ANGLES.

Markets basically just churned last week in advance of Friday’s release of the latest jobs data, with the S&P 500 closing on Thursday afternoon just a touch higher than it started the week on Monday morning.

Pelosi’s Taiwan visit and China’s entirely predictable reaction only briefly raised pulses but markets basically ignored it. Nothing to see here. Silly geopolitical stunts are not driving market sentiment, it’s still investors’ perceptions of future Federal Reserve (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) actions.

Federal Reserve regional presidents seem to be reverting to their playbook of having stock markets do their work for them by using soundbites to accomplish some serious expectation-setting. Here’s me playing right into their hands;

* Minneapolis Fed president Neel Kashkari sounded very punchy:“We are a long way away from achieving an economy that is back at 2% inflation. And that’s where we need to get to.”

* San Francisco Fed president Mary Daly told CNBC that the central bank was “nowhere near almost done” raising interest rates to combat inflation.

* Chicago Fed president Charles Evans said that a third-straight 0.75% hike in September might be appropriate if there was no meaningful downturn in inflation by then. 

* Cleveland Fed president Loretta Mester: "We have more work to do .. it's got to be a sustained several months of evidence that inflation has first peaked - we haven't even seen that yet - and then that it's moving down”

* St. Louis Fed president James Bullard said that the Fed Funds rate will have to end 2022 in a range of 3.75% to 4.00% – which implies another 1.50% more in rate hikes from here.

As I mentioned last week, the recent market rally is almost entirely under-pinned by the assumption that we have now reached peak inflation (and thereby we are closer to peak Fed interest rate hiking). This upcoming week, we will begin to find out if that assumption is justified with the release of the latest Consumer Price Index (CPI) measure of retail inflation and the Producer Price Index (PPI) measure of wholesale inflation.

But last week was all about Friday’s jobs report.

When it came out, the report was red-hot. Indeed, initial fears were that it was too hot. 528k new jobs were created in July, up from a revised gain of 398k in June, and more than double the expected 250k. The unemployment rate edged down from 3.6% to 3.5%, the lowest level in over half a century (recession? .. er, I don’t think so).

There were definite concerns that it showed that the Fed’s four interest-rate increases this year have so far done very little to dampen rampant labor demand. And buried deep within the report is the evidence of rapidly rising wages (average hourly earnings rose 0.5% last month alone) which can feed the beast of inflation, making it harder and more painful for the Fed to kill.

The more optimistic take, however, is that continued strength in hiring despite tightening monetary policy means the labor market will be able to withstand further rate hikes and buffer the economy against any downturn thereby protecting against a future recession. As a Harvard economist said on Friday: “Nice to see this many jobs added, but it is scary about what it means for the size of the adjustment we may have coming”.

In the end the markets just seemed dazed and confused all day on Friday, meandering around aimlessly to close mixed as attention now very much shifts to the massively impactful CPI and PPI numbers coming out this week.

“Not-as-bad-as-feared” data is no longer good enough to get stocks to bounce much further from the June lows. When the S&P 500 index (SPX) is at 4,140, it’s much harder to get a positive response from such fuzzy data than at SPX 3,670 which is where we were in mid-June.

Instead, we need actual, crystal-clear, positive data this week showing peaking inflation to avoid a stall in this rally, or maybe even a sharp reversion back towards the mid-June lows and possibly below if any kind of realization sets in that this whole July rally may just have been built on sand.

OTHER NEWS:

Things ain’t what they used to be .. Robinhood is slashing about 23% of its staff as the online brokerage continues to reel from a sharp slowdown in its customer trading activity. The job cuts mark the second round of layoffs this year at Robinhood, which in April got rid of about 9% of its full-time employees at the time. That’s over a thousand jobs eliminated in less than four months. The stock, which was at a high of 70.39 almost exactly a year ago, closed on Friday at 10.39 (I’ll save you the trouble of doing the calculation, that’s a fall of 85.2%).

Oil sliding .. The price of crude oil futures dropped below $90 per barrel last week, that’s lower than it was at the time Russia began its invasion of Ukraine. The latest drop comes after the Organization of the Petroleum Exporting Countries (OPEC) and its allies said they would increase oil production by 100k barrels a day beginning next month. Prices are also falling as a result of the possibility of a global recession and concerns about how that could impact demand for oil.

Gas prices at the pump have fallen for over 50 straight days to an average of around $5.00 per gallon. That said, it's still a lot higher than at this time last year when the average price was $3.19.

Jolly not good .. The Bank of England (BOE) implemented its biggest interest rate rise in 27 years last week and issued a dire warning that the United Kingdom is set to fall into a possibly years-long recession. The monetary policy committee increased the base interest rate by half a percent to 1.75%, its sixth consecutive raise and the biggest single increase in interest rates since 1995, in an effort to control runaway inflation.

