ANGLES.

A Wall Street Journal report on Friday by Nick “The Fed Whisperer” Timiraos reported that, while the early November Fed meeting will still most likely result in another 0.75% increase in interest rates, it could well be the final one that showcases a hike of that magnitude and that committee members are now actively contemplating easing up in December and beyond.

Interestingly, on the same day, San Francisco Fed President Mary Daly warned of the risk of over-tightening, the first time we have heard that sentiment in a long while.

As a result, the futures market (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) implied the probability of a 0.75% hike in December to be at 50%, down from 75% just a day earlier, while the chances of a “only” a 0.50% rate rise in December increased to 47%, up from 24% in the same 24-hour period, suggesting it’s basically a tossup between the two outcomes.

This was one of number of small, incremental pieces of good news for markets that we witnessed last week that saw both the S&P 500 and NASDAQ rise about 5%.

Some 72% of the S&P 500 companies reporting Q3 earnings thus far have beaten Wall Street's expectations although it's important to note that these expectations are historically low. Most bank earnings were solid, notably Goldman Sachs (GS) but, as you can see in THE WEEK’S UPCOMING CALENDAR below, this forthcoming week is the big one when it comes to earnings and we will be in a much better position to judge how things look by this time next week.

I mentioned last weekend that the smart money had UK prime minister Liz (“I’m a fighter, not a quitter”) Truss gone by Christmas but, as it turned out, she didn’t even make it to Thursday lunchtime as her domestic approval rating dipped to the annual rate of UK inflation, not very far ahead of that of Vladimir Putin and she finally threw in the towel after a whole 44 days in charge of the fifth largest economy in the world. The markets initially reacted positively to her departure and the incineration of her crazy economic lab experiment and global bond yields pulled back and the rampaging dollar stalled a bit.

However, as the specter was raised late Friday of a possible return to chaos with disgraced ex-prime minister Boris Johnson poised to make an improbable comeback, markets began to show understandable renewed nervousness.

We shouldn’t expect the S&P 500 to recoup all the losses directly brought about by this British psychodrama because there are scars from the whole episode that will take time to heal.

It’s important to enjoy the good days and the appearance of some chink of light at the end of what has been a long, dark tunnel so I’m not trying to minimize the recent rebound, as it does seem more legitimate than any we’ve seen this year. But the outlook for stocks still remains very challenged until such time as we see that inflation is definitely declining.

It still remains a broadly uncomplicated market. The global economy has a big inflation problem. Recessions are better than entrenched inflation (neither are good but the former is better than the latter) so central banks everywhere will continue to raise interest rates to cool inflation to a tolerable target (not 2%, but something probably between 3%-4%).

Those rate hikes will inevitably cause recessions, which of themselves will help fix inflation. Once that is done, these same central banks will eventually start to cut interest rates to stimulate the economy and growth will resume, albeit with a higher level of inflation than we had back in 2019.

It’s a process we must endure and there have been speed-bumps that still persist in the form of external shocks; oil price volatility, Russia/Ukraine, Chinese COVID lockdowns, economic and political havoc in the UK and now increasingly the US midterm election circus (we are less than a month away), but inflation is by far the dominant core issue and things will not meaningfully or sustainably improve until we get definitive proof that inflation is receding.

For anyone with a multi-year time horizon, remember that the Federal Reserve is going to break inflation eventually (best piece of Wall Street advice out there: don’t fight the Fed) and then they will at some point cut interest rates and re-stimulate the economy. So this absolutely will end and it will create a 2000-2002-type opportunity for longer term investors.

Do not get shaken out by fear, hyperbole or know-nothing simpletons spouting crap on TikTok. Make sure you read this week’s ARTICLE OF THE WEEK below for actual sensible advice.

OTHER NEWS

2023 updates .. The IRS last week raised 401k and IRA contribution limits by the most in 25 years and I wrote an article on what you need to know. I also updated my article “Is The Backdoor Roth IRA Contribution Right For You?” for 2023 and my “Workplace Benefits Explained” post has also been updated for next year, great if you are changing jobs or are undergoing open enrollment.

“Certain” recession in the US? .. Economists at Bloomberg maintain a quantitative model to predict recession odds that incorporates 13 macroeconomic and financial factors. The latest run of the model last week put those odds at 100% in the next 12 months. In the previous release, the model assigned a mere 65% odds to a U.S. recession in the next twelve months. The new run also assigned 73% odds, up from 30%, to a recession within eleven months.

Other Wall Street forecasters have also increased their projected odds of a recession in recent months, though few have described it with the certainty implied by the Bloomberg model.

Ready for some really, really big numbers? .. New numbers from the Treasury last week showed the federal budget shortfall was chopped in half in the last fiscal year (which ended last month), falling to $1.38 trillion (that’s $1,380,000,000,000).

Federal spending was $6.3 trillion, down more than 8% from the previous year. That drop largely reflects the end of COVID-related government programs. Meanwhile, government revenues rose by $850 billion, to $4.9 trillion. That was due, in part, to higher individual income taxes on the back of a strong labor market and wage gains for workers.

The road ahead looks more troubling, however. For one, the economy is cooling down, and many economists expect the unemployment rate to rise in the year ahead. So while the labor market caught a tailwind in the last fiscal year, headwinds may appear in 2023.

But possibly most damaging of all is that interest rates are rising, putting upward pressure on the cost of federal interest payments. Earlier this year, the Congressional Budget Office estimated that interest costs alone could top $1 trillion by 2032 — or 3.3% of GDP, more than double its share this year and rates have only moved up even faster since then.

UNDER THE HOOD:

There has finally been a noticeable reduction in the intensity of selling activity and downside momentum in the short term, but change is slow in the outlook of the ongoing primary downtrend, which still needs to be greatly respected.

Clustered days of very heavy buying and very heavy selling are more likely to reflect simply high volatility than a klaxon announcing the end of the bear market. Much more evidence is required to issue anything close to a technical all-clear signal.

It is important to recognize that it is the weight of the evidence, not just a one or two factors, that is paramount. Nonetheless, there are some technical bright spots such as the recent outperformance of smaller and mid-size stocks, which were the most beaten down and are therefore expected to turn first in the case of a market bottom. Also outperforming last week were less defensive sectors like Technology, Energy and Consumer Cyclical.

We do need to remember that it’s a post-COVID world that is still trying to get back into normal rhythms and some of these indicators that worked so well in the past could have different and less predictable timelines than they used to.

Anglia Advisors clients are welcome to…

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The market spent the first three days of last week just shifting about in a bumpy, lethargic, generally downward-trending trading pattern, simply waiting it out for the main event in the form of the Consumer Price Index (CPI) inflation number release due on Thursday morning. There was certainly no sign that the buyers from the week before were looking to capitalize on their brief success and take any kind of control.

Even when the starter course arrived on Wednesday in the form of a slightly hotter-than-expected measure of wholesale inflation, the Producer Price Index (PPI), there was little reaction in advance of CPI, the main course. PPI climbed 0.4% in September after a 0.2% decline in August. Compared to a year earlier, the index was up 8.5%, down from 8.7% the previous month as energy prices eased. The Core number, which excludes food, energy and trade services, rose 0.4% month-on-month, but this was largely in line with expectations.

The reaction to the CPI release when it did come out the next day before the market opened was quite extraordinary. And ultimately baffling. Month-to month inflation from August to September rose by 0.4%, twice as quickly as the expected 0.2% pace. Compared to a year ago, prices were up 8.2%. Last month, that figure was 8.3%. Core inflation, which strips out food and energy costs, rose 0.6% in a month in September, unchanged from the August increase. This Core measure is now up 6.6% from a year ago and that’s the highest since Joan Jett shared with us all that she loved rock ‘n roll back in 1982.

The Fed is desperately trying to get inflation under control, but you wouldn’t know it from looking at those numbers. While energy prices are falling hard, inflation in services, shelter and transportation is still running seriously hot and even the notoriously free-spending American consumer is going to be facing some very hard choices as we head into the winter and holiday season.

