, because this is when ‘bad news IS bad news’ vs. those times when ‘bad news IS good news’ for stocks – which has been the story for such a long time.  Recall that yesterday we were getting a handful of economic reports – the focus being the latest PMI (Purchasing Managers Index), the ISM Prices Paid, ISM New Orders and ISM Employment.

Well – here are the details – S&P US Manufacturing PMI came in at 51.3 – well above the estimate of 50.9 suggesting expansion (recall that 50 is the dividing line) – that’s a positive…..but the ISM Manufacturing PMI came in at 48.7 – well below the dividing line and well below the estimate of 49.5 – already weak. 

Ok – so we have two measures of PMI and both pointing in different directions…one says we’re expanding while the other one says – Nope – we’re contracting…so which one do you pay attention to?  Which one is telling us the truth?  Well, you have to understand the differences and the methodology they use!

S&P (a private global company) surveys a broad range of manufacturers across the US – including small and medium businesses – ISM (a professional association for purchasing managers) primarily surveys larger US manufacturers – likely skewing the results towards bigger companies… S&P uses a methodology that allows for direct comparisons to other countries while the ISM is tailored to reflect the US specifically…. S&P uses 5 major components and weights them according to their contribution while the ISM uses 5 components but weights them equally …. S&P has an international orientation while the ISM focuses on the US only.

Then we got ISM Prices Paid and that also showed a decline – which is a good thing…declining prices means inflation is subsiding…. just another reason to cut rates.   And then there was ISM New Orders and this reflects - NEW ORDERS – it is a key indicator of future production and economic health – so a declining number here suggests trouble ahead….New orders were expected to come in at 49.4, but came in at 45.4 – again well below the 50 (neutral line) and  well below the expectation….

And so now you know why the markets (algos’) paid attention to the weaker (ISM) results…. first it is US focused and second because it supports their narrative of a slowing US economy that is in need of ‘help’ -think rate cuts.  The slowing economy is caused by a restrictive FED and high interest rates.

The Dow Industrials gave up 115 pts (after being down more than 400), the S&P gained 6 pts, the Nasdaq gained 94 pts, the Russell which was up 25 pts in the pre-mkts prior to the data releases ended the day down 10 pts, the  Dow Transports lost 163 pts while the Equal Weighted S&P gave up 35 pts.

Bonds – once again rallied on this news…. The TLT was up 1.3%, the TLH up 0.8% while the AGG was up 0.3%.  The 2 yr. yields fell to 4.79%, the 10 yr. fell to 4.37% - recall the 2 yr. was rising 5% two weeks ago while the 10 yr. was kissing 4.71%.

The weaker ISM report most likely starting to make the computers (the algo’s) nervous…. many street strategists suggesting that weaker prices is a bad thing – that it is just another example of a weakening economy…remember – the algo’s react to how they are programmed, they react to mathematical models- unable to decipher the fine print – and you could argue that there is some biases by the people who program them, causing those – sometimes – irrational reactions in the markets…. when we see them, all run for the door at the same time, only to run right back in days later.

Which is why you need the plan…and you need to understand that long term investing is a game of patience and opportunity…. If you own a portfolio of large mega cap names, titans in the industries they represent with an appropriate risk score, then you would be less panicked vs. owning a portfolio of smaller, lesser capitalized names that put you further out on the risk scale, creating more volatility in your returns and causing you to not be able to sleep at night. The constant ‘in and out’ destroying your long-term performance – remember – your long-term portfolio is just that – long term.  

Now tech which underperformed on Friday did gain on Monday –up 0.25% (+9.5% ytd) – but it was Healthcare – XLV that was the day’s winner – up 0.7% (+6.1% ytd), followed by communications – XLC + 0.4% (15% ytd).  The other 8 S&P sectors were in retreat – with Energy down 2.6% (+8.25% ytd) - based on the latest OPEC+ news, followed by Industrials – XLI – 1.2% (+7% ytd) and Utilities – XLU – 1.1% (+13.5% ytd), Financials – XLF – 0.6% (+10% ytd), Consumer Staples and Consumer Discretionary down one half of 1/10th of a % (+7.5% and -1.6% ytd respectively).

The Value trade – SPYV which was a beneficiary on Friday came under pressure on Monday (it is up 5.6% ytd)…Again, that makes zero sense to me – the value sector is a place you would WANT to be if you own stocks and are concerned about an economic slowdown – Value stocks typically are defined by low P/E ratios, high dividend yields and solid fundamentals, stable earnings, lower volatility, defensive sectors and attractive valuations…(thus VALUE).  This vs. the Growth trade – SPYG – that was up 0.7%  (15.5% ytd) -  owning Growth stocks can be a challenge if you believe that the economy is slowing…Earnings are volatile, P/E’s are high, access to capital becomes more difficult and consumer and business spending goes into ‘austerity’ mode.  

So, if they are saying that the eco data suggests a weakening economy – we should have seen the growth trade be weaker…but also remember – the growth trade is really all about AI and the newest Industrial (technological) revolution…..which is still well in its infancy…so this time, it just might be different – which speaks again to having a well-diversified portfolio – and that includes tech….You just need to decide just how much exposure you want…. You have to do you, you have to decide what your risk tolerance is, what your time horizon, what your obligations are, what your current state of employment is or is not. Do you have kids?  Grandchildren, who are you looking to provide for and does that change your time frame and perspective? Are you leaving your wealth to charity?  I mean I could go on, but you get it, right?

