Market Briefing For Friday, June 17, 2022

Sculpture, Art, Breadline, Bronze, Depression, 1930

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Debates about a 'recession' are semantics at this point. We're in one, and have been so for some time. People feel it in their bones and wallets; even if some analysts pretend otherwise. It's not just building permits or mortgage rates of course; but it is hard to imagine that anyone looks at that and can still maintain optimism. It's also Quarterly Expiration now; so be alert to a forthcoming trading inflection.

Investors are facing a 'bust,' not just a constrained supply; in the consumer durables and similar sectors. The areas I've addressed such as travel (flying and cruising) isn't realistic spending; and is already on the wane (people often regret higher expenses they committed themselves to by buying tickets early). I've noted it a few times; and now the cruise ships (CCL, NCLH, RCL) and airlines (JBLU, DAL, AAL, UAL, LUV)are among the most hit . So are the auto and EV stocks; Tesla (TSLA) raising prices; Ford (F) saying they can't make money on EV at current prices; plus the biggest of big-techs get smashed too.
 

 

Energy is actually deflecting a 'real' view of the S&P; catching down with other areas declining for a year and a half or so (generals vs. troops). If Oil breaks a bit due to 'demand destruction' or even 'peace negotiations', it's debatable for now if any celebratory rally would be sustainable.

Companies are cutting estimates; the Fed hiking rates; the economy not quite so strong to withstand higher rates (such as Chairman Powell contended); as the Fed did remove wording in yesterday's statement saying 'the labor market should remain strong'. That means he's endorsing layoffs or firing it seems.

On the above: in-other-words, the individual stock PE can be very low when earnings have evaporated in a recession; so you get low share price and high PE concurrently. It does not provide logical help in analyzing a stock's value at the same time it would if price is down as a company maintains earnings too.)

In-sum: the Fed at least focuses on being data-dependent; slight flexibility but clearly they are hell-bent to break inflation no matter what it takes. The Fed's overly optimistic economic prognosis given what they're doing is questionable and pretty much rules-out a soft landing; because they actually believe in that.

 

By the time earnings estimates come down more; and the Fed realizes they'd gone too far the other way, well the S&P could even be below 3000. Growth, by the way, will be returning to the USA over the ensuing years; partially from re-sourcing (or diversifying) a lot that was made in China. And the younger or millenial crowd (the Robinhooders we tried to correlate with excess sentiment last year or even before).. that crowd probably is very burned in cryptos like Bitcoin (BITCOMP), so isn't likely to return to trading action until or unless prices are very high eventually (nod to inverse logic: optimism prevails in strength; pessimism in weakness).

Huge selling in mega-caps has been our warning for months; and was seen in big time liquidations on Thursday; exacerbated by the Swiss Bank selling from roughly 3-4 am ET U.S. Hence why S&P futures reversed in the middle of the night. They never really regained any footing in regular NY trading.

 

Heads-up: part of the quasi-panic mood (aside downside evacuation) relates to this being a significant Quarterly Expiration. The notional open interest in Puts is possibly over $3 Trillion (!!); so as these expire .... perhaps you get to a resulting inflection point. Reactive into the weekend; then a rebound next Tuesday is one possibility; probably how it unfolds at least on a daily basis.

So even if Friday were a meltdown I'd be open-minded to the possibility; and I would consider this week's mega-cap acceleration part of that; besides what triggered the Swiss into pulling their bailout handle last night.

Besides the Swiss triggering another mega-cap avalanche, you had an ECB meeting trying to sort-out the fragmented European bond markets; primarily a very obvious spread between German and Italian yields (not surprising). Talk among leaders eased stress a bit; although there's no underlying resolution.

There was also a concluded meeting of Defense Ministers in Brussels; with at least some further calls not only to arm and support Ukraine (which all agreed on); but also to push for liberation of all occupied territory, including Crimea. It may be fanciful (given Russia is solidly cemented there now); but expresses a moral justification to throw-back the bully. All along we were concerned about how Ukraine would do in open warfare (rather than urban) and not so well. At the same time, 'just now' they've received enough artillery that they may be at near-parity with Putin's forces; so we'll see how that goes immediately ahead.
 

Not much has changed with regard to prospects or risks. S&P remains clearly anchored to the behavior of a couple of its main battleship stocks; like Apple (AAPL) or Microsoft (MSFT), and of course a handful more. None have really readjusted for a slower economic environment; and yes they still have variable vulnerability.

So far the market's decline primarily priced-in or discounted rate adjustments, by the Fed, and not the path of earnings. That path is bumpy at best (for now) which is why we've said we're already 'in' recession; not something pending. If the decline in stocks only reflects interest rates and hasn't allowed for actually lower business conditions; it suggests lower prices for the behemoth stocks.

Underpinning this is the reality (as we see it) that 'crushing demand' won't be a savior to the inflation challenge. Eventually you'll have to increase demand, not just lower prices by bludgeoning the economy into a slowdown; to enter a better investment environment. Or put differently; either a Fed 'pivot' or sense that the issues are resolving, will allow a market low; but we're not there yet.

I'm reminded that Monday is a holiday for which U.S. markets are closed. So you may have some jitters today as there's really no incentive for traders, or money managers, to be particularly enthused, barring some surprises.

This is an excerpt from Gene Inger's Daily Briefing, which typically includes one or two videos as well as more charts and analyses. You can subscribe for  more

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