Sometimes the stock and bond markets just do exactly what you expect them to. This was the case when the opening bell rang on the stock exchange an hour after the release of the CPI data. Interest rates skyrocketed, with the 10 year Treasury soaring above 4.07% at one point, territory not seen since 2008. Stocks swiftly crumbled to new 2022 lows again and well beyond. Within a couple of minutes of the open, the S&P 500 had dived over 2.5% and the NASDAQ was down by more than 3%. Things looked downright apocalyptic.

And then the strangest thing happened. As if by magic, everything suddenly turned around for no apparent reason. By 11:15am, all the day’s losses had been extinguished and things just carried on higher and higher, with both indexes ending the day well over 2% up from Wednesday’s close having round-tripped 5% intra-day. The last time the stock market bounced back that far from an intra-day decline of that size was in August 2011.

Finding a sensible reason for the abrupt turnaround, however, proved surprisingly tricky. All I could find were some rather unconvincing explanations like:

* “Things have been miserable for while and we were due for a bounce”. If the indexes had finished lower on Thursday, they would have logged their longest losing streak since February 2020.

* “Rent inflation may not be as bad as the CPI report showed”. Rents are factored into CPI on a lagging basis, meaning that the trend for shelter inflation might not actually be as awful as it appeared in the CPI report, since rent costs appear, anecdotally at least, to be moderating in real time.

* “Inflation remained high, but no one was expecting it to be low”. If inflation causes the Fed to tighten monetary policy too much, it would eventually correct course by loosening monetary policy again. That would, in theory, be good news for stocks (this one I found to be particularly absurd).

* “A technical bounce on the charts”. The initial price falls first thing in the morning hit some ancient trend-line drawn on some chart going back years and the market has a long memory.

Those all seem like poking around to find pennies in a fresh pile of cow dung to me, retro-fitting some tiny silver lining to a very large cloud. I could not find a single compelling reason given for the exceptional price spike and, believe me, I looked.

And so, while the champagne corks were popping on the New York Stock Exchange and giddy talk abounded that we had finally found “The Bottom”, a good number of us were just scratching our heads asking “WTF did we just see? And why?”

It took just 24 hours for this latest false start to be exposed as sham built on nothing. By the end of yet another ugly Friday, both the S&P 500 and the NASDAQ had had yet another losing week.

Beyond the CPI number, other factors also weighed on stocks last week. A number of Chinese cities moved to reimpose COVID lockdowns, but the main external culprit was across the pond.

Renewed turmoil in the UK government bond and currency market reached a crescendo on Friday after the Bank of England (BOE) refused to extend its program of stabilization through market intervention and British finance minister Kwarteng was summoned home early from Washington DC where he was meeting with his counterparts from around the world, only to be fired by a text from Prime Minister Liz Truss as soon as his plane landed, triggering a full blown political crisis to add to the financial chaos.

The global financial markets, the United Nations, the International Monetary Fund (IMF) (see EXPLAINER: FINANCIAL TERM OF THE WEEK), most of Britain’s leading economists, the bulk of Truss’ own rebelling party and the vast majority of the UK electorate had all already expressed varying degrees of despair and/or anger at the bizarro-world plan of apparently unfunded massive tax cuts announced by Kwarteng that now apparently threatens the financial stability of the fifth largest economy in the world and a blood sacrifice was required. The smart money has Truss gone by Christmas.

OTHER NEWS

Ugly .. The IMF cut its global economic growth forecast for next year, warning that “the worst is yet to come.” It reduced its 2023 outlook from a gain of 2.9% in July to 2.7% now, with a 25% probability it could fall below 2.0%. That’s the weakest estimate since 2001, except during the global financial crisis and the outbreak of COVID. The World Bank endorsed these miserable prognoses.

Having said that, the ARTICLE OF THE WEEK below emphasizes how rubbish people and organizations are at making predictions.

Nice bump, but .. About 66 million Social Security recipients will see their benefits rise 8.7% starting in January, the highest inflation-linked cost-of-living adjustment since 1981, but the soaring cost of food, rent and other essentials means it won’t stretch that far for most of them.

The average $1,656 retirement benefit will increase by $144.10. The standard Medicare Part B monthly premium will decrease by $5.20 for 2023, which will further boost the checks of recipients who get their premiums automatically deducted from their Social Security checks.

However, more of retirees’ income could be subject to federal income taxes. The IRS will soon announce the 2023 standard deduction and the inflation-adjusted dollar thresholds for each income tax bracket, which could eat into many retirees’ take-home.

UNDER THE HOOD:

The Percent of Stocks 30% or More Below One Year Highs is an important measure of the most beaten-down stocks. It not only shifted higher when the June-August bear market rally died, but it has since returned to levels worse than it recorded at the June 16th low. In other words, such low prices did not spark committed buying in this supposedly “on sale” area of the market. This is suggestive of a lack of desire to even nibble on stocks, let alone enthusiastically backing up any trucks.

The same conclusion can be drawn from the fact that 80% of all stocks are now below their 10-week moving averages, a historically extremely low level which usually triggers swift dip-buying, but…

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Bad news is often good news for investors these days, who have to perform mental gymnastics as the economic picture comes into focus. Traditionally negative indicators of a weaker economy such as rising unemployment or falling consumer spending tend to result in lower inflation, which likely means the Fed can take its foot off the gas with monetary tightening, which should mean less pressure to raise interest rates, which means potentially higher stock valuations.

We saw some of great examples of this last week.

First, the August Job Openings and Labor Turnover Survey (JOLTS) came up surprisingly short. There were a seasonally adjusted 10.1 million job openings at the end of August, down from 11.2 million a month earlier. That's the biggest month-over-month decline in job openings since the depths of COVID in April 2020. Facing higher interest rates and signs of a slowing economy, employers appear to be cutting back on their hiring plans.

We also saw weak US manufacturing data (the lowest reading since May 2020) which offered new evidence that economic growth and demand are slowing which on the surface is not normally a plus for stock markets. But you can follow the breadcrumbs from this data to a Fed that is showing signs of success in bringing inflation back under control and therefore may be more inclined to ease off the pace of its aggressive interest-rate hikes in the months ahead.

Investors didn't panic at these clear signs that the economy may be heading for trouble, instead they celebrated. The market, which was overdue for a rebound rally anyhow, ripped higher for two full days on Monday and Tuesday.

Bets on the Fed Funds rate getting to an upper band of 5% by the end of 2023 fell away, according to the CME FedWatch Tool. By Tuesday, futures markets were pointing to the 4% to 4.25% range as being the the most likely target.

Screens were flooded with green by Tuesday’s close after these two rather economically disappointing data releases. Sentiment were also bolstered by the Reserve Bank of Australia (RBA), who surprised everyone when it raised the Australian version of the Fed Funds interest rate by a mere 0.25% when it had been widely expected to go with 0.50% or even 0.75%. Cue more hope that we may all be getting closer to peak interest rates for this hiking cycle.

Faced with this suddenly born-again idea that interest rates may not rise quite as fast or for as long as feared, the Fed got straight down to business pouring cold water on it, using its favorite weapon: dialed-up Fed-Speak. Chair Jerome Powell’s foot soldiers were blitzing the airwaves and roaring fire and brimstone from stages around the country, turning up the volume with the Fed’s highly-targeted messaging.

San Francisco Fed’s Mary Daly reiterated the Fed’s hawkish stance and the commitment to getting inflation down while strongly dismissing expectations of rate cuts in early to mid-2023. Atlanta Fed’s Raphael Bostic also dismissed the notion of rate cuts next year. Fed Governor Christopher Waller, a current voting member of the Federal Open Market Committee (FOMC) that sets the interest rates, was pretty explicit when he said that"inflation is far from the FOMC's goal and not likely to fall quickly" while his fellow Governor Lisa Cook described inflation as “stubbornly persistent”. Minneapolis Fed President Neel Kashkari said the Fed was “quite a ways away" from pausing its campaign of interest-rate increases.

This all burst the market’s bubble and on Wednesday and Thursday we saw far more muted enthusiasm ahead of Friday’s important jobs report as investors were reminded of the old adage that fighting the Fed is usually not a great idea. What we eventually saw on Friday was yet another classic example of the “good news is bad news” effect. More mental gymnastics required.