Even with these measures, the CPI measure of UK retail inflation is now forecast by the BOE to go above 13% by year-end, the worst level since Queen first briefed us that another one had bitten the dust in 1980.

While this was all being announced, lame-duck Prime Minister Boris Johnson decided to head off on vacation to an undisclosed location and Nadhim Zahawi, the interim Chancellor of the Exchequer (Brit-speak for Finance Minister or Treasury Secretary) who has been in the job for all of about four weeks and probably won’t be by this time next month, was also “working remotely” from somewhere. But, never fear, both were said to be staying right on top of things on WhatsApp. You can’t make this s**t up.

The country is typically a large component holding in any International Developed Market mutual fund or exchange traded fund (ETF).

UNDER THE HOOD:

Some technical analysts are starting to hone in on the S&P 500 (SPX) level of 4,231. If we break up through that level, that would mean that we will have retraced 50% of the index’s entire decline that began on January 4th. While in almost every bear market, there are often 20% retracements that ultimately fall apart and are subsequently followed by new lows, it is much more uncommon (though not unknown) for 50% retracements to fail in a similar fashion.

Having said that, it’s the job of every bear market rally to fool investors into believing that the bear market is over. This job gets harder and harder the lower the starting point of the upswing is and the rallies have to be made to look more and more convincing.

The comparative levels of Demand and Supply continue to move in the right direction with the measure of Demand stretching its advantage over that of supply. However, withdrawal of Supply appears to have been more responsible for this rather than a major expansion of Demand. This puts the onus on the buyers to step up if the current market advance is to develop into something more and they are not really showing a sign of that yet.

Another possible reason for skepticism in the current advance continues to be the lack of escalating volume that typically accompanies new bull markets. High volume is among the hallmarks of institutional accumulation. Last wee…

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(Slightly longer report than usual this time around, but last week was a doozy)

Last week’s big story was always supposed to be the Fed’s interest rate hike on Wednesday but in the end, that proved to be rather uneventful and lacked any kind of a wow moment. The surprise-averse stock market absolutely loved that.

But what really generated a huge amount of heat but precious little light was the often hyperbolic, ill-informed and sometimes blatantly politically motivated media reaction to the preliminary estimate of Q2 2022 Gross Domestic Product (GDP) on Thursday. Who knew that the release of a Q2 GDP initial estimate could generate such passion and vitriol?

The week began with an indecisive, meandering session on Monday, but after the close, retail juggernaut Walmart (WMT) shocked the market. It’s been staring us in the face for weeks, if not months. But it took Walmart to announce it, that higher prices for food and fuel were forcing shoppers to hold back on other items and that its previous outlook and guidance for Q2 and the full year was very wrong and needed to be meaningfully changed (and not in a good way), to really make investors realize: Inflation is now finally starting to cause a real demand problem in the US economy.

Supply shortage has become overstocking. And if the biggest US retailer is feeling it so badly, then who else can possibly escape the pain? Walmart stores have too many unsold items and it is going to have to slash prices to reduce its merchandise inventory levels. The stock crapped out nearly 10% in after-hours trading on Monday before making up some ground later in the week.

The announcement and its implications and aftermath sent a shiver through the whole market when things opened on Tuesday morning. All the giddy, boisterous optimism of the week before was sucked out of the atmosphere as investors apprehensively approached hugely significant earnings from the big guns, the Fed interest rate decision and the initial Q2 GDP print.

A less-hawkish-than-feared, yet still inflation-fighting-focused, Federal Reserve doing what was expected was precisely what markets wanted to see on Wednesday and they got it. The central bank duly raised interest rates by 0.75% for the second time in as many months. The Fed Funds rate now stands at a target range of 2.25% to 2.50%. During his press conference Fed Chairman Jerome Powell emphasized the Fed’s commitment to restoring price stability and said failing isn’t an option. Another 0.75% hike might be necessary at the Fed’s next meeting in late September, he said, but there is a lot of time and a lot of data releases between now and then.

He essentially acknowledged a slowing economy while still emphasizing that inflation was unacceptably high. That combination seemed to thread the needle perfectly as far as the stock market was concerned. The Fed isn't giving up the fight against inflation, but it isn't flagrantly driving the economy into a recession either. Stocks were unable to find any negativity and rallied hard after the decision was announced, pushing even higher during Powell’s presser.

Two back-to-back quarters of negative growth as measured by GDP is often considered as a common rule of thumb that a recession is underway, but actually this is just table stakes for a recession declaration.