In any event – the focus is now squarely the labor market, Friday’s NFP report – which includes Unemployment, Avg hourly Earnings m/m & y/y along with changes in manufacturing employment (which means less to me since we are a SERVICES economy).  Next week we will get CPI and PPI reports, the June FOMC meeting (which begins on Tuesday) – which means as of today – we are in the ‘black out period’ – FOMC members are now prohibited from talking to the media (until next week) – but that does not mean that the Non-Members have to keep quiet….so look for anything from Neely Kashkari – since he seems to be the mouthpiece for when the others can’t speak. You can also watch for comments/stories from Nicky T (WSJ) or anyone from Goldman as they are ‘sources of leaks’ by the FED, when they want to float a balloon (or an idea) to see how the markets react. 

For now, no one expects a change in policy next week – rates to remain unchanged, but you can bet that many are expecting JJ to change the tone of his speech, become less hawkish and more dovish….Remember – there are some that are now back in the June rate cut camp – while others have moved from December back to September…while others are firmly planted in July…. I remain planted in 2025, I still don’t see a 2024 rate cut, inflation is still well above the 2% target…now if they change the target then all bets are off…. but if they don’t then I’m good.

The VIX – surged by 10% by lunchtime – as the Dow was plunging- only to end the day up 1.5% after the Dow settled down. This morning – the VIX is up 6.3% in pre-mkt trading – suggesting building fear…. futures turned from flat to lower…Dow futures are now down 200 pts, S&P’s down 28, Nasdaq down 100 and the Russell down 20.  Investors have had 24 hrs. to reconsider the data and the commentary continues to push concerns over the health of the US economy and slowing factory activity – slowest in 2 yrs. – today slowest is being used as a negative….when last week – slowest was used as a positive when describing the pace of inflation in the PCE report.  Funny how that works.

Oil – continues to be under pressure after OPEC+ said they would continue the production cuts for some of its members (Saudi and Russia) while possibly allowing increases for other members starting in October….and all this is doing is raising the ‘over supply’ concerns….no matter that demand is expected to grow thru 2025.

The US will release inventory results tomorrow and we will also find out just how much gasoline was consumed over the Memorial Day long weekend. WTI was down 3.9% yesterday and is down another 2% this morning leaving oil trading at $72.80/barrel – down $4 from Friday’s close.  $70 is now the target – representing the lows of December, January and February. Now if we break $70 – then we will hit $65 even faster and if we do that – then expect the Saudi’s to call for an ‘emergency meeting’ as they change the narrative to try and stop the bleed.

Gold shot up by $25 or 1.6%  - think safety trade (fear of a slowing economy) causing those algo’s that moved out of safety on Friday and into equities, out of equites and back into safety…..This morning – gold is off by $17 trading right back at the trendline as it struggles for direction.  Weaker data, suggesting a slower economy will see gold hold steady to higher.  I think we remain in the $2300/$2400 trading range.

Eco data today includes JOLTS job openings of 8.35 mil, Factory Orders – expected to be +0.6% - which doesn’t make sense according to yesterday’s weak results…although it would be down from last month’s +1.6%. Durable Goods of +0.7% and Cap Goods Orders and Shipped of +0.4% and +0.3%.... both in line with last month.

European stocks are weaker…. because that seems to be the story…. Spain down 1.5%, Italy down 1.3%, Germany down 1.2%, Euro Stoxx down 1.1%, Germany down 0.8% and the UK down 0.5%.  Now the ECB is expected to announce a rate cut on Thursday, but the higher-than-expected Eurozone inflation report last week – is now causing concerns that that may not happen. Germany is expected to release unemployment figures later this morning.

The S&P closed at 5283 – up 6 pts…. Yesterday I thought we were about to test the May 23rd high of 5340…. I was incorrect……but I wasn’t expecting the much weaker ISM report and then the resulting reaction.  The tone is now negative – thus the pressure on markets today. If you are putting money to work then let it come to you, no need to reach and take, let the sellers hit your bid….

Roast pork loin with peaches and honey

This is a simple dish and presents beautifully on a platter.

For this you need:  1 3lb boneless pork loin, canned peaches, honey, fresh lemon juice, brown sugar, s&p.

Preheat the oven to 400 degrees.

Season the loin with s&p – nothing more…massage the s&p into the loin and then place the loin in a baking dish – and place in the oven – uncovered and let it roast for 30 mins….

Now - in a pan – add the canned peaches with the juice, the juice of 2 fresh lemons, 2 tblsp of honey and ½ c of brown sugar.  Bring to a boil and then crush the peaches with the back of a spoon – cook for maybe 4 – 5 mins…then remove and let cool.

After 30 mins – add the peaches to the baking dish – pour the peaches over the whole loin.  Return to the oven and cook for 30 more mins…. You can turn the loin if you want to – when done – remove – slice to make sure it’s cooked and then let rest for 5 mins.  Slice and then place on a serving platter – spoon the peaches and juice over the top and serve with roasted cauliflower and a large mixed salad.