Pre-market, we learned that the US economy had added yet another 263k jobs in September, over 50k down from the August increase of 315k, but still a further expansion of job creation and greater than anticipated. More importantly, the unemployment rate rather unexpectedly fell from 3.7% to 3.5%, a half-century low. In normal times, all pretty positive news for the economy.

However, the market quickly decided to interpret this as a sign that the job market is still strong enough for the Fed to feel the need to continue its aggressive inflation-fighting efforts through interest rate hikes. Stock prices fell hard across the board as we experienced yet another brutal Friday (an increasingly common feature over the last couple of months).

It wasn’t enough, however, to wipe out Monday and Tuesday’s spectacular gains and the major indexes closed broadly higher for the week for the first time in what feels like ages, although well off their highs from Tuesday evening.

The script for how this market misery ends is no mystery: Inflation peaks and quickly recedes, the economy slows meaningfully but doesn’t collapse, geopolitics improves and the corporate earnings outlook stays relatively stable - all of which gets the Fed to peak hawkishness and a pivot away from hiking interest rates (maybe even towards cutting them again). That’s it. That’s the simple recipe to end this bear market and all market participants know it.

This coming week is extremely important for figuring out where we are with this narrative as we get the latest inflation numbers (both retail Consumer Price Index CPI and the wholesale Producer Price Index PPI) and the Q3 earnings season gets under way (see THIS WEEK’S UPCOMING CALENDAR below).

Longer term investors, however, should not deviate from the plan of continuing to systematically buy index funds or certain factor-based ETFs on a regular basis (weekly, bi-weekly, 2x per month, monthly - whatever), indeed stepping up the amount they buy right now, if cash flow allows. I have no idea exactly when, but one day relatively soon you will be very, very glad you did.

OTHER NEWS

K-Krypto trouble .. Finance guru Kim Kardashian will pay $1.25 million to settle regulatory charges that she failed to disclose the $250k she was paid to promote tokens of cryptocurrency Ethereum Max (EMAX) to investors on her Instagram account, the Securities and Exchange Commission - SEC (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) announced last week.

Her promotional post included a link to the EMAX website, which provided instructions for how to invest in EMAX, which fell 97% in value after her post first appeared. She agreed to give back the $250k and pay a $1 million penalty.

“This case is a reminder that, when celebrities or influencers endorse any investment opportunities, including crypto asset securities, it doesn’t mean those investment products are right for all investors,” SEC Chairman Gary Gensler said.

KK is the latest celebrity to face punishment for flouting investor-protection laws over getting mixed up with crypto bros and their promotional schemes. Boxing’s Floyd Mayweather, music industry’s Nick Carter (‘N Sync) and Soulja Boy and YouTuber Jake Paul all face similar or greater sanctions for allegedly fraudulent crypto involvement.

Please let it be over .. Like a bad smell, Elon Musk wafted back into our consciousness as he finally admitted defeat and agreed to buy Twitter (TWTR) by an October 28th deadline for the price to which he had originally committed, hopefully bringing this whole tiresome saga to an end.

Unsurprisingly, the news boosted the ailing TWTR stock price, but Tesla (TSLA) shareholders were not impressed that the company’s notoriously unfocused and erratic boss will now have a shiny new toy to play with and TSLA stock stumbled badly on the news. Out of the Jack Dorsey frying pan and into the Elon Musk fire. Gotta feel for those Twitter shareholders when it comes to who’s driving the train.

UNDER THE HOOD:

Regardless of the prevailing narrative, the main reason for the rally early last week was buyers’ recognition of an oversold condition and a ripe environment for BTFD activity with RSI read…

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KEEP AN EYE OUT FOR THE MY INAUGURAL QUARTERLY MARKET REVIEW WHICH I WILL BE SENDING TO ALL SUBSCRIBERS IN THE NEXT DAY OR TWO, TAKING A DEEP DIVE AND LOOKING BACK OVER AN EVENTFUL (TO PUT IT MILDLY!) Q3 2022.

Dearly beloved, we are gathered here today to mourn the demise and end of the summer stock market rally which finally expired last week, as the entire set of gains since the June 16th prior lows were completely erased and new lows were made for 2022. The rally may have only had a short life of two and a half months, but it impacted the lives of millions of people during its time here on earth. It turned many investors into believers that the year of pain was finally ending, the bottom had been reached and the skies were clearing. However, it got exposed as just another cruel “bull trap”, just like the one we experienced in late March.

When the autopsy results came in, the cause of the rally’s death was determined to be Jerome Powell’s Jackson Hole speech on August 26th, Michael Myers-style inflation that will not die and the collapse of the giddy self-delusion of many investors who had convinced themselves that what they wanted to happen was what was going to happen.

At the beginning of August, with the rally under way, I posted this on Instagram ..

.. which unfortunately proved very prescient. Also, if you have been a regular reader of the UNDER THE HOOD part of this report you will have learned that there were plenty of technical deficiencies with the rally that made many skeptical of its sustainability.

The S&P 500 lost about 9% for the month of September, and the NASDAQ plunged 10.5%. For the third quarter, the S&P 500 fell 5%, and the NASDAQ declined 4%. (I will shortly be sending a Q3 market review as part of a new quarterly service to subscribers)

The UK’s central bank, the Bank of England (BOE), announced on Wednesday it would take action completely contrary to UK Treasury policy and start massive buying of the country’s government bonds in an attempt to check the frenzy afflicting UK bond and currency markets brought about by what is quickly becoming known as “The Trussterf*ck”, a stimulus plan announced by the UK’s new Prime Minister Liz Truss and her finance minister (“Kami-”) Kwasi Kwarteng that basically stuck a middle finger up to financial markets and mainstream economic orthodoxy. For a few hours at least on Wednesday, it looked like it might have worked. Pressure on interest rates eased not only in the UK but around the world.

In the US, the interest rates for the benchmark 10-Year Treasury note, which had briefly climbed above 4% for the first time in more than a decade, quickly and dramatically slid back down on the back of the BOE announcement. By the end of the day, it was at 3.71%, that’s its steepest one-day drop since Lady Gaga drew our attention to her poker face in 2009. Bond yield moves like we saw in just one day last Wednesday in the US and the UK often take months to play out, but these aren't ordinary times.

Most stocks initially ripped higher as a result, although conspicuously absent from the sector leaderboard was Technology, which was held down partly by Apple (AAPL) after the company announced it is dropping plans to boost iPhone production due to disappointing demand.

The relief was temporary however (probably not helped by an absolute car crash of a media-round by PM Truss trying to justify her policy initiative) and by Thursday lunchtime, stock markets everywhere had given back all of Wednesday’s gains - and more - and interest rates were shooting higher again.

Markets found it easy to find more to get anxious about. The Federal Reserve's preferred inflation gauge came in hotter than expected. The Core Personal Consumption Expenditures price index (PCE), rose 0.6% in August, indicating that inflation is becoming more structural. The PCE doesn't have housing and rents as as a big component as the Consumer Price Index (CPI) does, so the fact that it is still rising is worrying and simply provides more cover for the Fed to continue to aggressively raise interest rates.

The situation in Ukraine deteriorated as Russia annexed eastern regions following sham “referenda”. The temperature was also raised by damage to the Nord Stream gas pipelines that NATO blamed on Russian sabotage and said that the attacks on European energy security could be met with a military response.

All of which raises the question; when does this all this s**t stop? I would say the answer is three-fold ..

* A meaningfully softer CPI number. The next release is on October 13th. If CPI drops enough, that will signal disinflation is quickly taking hold and we could easily see a 5% or more rally in the stock market because it’d call into question the Fed’s damaging “dot plot” and likely result in a decline in the all-important expected Terminal Rate (what the Fed Funds rate will be at the time the Fed stops raising rates).

* Better-than-expected earnings. Q3 earnings season begins in earnest on October 14th. Earnings concerns are pressuring stocks. If companies come out, like some did in Q2, and basically say business is holding up fine, that will go a long way to easing concerns about an imminent collapse in corporate earnings.

* More dovish Fed speak. The Fed does have a history of “blinking” on rate hikes when economic data seems to justify a pause at least. If the rhetoric of Fed presidents and Powell’s press conferences start to focus on acknowledging the slowing economy and the relative success of their “shock and awe” policy of raising interest rates at such an extraordinary pace, then expectations for that Terminal Rate may begin to drift lower and that could result in a big relief rally that could possibly prove to be sustainable.