The group of eight economists at the National Bureau of Economic Research (NBER) who get to officially call it also evaluates a range of other indicators such as retail sales, personal income and consumption, manufacturing output and, very importantly, the labor market in reaching their conclusion and the process has always been fuzzy. Its official mandate does not even mention GDP or two consecutive quarters; “The determination of the months of peaks and troughs is based on a range of monthly measures of aggregate real economic activity published by the federal statistical agencies”.

As I have mentioned in a previous report, they consider their audience to be future economic historians and statisticians in three, five, twenty or a hundred years’ time looking back on long-ago recessions. They are absolutely not into producing real-time information for use by hedge funds, day-traders, black box algorithm designers, CNBC pundits or opportunistic party political snipers.

It was announced on Thursday that the initial estimate for quarterly GDP for Q2 2022 was -0.9% following the final estimate for Q1 of -1.6%, which inevitably led to many squealing media outlets confidently announcing an official recession based on the “two consecutive quarters” misapprehension.

Let me be clear, even if we do end up with two consecutive quarters of negative GDP prints even after two more revisions for Q2, the US economy was very clearly not contracting in either quarter in 2022, and is right now not (yet) in a recession. How can I say that with such confidence?

First, drawing any conclusions from Thursday’s GDP report is premature and risks making one look foolish. A final quarterly GDP number actually comes in a process of three incremental reports over a period of many weeks which can change dramatically from report to report as more data becomes available. The number on the third report is deemed to be the official figure for that quarter. What came out last Thursday was just the first estimate of the three for Q2 which is based on the least amount of data and will doubtless be heavily revised on two separate occasions in the coming weeks.

Second, the main (some would argue “only”) reason US GDP showed as negative in Q1 was because of inventory builds and imports. Remember, GDP was created to measure the “net output” of the US economy, so anything imported is deemed to subtract from US economic output (GDP was created in a very different global economy). It was the statistical influence of the inventory builds and imports (also spurred by a strong dollar) that pushed Q1 GDP into negative territory.

The fact is that Americans spent money like water in the first half of the year and that the US economy grew solidly in Q1 according to any and all measures of consumer spending (which rose 1.8% in Q1 and followed that up with another 1.0% increase in Q2) and consumption as well as ridiculously buoyant labor market data.

Third, Q2 2022 saw retail sales, durable goods spending, personal consumption, consumer and business spending and investment all move higher again. US corporate earnings handily beat estimates most of the time. Most importantly, the economy has added 2.75 million jobs since New Years’ Day and the unemployment rate has remained steady at a historically low rate of around 3.6% all year.

You cannot be experiencing a recession while the economy is sporting those kind of numbers, no matter what GDP estimates say.

While Thursday’s GDP numbers were no good at all to anyone trying to draw a real-time conclusion about where the economy is at, they were really, really good for lazy headline writers and those looking to whip up hysteria for either investor attention, social media eyeballs or party political point-scoring. And that was what was responsible for so much of the nonsense that we saw and read on Thursday and Friday and into the weekend.

Much of Big Tech announced Q2 earnings and forward guidance during the week and the aggregate outcome was probably a 6.5 out of 10. Alphabet/Google, Amazon, Apple, Meta/Facebook and Microsoft haven't been as unstoppable this year as investors have gotten used to seeing over the past decade but their combined weight of close to 25% of the S&P 500 still means that their results matter for the broader market. Collectively, they brought in a total of $354 billion in revenue in Q2, with Amazon and Apple probably happiest with their results and Meta/Facebook, not so much.

To come full circle, we are not in a recession whatever the economist wonks, CNN or Fox News say, nor have we been in one at any time in 2022. But (big but!) what the Walmart announcement finally brought home …

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Markets seem to have firmly seized onto the hope that we are now close to 1) peak inflation, 2) peak Fed hawkishness and, as a result of the first two, 3) peak US dollar strength. The result was a very solid week for most stocks (with the occasional notable exception, like SNAP which collapsed nearly 40% on Friday alone after terrible sales growth numbers).

But hope combined with some favorable readings from some frankly second-tier data points isn’t usually enough to cause such a substantial bounce (or at least the most substantial one we’ve seen in a few months). However, this particular rally has been spiced up, despite its lack of actual fundamental progress, by one ingredient: prevailing extreme pessimism. 

Bank of America investor sentiment data released last week showed:

* Recession expectations are the highest since the pandemic and before that the 2008 financial crisis 

* Stock allocations are at their lowest level since 2008 

* Cash holdings are at their highest level since 2001 

* Growth and profit expectations are at all-time lows 

* Investors are demonstrating the most risk-averse behavior since October 2008 

In the eyes of those who follow the “it’s always darkest just before the dawn” narrative, such catastrophic sentiment data heralds the beginning of the transition from bear to bull as it brings up the exciting prospect of the C-word. Capitulation.