One little-noticed silver lining to what has been happening is the interest you can actually earn these days. Most portfolios have at least some bond exposure, which has been a problem on a price basis in 2022 as interest rates have rocketed. It is however worth reflecting on the fact that, one year ago, these were the approximate prevailing interest rates in various parts of the US fixed income market:

* Short term government bonds: 0.3%

* Corporate bonds: 2.3%

* High Yield Savings Accounts: 0.30%

* High yield bonds: 4.4%

Here are those approximate yields today:

* Short term government bonds: 4.4%

* Corporate bonds: 5.6%

* High Yield Savings Accounts: 2.30%

* High yield bonds: 8.0%

Keep your chin up and make absolutely sure you read the ARTICLE OF THE WEEK below for more about why this is actually a much better environment for regular ongoing investors than the one we were in this time last year when it seemed that we were seeing new market highs almost every other day.

OTHER NEWS (REAL ESTATE EDITION):

Buyers and sellers alike seem to be souring on the real estate environment .. Government data on new-home sales in August released last week came in surprisingly high at 685k, crushing the 495k expectation. However, it’s still way down from the peak rates of more than a million new home sales in summer 2020 and 800k in summer 2021.

On the affordability side, prices are still soaring but at a rapidly diminishing rate. Data released last week showed July’s average prices nationally up 15.8% from a year earlier. But that was well down from June’s 18.1% annual gain. Indeed, that month-on-month fall in the rate was the largest deceleration in the history of the index.

Anecdotal evidence abounds of listing agents sitting around twiddling their thumbs at what is normally a very busy time when traditionally lots of sellers throw properties on the market ahead of the winter slowdown. People are just sitting on their already-refinanced 2.8% mortgages and have little interest in replacing them with 6.8% ones by selling and re-buying.

Buyers are pulling the brake too. Even leaving aside for a moment the sky-high prices still being asked by sellers who are still mentally anchored to 2021 and the doubling of mortgage rates in a matter of months that is crippling …

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For years, corporate America and stock market investors could rely on the Federal Reserve to have their back. Ridiculously low borrowing costs turbo-charged stock prices - especially those of profitless (and sometimes mindless) tech companies. The Fed’s interests were aligned with those of the likes of Apple, Tesla and Microsoft but also with those of regular people pouring money in their 401k every two weeks. The Fed’s extended purchases of mortgage bonds drove up home prices, delighting homeowners.

Everyone was a winner. Well, everyone except would-be first time home buyers who watched prices soar out of their reach and savers and those living on fixed income investments for whom income dried to up pretty much zero.

A whole generation of stock market participants learned to reduce their investment time horizon from decades to hours. Others learned to sink money into all sorts of nonsense and some even made a quick buck out of it for a while. This was all brought about by the orgy of easy money that the Fed created.

But Lucy has now pulled the football. The stock market’s ex-sugar-daddy has deleted and blocked its phone number. The Fed’s job has never been to prop up the stock market, it just so happened that, for a good while there, the interests of the two were joined at the hip. But not any more. The cavalry ain’t coming this time.

Markets were due for a relief bounce following the steep declines of the past couple of weeks, and that started happening on Monday as there were some light positives from corporate earnings and guidance (Ralph Lauren, RL), while old school BTFD’ers and short-covering helped all the broad indexes rally coming into Fed Decision Day.

However the announcement, when it arrived on Wednesday afternoon, of the 0.75% increase in the Fed Funds rate and particularly the tone of Fed Chair Jerome Powell’s subsequent press conference, confirmed that the Fed continues to be wedded to an extremely hawkish stance and it was reiterated yet again (just in case there’s anyone left for whom this hasn’t sunk in yet) that, even if we have indeed already seen peak inflation (far from certain) and the Consumer Price Index (CPI) readings do start to trend lower from here, that is not even close to what the Fed needs to see in order to change its monetary policy. They will require multiple months of consistently falling inflation and their 2% target CPI rate appearing realistic before they will ease up on their current stance.

Most of us heard nothing really new or surprising here, but some people need to be told things over and over before they finally absorb it - especially when what they are being told directly conflicts with what they yearn for (ie., an end to all this bearish, risk-off environment and a return to a nice, easy steadily rising stock market).

Fed officials did out-hawk us all, however, with their frankly quite astoundingly front-loaded expectations of what comes next in their Summary of Economic Projections (the so-called Dot Plot). The median forecast within the Fed is for the Fed Funds rate to rise to 4.4% by the end of this year, then up to 4.6% early in 2023 with some members of the committee thinking quite a bit higher. As recently as June, those median numbers had been respectively 3.8% and 3.4%.

If accurate, these latest projections would mean a total of still another one and a half percentage points of rate increases from here. That puts a fourth-straight 0.75% hike very much on the table for the next meeting in November (just six days before the US midterm elections) and then maybe even extending the streak to five in the one after that in December.

The market’s expectation for the Terminal Rate (the Fed Funds rate at the time the Fed stops raising rates) is now about 4.62% and rising.

After initially meandering higher following the announcement (perhaps based upon an element of relief that the hike was not a full percentage point), markets turned sour and spent the last part of Wednesday falling hard.

The scenario of a no-recession outcome to what we are seeing is becoming less and less likely and the growling bears immediately turned their eyes hungrily on the 2022 S&P 500 lows of June 16th (SPX 3,666) as their next destination. By the end of yet another brutal Friday session to close the week, we were almost there (SPX 3,693).

Investors will now turn their attention to the Q3 earnings season next month (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) and it could be tough for stocks. A bleak warning last week from Ford Motor (F) about its upcoming earnings built on the previous week's dismal commentary from FedEx (FDX).

The major indexes have still not yet priced in a material economic slowdown in the US and/or a really bad Q3 earnings season. If these both come to pass in a substantial way, the stock market could easily sink a lot further and still not be at a compelling value. Remember, however, that neither scenario is a given and it could be that both are avoided, but these are the factors that need to be top of mind for investors in the coming weeks. Keep an eye on them (or let me do it for you and just read/listen to my report each week).

To end on a slightly more positive note, while the last few weeks have been undoubtedly painful, much of the baseless, naive hopes of a quick resolution to all of the economy’s issues and imminent falling interest rates have now been been tossed into the garbage and we may possibly be back to having a stock market that is more sensibly and accurately priced.

OTHER NEWS:

The newest emerging market? .. The United Kingdom is now essentially being treated by financial markets (and ex-Treasury Secretary Larry Summers) as an emerging market, in the same category as Vietnam, the Philippines, South Africa or Chile, which are viewed as not having the same degree of reliable, disciplined institutions setting economic policy as more developed economies such as those in North America, most of Western Europe/Scandinavia and Australasia.

This comes after new UK prime minister Liz Truss and her new finance minister Kwasi Kwarteng introduced a mind-bending package of tax cuts, unfunded state aid and colossal increased borrowing. They claim it is intended to stimulate growth, but it clearly risks turbo-charging already out-of-control inflation and increasing the odds of a very nasty and prolonged recession. It’s a massive gamble of the part of the new government that is likely only two years out from a general election. Even the independent central bank, the Bank of England appeared shocked.

Financial markets hated the plan, viewing it as a reckless, vote-seeking set of gimmicks that put the country in economic peril. Their punishment was swift and severe, the UK currency immediately plunged to its lowest level against the US Dollar since 1985 and the benchmark five-year interest rate exploded upwards for its largest one-day increase in its history.

The problem for US investors is that the UK constitutes a relatively large component holding in exchange-traded funds and mutual funds focused on so-called developed international markets. These are very common among, for example, many 401k fund allocations.

Global phenomenon .. It’s not just the US that is busy raising rates. Just last week alone, the central banks of the UK, Switzerland, Sweden, Norway, South Africa and Indonesia all did the same. Japan did not raise rates but did announce central bank intervention in foreign exchange markets to support the yen. The last time that happened, Will Smith was getting jiggy with it in 1998.

Fewer jobs at the big guys .. Meta/Facebook is reportedly cutting staff in a push to reduce costs. the company is looking to cut costs by at least 10% while rival Google is requiring some existing employees to apply for new jobs. Walmart plans to hire fewer workers than last year as it prepares for the holiday season amid a slowing economy. Walmart plans to add 40,000 workers in seasonal and full-time roles compar…

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Monday was mostly just about positioning going into the next day’s inflation print (although the surprisingly effective counter-attack by Ukrainian forces also came into play somewhat). A narrative slowly built throughout the day that maybe future inflation might not be as elevated or persistent as was previously feared and that we might expect to see an appetizing Consumer Price Index (CPI) number, boosted by the fact that three-years-ahead inflationary expectations dropped to 2.8%, the lowest since early 2021, in advance of Tuesday’s release of the latest data.

And then BOOM! The CPI announcement came out and it proved to be a massive blow to hopes of 1) imminent lower inflation, and 2) reducing the pressure on the Fed to keep hiking interest rates.

Overall consumer prices returned to their habit of moving higher again month-to-month rising 0.1% in August, after dropping to a zero increase in July and are up 8.3% over the past year. That compares to the 8.5% year-over-year figure reported in July but was higher than the expected 8.1% increase.

Food prices increased 11.4% from a year ago, in the largest twelve-month increase since Rod Stewart asked us to let him know if we liked his body and thought he was sexy in 1979. However, the report noted the food price increase was largely offset by a 10.6% decline in gas prices. The big problem was that Core inflation, which strips out those volatile food and energy prices, rose 0.6% last month, double July's 0.3% pace. Compared to a year ago, August Core inflation is higher by a staggering 6.3% compared to 5.9% in July. The high Core reading was particularly disturbing as it indicated a wide distribution of inflation throughout the economy and not just in food and energy.

The market showed no mercy in response. The recent rally was completely unwound and exposed as having been founded more on investor hopes than realistic assessments, which generally sums up a recent period of self-delusion by many market participants and pundits. No sector was spared in the ensuing bloodbath and we saw the worst single day for the stock market since the early weeks of the pandemic panic in 2020, with tech stocks whacked by far the hardest. Gold, oil and crypto got punched in the face as well. The only things that moved higher were market interest rates (up to very close to 4.0% in the benchmark 2 Year Treasury), the US Dollar and investor stress levels.

As the market licked its wounds on Wednesday, attention turned to CPI’s wholesale cousin, the Producer Price Index (PPI) which measures the inflation rate of raw materials.

When it came out, the PPI number slightly softened the blow of the CPI print, falling 0.1% in August. The headline annualized rate in August was 8.7%, almost a full percent lower than July’s rate and a little lower than analyst expectations. This was, of course, mostly driven by falling energy prices over the last month or two.

The market felt like it had dodged a bullet as the PPI failed to confirm the worst of the bad CPI news and stock prices stabilized for a while, helped by news that a possible US rail strike, that would have severely damaged domestic supply chains, had been averted and that the Chengdu lockdown was being eased in China.

But the broad decline resumed on Thursday and accelerated into Friday as investors seemed to decide they just weren’t comfortable owning risk assets in the current environment and the realization set in that virtually none of the conditions required to have the Fed back off its current hawkish stance have been met.

Things weren’t helped by FedEx (FDX), sometimes viewed as a barometer for the economy in general, who released an atrocious earnings report that cited huge and rapidly-worsening macro-economic deterioration as the reason and the CEO warned of an imminent “worldwide recession”.

The stock was punished, suffering its worst single day in history, plummeting more than 20% in a matter of hours. By the time the bell rang on Friday afternoon, mercifully bringing the week’s proceedings to a close, the S&P 500 had lost more than 4.0% since Monday morning, while the Nasdaq had tumbled 5.5%.

In last week’s report I highlighted the importance of the expectations for the Terminal Rate (the level at which the Fed stops raising rates) and, following the hot CPI number, the average market expectation has now shifted up from a midpoint of around 4.0% to above 4.4%, with the odds that the Terminal Rate will be above 4% now standing at 93%.

Any lingering hopes of less than a 0.75% increase in Fed Funds rate this week have now completely evaporated. Indeed, markets are even pricing in a non-trivial probability of a full percentage point increase on Wednesday.

The bottom line is this: stocks rallied off the early September lows on the hope of a quick decline in inflation and seeing as that idea is now in ruins, the S&P 500 is right back at those lows again. Looking forward to this week’s Fed interest rate decision, it’s the market expectations of the Terminal Rate that will be the key variable that likely will decide if the S&P 500 breaks down towards a test of the June 16th lows or embarks on yet another relief rally.

OTHER NEWS:

6% ceiling shattered .. The average rate on a 30-year fixed mortgage (see EXPLAINER: FINANCIAL TERM OF THE WEEK) hit 6.02% last week, up from 5.89% the previous week and 2.86% a year ago, according to a survey of lenders by Freddie Mac. The last time rates were this high was in the heart of the financial crisis almost fourteen years ago, when the U.S. was in a deep recession. The jump is one of the most obvious and hard-hitting effects of the Fed’s relentless campaign to curb inflation by lifting the cost of borrowing for consumers and businesses, slowing what was a red-hot housing market not so long ago.

Elon vs. Twitter .. Beaten-down Twitter (TWTR) shareholders overwhelmingly voted to stay strong on Tuesday and hold Elon Musk’s feet to the fire to enforce his commitment to buy the company. The billionaire continues his wiggling gymnastics to try to back out of the deal he made supposedly based partly on questions about a lot of fake “bot” accounts (wow, who knew??) and supposedly partly on the testimony of former Twitter security chief Peiter “Mudge” Zatko whose testimony has been described by his former employer as being “riddled with provable inaccuracies”. TWTR stock was almost unique on Tuesday as it actually ended the day higher on news of the vote although, like almost everything else, it ended up down for the week as a whole.

UNDER THE HOOD:

In looking at the recent market rallies, I have previously emphasized in this report how the lopsided heavy retreat in Supply relative to the rather timid expansion in Demand is typical of market advances that find it hard to sustain themselves and extremely untypical of enduring rallies off the bottom. They are also susceptible to collapsing upon themselves as soon as things get tough.

And so it proved as buyers showed themselves to be fearful wimps as the disturbing inflation news broke and a monumental withdrawal of Demand took place. It didn’t even need a huge increase in Supply to push markets right back where they had come from but as the week went on, that Supply level grew stronger anyhow.

In a market so weighted towards the tech sector, the complete rout of those stocks last week rippled brutally throughout the entire universe of US stocks as a whole.

Committed buyers need to pick themselves up, dust themselves down and start answering the call in a major way if this downtrend is going to be reversed. Longer term indicators need to stay above their levels from September 6th because if they don’t, then the likelihood that stock prices break down through the June 16th lows is magnified many times over.

Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.

THIS WEEK’S UPCOMING CALENDAR ..

All eyes will be on the Federal Reserve next week, the Federal Open Market Commi…

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A holiday-shortened week began uneventfully with little of interest coming over the newswires and markets simply drifted along the path of least resistance, which is currently downwards.

Things soon began to pick up steam to the downside though, as the Chinese city of Chengdu extended COVID lockdowns for the majority of its 21 million residents due to rising infection numbers, dimming the demand outlook for oil and sending the price of crude oil and stocks lower. Then a new report from the Institute for Supply Management showed unexpected US growth in the services sector from a month ago. New orders and business activity actually accelerated from a month previous. Hardly evidence of an economic slowdown. Chalk up yet another justification for the Fed’s program of aggressive interest rate rises and the market’s sinking feeling grew stronger.

Fed chair Jerome Powell then notably failed to walk back his previously extremely hawkish comments in a speech he gave on Thursday where he made it clear (yet again!) that the central bank is thoroughly committed to tackling inflation and staying aggressive until it falls back to its 2% target.

Powell's appearance followed the decision of the European Central Bank (ECB, see EXPLAINER: FINANCIAL TERM OF THE WEEK, below) to raise interest rates in the EuroZone by 0.75% on Thursday. The ECB's target rate is now above zero for the first time since Kelly Clarkson came out with the rather dubious assertion in 2012 that anything that doesn’t kill you somehow actually makes you stronger. The ECB’s rate hike (following a 0.50% increase as recently as July) was the biggest increase since Britney invited her baby to hit her one more time in the early days of Europe’s monetary union in 1999.

The bank is moving aggressively to combat record levels of inflation even as an energy crisis puts Europe on the brink of recession and the bank made it clear that rate rises would not stop there. The death of Queen Elizabeth II, while sad, had little effect on markets although trading activity may slow in the UK with an official period of mourning and likely upcoming additional national holidays for the funeral and Charles III’s coronation.

Nothing chair Powell said dampened the expectations of a 0.75% rise in interest rates at the next Fed meeting on September 21st, with markets pricing that probability at 84%. The size of the rate increase and its frequency over the coming weeks and months is The Journey.

It is, however, important to keep in mind that the more important variable here is not The Journey, but The Destination. This is the Terminal Rate when it comes to interest rates. That is to say; at what level and when the Fed will stop hiking rates.

The Journey by which the Fed reaches The Destination is less important than exactly where that final destination ends up being. Market expectation for the Terminal Rate is currently a little over 4.0% by March 2023 and keeping an eye on how this number moves up or down is probably more important than analyzing the s**t out of a single rise of half or three-quarters of a percent in September, which is simply a milestone on the way to The Destination.

After taking an initial dive at Powell’s comments, the market then decided that, actually, there was nothing new here and prices stabilized quickly. An over-sold bounce was always going to happen after a miserable three weeks and investors were just looking for a catalyst.

Fed-Speak, for once, was a bit more more dovish than hawkish and it was this that provided the needed spark for that inevitable oversold bounce. In a speech, deputy chair Lael Brainard seemed to make a deliberate point of noting the risks involved in raising rates too quickly as well as too slowly and highlighted recent progress indicating that the rising rate of inflation may have topped.

Indeed, if Powell hadn’t explicitly ruled it out a week earlier, her speech would have given hope to those who used to believe in a Fed pivot back to lower rates sometime soon, but it was enough to trigger an over-sold bounce that lasted right the way through to Friday’s close, leaving markets meaningfully higher for the shorter week (see LAST WEEK BY THE NUMBERS, below), essentially erasing the previous week’s steep losses.

OTHER NEWS:

Natural gas trouble (part 2) .. Natural gas prices surged 36% in Europe in a day after Russia announced it was halting the flow through its Nordstream gas pipeline. European natural gas prices are now up over 400% from a year ago.

Russia said its main gas supply pipelines would remain closed indefinitely, fueling fears of gas rationing in the European Union this winter. Russia said the shutdown was due to “technical reasons,” but European officials accused Russia of weaponizing energy prices in retaliation for sanctions imposed following its invasion of Ukraine. The Nordstream pipeline has typically supplied Europe with about a third of the gas imported to continental Europe from Russia.

Travel boom .. In another sign of the airline industry's recovery from its COVID-related slump, the number of Labor Day weekend air travelers in the U.S. surpassed pre-pandemic levels for the first time. The Transportation Safety Administration (TSA) reported that it had screened 8.76 million passengers between Friday September 2nd and Monday September 5th. That was 102% of the volume recorded during the 2019 holiday. Friday was the busiest travel day, with 2.48 million people screened.

Despite the increased number of fliers, just 0.6% of the more than 90,000 flights scheduled on U.S. airlines were canceled and only 16% were delayed. 

Turbulence at BBBY .. Gustavo Arnal, the CFO of Bed Bath & Beyond (BBBY) who leapt to his death from a Manhattan skyscraper (ruled a suicide by the New York City medical examiner), had faced a “pump and dump” allegation less than two weeks earlier, it was reported last week.

Arnal’s death marks the latest chapter in a turbulent period for the troubled home goods retailer and meme stock phenomenon. BBBY stock skyrocketed earlier this year based on the usual manic meme stock phenomena but was brought crashing down to earth last month after activist investor and GameStop (GME) chairman Ryan Cohen disclosed he was selling a large stake in the company. A lawsuit filed in the United States District Court for the District of Columbia alleges that both Arnal and Cohen were engaged in a pump and dump scheme involving BBBY stock.

Frozen Apple .. Never mind better battery life or a fancier camera, the biggest innovation from the latest product launch from Apple (AAPL) was a price freeze. It says a lot about the state of the economy that the consumer electronics company famous for its talent at extracting cash from its loyal customers is choosing not to raise prices, holding the cost of its iPhone 14 range at the same level as its predecessor. Holding prices steady while inflation ramps up its costs looks like a valuable goodwill gesture, but it actually removes one reason for not upgrading handsets as the company seeks to protect its $200 billion franchise.

UNDER THE HOOD:

Last Thursday’s reflex rally sprung from deeply over-sold short term conditions, pushed Buying Power into a dominant position over Selling Pressure (see below) and provided welcome relief from the relentless selling since the August 16th high. The rally was, however, entirely predictable as a reaction to the levels to which prices had so quickly fallen.

Unfortunately, a return to below-average trading volumes on both of last week’s up-days left the conviction of the buyers in question. Smaller defensive sectors are leading the bounce (I’m looking at you, Utilities and Materials) and Small Cap stocks are lagging, and all on low volume.

That is the exact opposite of what we would expect to see in a legitimate, sustainable risk-on uptrend. It is, however, exactly what you would expect to see in a rally driven mostly by opportunistic investors buying simply because overall prices had fallen so far…

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How quickly that half-full glass I talked about last week has emptied. A third consecutive week of stock market losses ended with a thousand point fall in the Dow Jones Industrial Average on Friday as Federal Reserve chair Jerome Powell, talking at the Fed’s annual jamboree in Jackson Hole, Wyoming, ferociously doubled down on the central bank’s commitment to raise interest rates as aggressively as is needed to bring current high inflation levels back down towards the target level of 2%. I’ll come back to this later.

The durable goods report for July was disappointing, which may have been a good thing since all economic data is now viewed through the lens of “What will it make the Fed do?” and it suggested a welcome slowing of demand which could throw a little cold water on inflation and thereby reduced risk of greater interest rate rises. It showed new orders for big ticket items were virtually unchanged last month. Economists had expected a 0.5% increase after June's 2.2% gain.

The same can be said of the release of US and European Purchasing Managers’ Indexes (a monthly survey of supply chain managers across all industries which measures the prevailing direction of economic trends in manufacturing). The results were disappointing relative to analyst expectations and indicate an economic slowdown, thereby potentially reducing the need for outsized interest rate hikes.

Evidence of this slowdown is locked in combat, however, with increasingly hawkish (i.e. more inclined to raise interest rates) Fed-speak as Fed presidents continue to weaponize their words, literally yelling at the stock market that it was being way too over-optimistic.

The idea that Powell’s speech would be a happy-clappy celebration of the recent apparent stalling of inflation and that he would begin to ease the rhetoric on interest rate hikes started to recede early in the week as the consensus began to shift to the (ultimately accurate) position that in fact the Fed would be striking a more hawkish tone on Friday to combat recent market exuberance and continuing resilient labor market conditions and stock prices began to tumble in anticipation.

Obviously, the Saudis weren’t particularly listening during Biden’s recent visit as their energy minister last week suggested OPEC+ nations may now cut production to keep prices high. The price of oil duly spiked, which is mostly bad news for stocks not in the energy sector.

Going into Friday’s speech, the futures market bet on the likelihood of a three-quarter point rate hike rather than a half point at the September 20th/21st meeting started shifting back to a probability of over 50%.

Which brings us back to Powell’s words on Friday which spooked investors so badly. The market’s gut feelings that a nasty Fed Friday surprise was brewing proved to be correct. J.P. was uncommonly succinct and direct, aiming to convey nothing but steely resolve in the central bank's efforts to bring down inflation. He suggested recent inflation results that show cooling prices were much too small a sample size to affect Fed policy yet.

His key words were; "While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."

He hit back at the bizarre Wall Street narrative that somehow built up recently that the Fed may start cutting rates again next year. He talked about a “sustained period” of low growth and higher interest rates and even specifically said that"the historical record cautions strongly against prematurely loosening policy [i.e. cutting interest rates]".

This flawed rate-cut story that Wall Street had concocted, based on absolutely nothing as far as I could see, is behind at least a part of the significant rally we have seen since mid-June. Now that’s off the table, it was inevitable that the market would have a tantrum on Friday as it tends to do whenever anyone takes one of its toys away.

As I have mentioned many times, the viability and continuation of the June-to-August rally depends on the feel-good vibes that have driven it actually being grounded in reality. Cracks are appearing in that whole narrative and markets are now taking back many of those gains, effectively pleading guilty to the Fed’s charges of recent over-optimism.

OTHER NEWS:

Student loan debt cancellation .. I sent out a special edition of Angles to all subscribers on Thursday immediately following the announcement with a summary of what we know so far.

Cute little money pits .. The Brookings Institute determined that an average married, middle-income couple with two children would spend $310,600 - an average of $18,271 per year (after tax obviously) to raise just their younger child born in 2015 through age 17. The estimate covers a range of expenses, including housing, food, clothing, healthcare and child care, and accounts for childhood milestones and activities, diapers, haircuts, sports equipment and dance lessons, among many other costs.

The calculation uses an earlier government estimate as a baseline, with adjustments for inflation trends. The total has increased by over $26k - or more than 9% - since the previous calculation in 2020. 

Like a bad movie? .. Shares of legendary meme-stock and Reddit crowd fave AMC Entertainment Holdings (AMC) plunged on Monday as a rival theater operator said it is considering bankruptcy, prompting CEO Adam Aron to issue an upbeat, “nothing to see here” statement. On August 16th, AMC stock reached almost $23. On Friday, it closed just above $9.

However, it should be noted that the apparent price crash coincided with the debut listing of AMC’s preferred shares (preferred ticker symbol APE) on the New York Stock Exchange, distributed to shareholders instead of a dividend - so in fact the value of a shareholder’s holding is the aggregate of AMC and APE, something mostly overlooked by financial headline writers heralding the AMC price fall as a total catastrophe without due consideration of APE.

Earlier, British-based Cineworld, the world’s second-largest theater chain and operator of Regal Cinemas in the US, was undergoing a genuine catastrophe. It confirmed that it will likely file for Chapter 11 bankruptcy protection (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) as it tries to restructure its gruesome-looking balance sheet.

Cineworld blamed a lack of blockbuster movies and residual effects of COVID-19 lockdowns on theater attendance for an explosion of debt, which it put at $8.9 billion at the end of 2021.

GDP saga part 2 .. The Commerce Department reported the revised second of three estimates of Gross Domestic Product (GDP) showing a 0.6% fall in Q2, down from the first estimate of 0.9% that caused such a flap at the end of last month.

Economists had expected the second estimate to show a decline of 0.8%. We now await the third revised estimate, which will determine what GDP number for Q2 2022 will actually go into the history books.

UNDER THE HOOD:

Short-term overbought readings began to take their toll, as stocks pulled back to digest their gains. Overbought conditions in and of themselves are not sell signals. They set the stage, but require some sort of spark to bring out pent-up selling.

The viability and extent of this spark is far more interesting than what caused the overbought conditions in the first place, which can be just the simple attainment of the 200-day moving average (200 DMA) by the major indexes (more on this below), extended valuations after a mostly uninterrupted period of gains or a troublesome word from the Federal Reserve (all of which have been in play for the last week or two). The reaction that set in on August 19th has seen a number of days of pretty intense selling, not least on Friday.

In May 2008, a market recovery stalled right at its 200 DMA. The S&P 500 then went on to fall another 53%…

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The market appears to have decided that the glass is half full, for the moment at least. Last week’s stock price declines, mostly concentrated on Friday, can essentially be put down to the seriously overbought conditions brought about by four straight weeks of gains and two months of solid progress. There wasn’t a whole lot else behind the price slump.

Yes, perhaps economic data out of both New York state and China disappointed to start the week and some late-week Fed-speak attempted to dampen recent exuberance generated by the growing view that the days of rate hikes of more than half a percent at a time may now over.

But the intense pessimism of the first half of 2022 now seems a distant memory already. War in Europe, runaway inflation, an inevitable collapse in corporate profits, a bumbling, behind-the-curve Federal Reserve forced to push the economy into recession; you don’t hear about all this nearly as much these days. A string of solid employment and, more recently, inflation data, much better-than-feared Q2 earnings and a tangible pullback in commodity prices are behind the shift.

The latest Bank of America Global Fund Manager Survey reported that sentiment remains bearish among investment professionals, but is easing for the first time in a good while.

Retail earnings kicked off the week with some good news as both Walmart (WMT) and Home Depot (HD) reported better-than-expected results for Q2. Shares of both retailers have been punished at times in 2022 as investors worried about inflation and a slowing economy. But these earnings provided a sigh of relief. Target (TGT) and Lowe’s (LOW) numbers weren’t as robust, but since investors are currently sporting rose-tinted spectacles, they were relatively forgiving.

U.S. consumers continued opening their wallets last month, shifting savings from falling gas prices to purchases of everyday goods as they continue to weather high inflation and a slowing economy. Overall retail sales were flat in July compared with the prior month’s revised 0.8% increase but the measure of spending that strips out gasoline and auto sales rose 0.7% last month, showing shoppers maintained the ability to spend with much of the spending moving online.

Minutes from last month’s Fed meeting released last week showed the members agreed that inflation was still too high and decided to increase the Fed’s key lending rate by 0.75% to a range of 2.25% to 2.50%. Officials see the fight against inflation as far from over. Recent declines in oil and other commodity prices can be largely dismissed, officials said, because they could quickly rebound just as easily, while gains in stickier categories like rents are expected to be ongoing.

However, the participants indicated that as monetary policy tightened further, “it likely would become appropriate at some point to slow the pace of policy rate increases” while the Fed analyzed the effects on economic activity and inflation. In other words, wait and see.

Frankly, I don’t see any policy shift here or indeed anything new at all and I was a bit puzzled as to why the market reacted so favorably to the release as if it represented some kind of new set of positive information or a sign of movement in a favorable new direction. A steep late-week fall in stocks suggested that maybe some kind of reassessment of this initial impression was going on.

The year-end Fed Funds interest rate (the “terminal rate”) is still expected to be between 3.00%-3.50%. This expectation has not changed for a good while now. Regarding September’s hike in rates, it’s now considered more likely to be half a percent although three-quarters is still on the table.

Put simply however; in order for the Fed to declare the rate hike cycle is ending (the holy grail of peak Fed hawkishness), it’s got to be very confident that:

* the labor market will return to a better state of balance between job vacancies and the number of unemployed Americans (not happening yet).

* that inflation will gradually be on course to return to the 2% target (not happening yet).

* that future inflation expectations will remain well anchored at least near 2% (not happening yet).

We have weeks for these pieces to fall into place, but the recent pace of progress cannot afford to show any signs of slowing down. Otherwise that half-full glass might very quickly start to look a lot emptier.

OTHER NEWS:

Housing grab-bag .. Housing appears to be transitioning from a tailwind to a headwind for the US economy and could well actually subtract from real GDP growth over the next year. Higher mortgage rates and soaring property prices means that, even as they spend more at Home Depot and Walmart, Americans are no longer spending so lavishly on buying new homes. And that's causing home builders to make adjustments. 

New home construction fell more than expected last month as demand slowed substantially. Housing starts declined from June to the fewest since February 2021. Starts for both single-family homes and multi family units dipped 10%. Every region in the country had a drop in starts, except the Northeast. Building Permits also were down, sliding 1.3% to a 10-month low. The National Association of Home Builders (NAHB) said confidence among its members was the lowest since May 2020.

Sales of previously-owned existing homes slid 5.9% in July from the prior month to a seasonally adjusted annual rate of 4.81 million, the weakest rate since November 2015, not counting the pandemic-related drop in 2020, the National Association of Realtors said Thursday. July sales fell 20.2% from a year earlier.

This was also the sixth consecutive month of existing home sales declines. The last time that happened, Miley’s wrecking ball was swinging through the Billboard charts in 2013.

The number of home sale cancelations also soared in July to another two-year high as buyers continue to pull back. About 63,000 home sales were canceled last month, that’s about 16% of homes that went into contract.

Meme stock nonsense is back again - with the same result .. Bed Bath & Beyond (BBBY) shares had their worst day ever on Friday, falling more than 36% in a matter of hours. Self-styled meme stock influencer Ryan Cohen’s RC Ventures announced Thursday evening that it had sold its entire position in the company. Cohen, who is also the chairman of GameStop, had owned about 12% of the firm’s entire float of shares and had been a guiding light to this latest iteration of the Reddit meme stock crowd who focused on buying up the stock using the Gamestop/AMC January 2021 playbook.

On Tuesday, its stock price soared almost 70% intraday because of a short squeeze (see EXPLAINER: FINANCIAL TERM OF THE WEEK below). It finished the day up 29%. From that point to Cohen’s announcement late Thursday, it gained another 17%. At one point on Thursday, the stock was up almost 450% in August alone.

The seemingly-doomed retailer spent 2021 and most of 2022 closing stores all over the place and massively reducing its workforce. It ended its most recent quarter with a little more than $100 million in cash to stay alive. Analysts now question whether vendors will agree to ship all the holiday merchandise Bed Bath & Beyond needs because of its awful finances.

Needless to say, Ryan Cohen isn’t quite as popular with the retail meme stock crowd now that he has dropped them all like a hot potato, pocketing an estimated $68m in seven months for himself along the way.

Please be careful who you blindly follow like a financial groupie.

Problems in the Metaverse .. Meta’s Mark Zuckerberg has once again been publicly blasted on Twitter and elsewhere and this time it’s not over product-placing his favorite barbecue sauce. Last Tuesday, he Facebook-posted a screenshot from the company’s Horizon Worlds celebrating the game’s release in France and Spain. The image shows his awkward, dead-eyed avatar standing in an empty landscape populated only by a small version of the Eiffel Tower and Barcelona’s unfinished Sagrada Familia.

The reception w…

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While the FBI searching Trump’s home at Mar-a-Lago and its aftermath might have been the biggest deal in the civilian media last week, it was a complete non-event as far as the financial markets were concerned. There was only ever going to be one story last week. Well, maybe one and a half.

Data released on Wednesday showed that the Consumer Price Index (CPI) measure of retail inflation was unchanged in July after a 1.3% rise in June, as gasoline prices fell sharply, offsetting continued increases in food and shelter costs. The year-on-year increase was 8.5%, down from 9.1% in June. The Core number, which excludes volatile food and energy prices, also showed signs of softening - edging up just 0.3% in July and now up 5.9% from a year ago. All these came in lower than expected.

The following day we learned that the less impactful but still important Producer Price Index (PPI) measure of wholesale inflation of manufacturing raw materials actually fell 0.5% in July after a 1.0% gain in June, and was up “only” 9.8% from a year ago, down sharply from the year-on-year rate of 11.3% the previous month and well below analyst expectations.

While both of these releases reinforced the idea of peak inflation, Fed-speak from various regional Fed presidents which generally described the data as a “welcome sign” that“could lead to a slowing” in the pace of rate hikes (for example, half a percent in September, not three-quarters) also pointed to the possibility of peak Fed hawkishness maybe having been reached.

As regular readers will remember me saying, a perception that we have reached peak inflation and peak Fed hawkishness are two of the major requirements for a sustainable market recovery.

So the investor battle lines are drawn ..

On one side are the bulls. In their perfect world:

* there would be an accelerated decline in inflation,

* a very moderate slowing of growth,

* the Fed opening the door to a pause in interest rate hikes in 2022 and regional Presidents backing off hawkish statements

* China either has a much-reduced level of COVID cases or backs away from its Zero-COVID policy,

* some kind of de-escalation, a pause or a cease-fire in the Ukrainian conflict.

This ultra-cheerful scenario could generate a very significant further jump in stock prices across the board, possibly in the indiscriminate and chaotic manner that technical analysts have been waiting for to complete that final transition from overall bearish back to bullish conditions.

The S&P 500 has already recovered more than half of its January 4th to June 16th decline in less than two months.

Futures market positioning now strongly favors the probability of “only” a half a percent interest rate rise at the next Fed meeting in September instead of the previously-favored three-quarters of a percent and there are even a few Optimist Ultras who think it could be less than that.

Since bottoming at 10,646 on June 16th, the NASDAQ composite index has rallied 22.5% to close last week at 13,047, technically entering a new bull market (up over 20% from a recent low). While the new bull market designation is largely symbolic, it does bring to an end the longest bear market for the index since the dark days of 2008.

Lined up against the bulls are the bears who warn of a scenario where:

* inflation just flatlines or dribbles slightly lower rather than substantially declines,

* growth falls at a faster rate than inflation creating stagflation (see my weekly review entitled “Fear The Stag” from way back in October last year). At SPX 4,280, stagflation is most definitely not priced into stocks in any way,

* the Fed doubles down on its commitment to keep raising interest rates as much and as frequently as it needs to in order to defeat inflation and regional presidents are not afraid to publicly talk up this strategy,

* China continues to have to impose lockdowns over scattered outbreaks and a still-robust Zero-COVID policy,

* there is no sign of de-escalation, a pause or a cease-fire in the Ukrainian conflict.

This much more gloomy scenario could potentially unmask the recent rally as simply a house of cards and in need of correction back down to mid-June lows or even below to reinvigorate any kind of justified sustainable Demand.

They argue that, by virtue of shorter term interest rates being higher than longer term ones (the infamous “inverted yield curve”) the bond market is screaming that we are headed for an economic contraction that hasn’t even had a chance to start yet. The economy has not yet begun to really feel the impact of higher interest rates, they say, since these take time to filter through. Normally, the economy has years to absorb 3% of interest rate increases. By September, the Fed will likely have hiked 3 full percentage points in the space of six months.

As for the new NASDAQ bull market, they argue that explosive rallies of 20%+ are actually more common in bear markets than in bull markets. From 2000 to 2002, for example, the NASDAQ had multiple upswings of more than 20% that were each followed by steep declines and renewed lows within months. It wasn’t until October 2002 that the index finally entered a bull market that lasted for a few years.

A similar pattern was seen during the 2008-09 financial crisis. The NASDAQ gained 25% from November 2008 to January 2009, but then fell 23% from January to March that year before it hit its lowest point of the crisis on March 9th 2009.

But first blood went to the bulls, traders were impressed with the inflation data and started pushing prices meaningfully higher, spurred on by the approving nods from the Fed regional presidents and a general lack of fresh worrying news out of China.

The bull case is getting more traction at the moment, although that can certainly change. It unquestionably doesn’t hurt that it is the preferred scenario that investors emotionally want to happen. Financial markets are often depicted as being like cyborgs driven by streams of purely quantitative data running roughshod over investor hopes and dreams. But sometimes such emotional “tilts” can put a thumb on the scale and be the bulls’ secret weapon.

OTHER NEWS:

Biden-bound .. The Senate passed the Inflation Reduction Act of 2022 (see this week’s EXPLAINER: FINANCIAL TERM OF THE WEEK below), a climate and tax package which would raise more than $700 billion in government revenue partly driven by a 15% minimum tax on large corporations. It passed through the House on Friday and is now heading to Biden’s desk for the president’s signature. Broadly speaking, it’s deemed to probably be net slightly positive for the green energy space and net slightly negative for pharma, but generally markets don’t expect its passage to have much meaningful impact on stock prices in the near term.

Not so fast .. Over 38% of U.S. adults say they are now reconsidering major milestones such as buying a house or a car because of inflation. More than half of respondents to the survey from TheBalance.com said that, while they had been considering buying a car, getting married, purchasing a home, having a child and/or other major milestones in the next twelve months, inflation has forced them to reconsider those choices.

Buying a car topped the list as the #1 milestone to be delayed. The next most common major purchase to be delayed was a home purchase. Of those who were originally thinking of buying a house in the next year, 78% are now planning to delay the purchase or are reconsidering the idea altogether. Among those who were considering changing careers in the next year, 72% are now planning to delay taking such action or are completely reconsidering doing it at all.

Slapping it on the plastic .. In a sign of the continuing toll from decades-high inflation, Americans loaded an extra $46 billion on their credit cards during Q2 2022 and their balances saw the sharpest increase in more than 20 years. Credit card debt grew 5.5% from Q1 to Q2 and 13% year-on-year.

Overall, Americans added $312 billion in mortgage and non-mort…

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit simonbrady.substack.com