Capitulation is often a necessary staging post on the way to a sustainable recovery as sellers exhaust themselves and buyers throw in the towel. But while the evidence shown above might imply this, the Under The Hood data (see below) seem to show that capitulation is apparently not yet upon us, so caution is required.

Volatility always shows up at pivotal market turns but volatility itself is not a signal of that turn. This is a mistake many investors make, using volatility as confirmation bias because they so desperately want the bear market to be over and get back to making easy money again.

And it also needs to be remembered that, from an economic and corporate earnings standpoint, we have not even really started to feel the impact of the soon-to-be full 2.0% of interest rate increases that’s occurred since March. 

A strengthening US dollar makes exported goods more expensive overseas and foreign imports cheaper in the US, a double-whammy that punches US exporting corporations in the face since it is estimated that about 40% of the average S&P 500 company’s earnings come from outside the US.

The dollar finally showed signs of topping out last week (partly caused by increasing interest rates in Europe and the Far East), but is still up 17% from a year ago. That means that total S&P 500 company earnings have been reduced by about 6.8% over the course of the last year simply as a result of currency movements. If there is a sustainable turn and the value of the dollar flattens out or even turns down, it will definitely be helpful from this standpoint.

Early in the week, we saw both Apple (AAPL) and Goldman Sachs (GS) announcing plans to slow hiring next year. Goldman Sachs also said that second-quarter earnings fell 47%. Bank of America’s second-quarter profit fell 32% but revenue rose on strong consumer spending and borrowing.

The National Association of Home Builders Housing Market Index (see “FINANCIAL TERM OF THE WEEK” below) unexpectedly crashed by 12 points from 67 in June to just 55 in July. It was the second-largest drop on record and served as a reminder that certain parts of the economy are really beginning to feel the impacts of the Fed’s aggressive policy stance and many buyers have been completely priced out of the market by the simultaneous rapid rise of home prices and mortgage rates. It was noted that many builders have stopped work on projects because the costs for land, construction, and financing were more than the value of the homes being built. 

The median existing home price hit another record in June, rising to $416k, up 13.4% from the previous year and increasing from a revised $408k in May. Home sales declined for the fifth straight month. Sales of previously-owned homes fell 5.4% in June from the prior month to the weakest rate since mid-2020. There were 14.2% fewer sales of previously-owned homes last month than there were a year ago.

But stock indexes powered through all these potential headwinds, firm in their apparent new-found conviction in the peak inflation / peak Fed hawkishness / peak US dollar strength theory and given its extra spicy thrust by idea that the awful pessimism among consumers simply can’t get much worse.

Enjoy the rally, goodness knows we all deserve it. But don’t treat it as a bottom yet. There’s no definitive proof that this bear has been vanquished (see “UNDER THE HOOD” below). Remember, if this really is the start of a new uptrend it will, by definition, have legs and provide you with ample opportunities to get on board. But if it suddenly becomes clear this is indeed just another knee-jerk reaction to outside events in an oversold market, the drop to new lows could be swift and painful.

But I want to emphasize that, when it comes to accounts with longer-term time horizons (say, about twelve to fifteen years or more), none of this timing or sizing stuff or determining if we are at the bottom yet matters at all. Just keep on systematically buying the right kind of equity exchange traded funds (ETFs) and younger investors (say, forty years old and younger) should lean into this in their various retirement and very long term accounts and actually step up their level of buying if cash flow allows.

OTHER NEWS:

European energy crisis looming? .. Russian energy provider Gazprom last week declared a force majeure for gas supplies to Europe via its Nord Stream 1 pipeline. The company said it could no longer guarantee meeting its contractual obligations due to "extraordinary circumstances beyond its control." before backing off later in the week. But the issue of European use of Russian energy has the capacity to be a very big deal. The development drove energy prices higher, pointing to possibly severe European supply chain disruption and consequent higher inflation growth in the region down the road if Russia continues to hold much of Europe to ransom and the Ukraine war goes on and on.

While Europe bakes in record-breaking heat in July it’s easy to make all the right noises about cutting back on buying energy from Russia. This will be far from the case in six months’ time when large numbers of the continental European population will be freezing in their homes unable to pay their energy bills, possibly facing power cuts or rationing. Germany is apparently already preemptively dimming the brightness of its street lights as an energy-saving measure.

Crypto fraud arrests .. A former employee at popular crypto exchange Coinbase (COIN) and two other men were charged with wire fraud on Thursday in what federal prosecutors called the first insider-trading case involving crypto-currency markets. A indictment unsealed in federal court in Manhattan charged Ishan Wahi, a former product manager at Coinbase, his brother Nikhil Wahi and friend Sameer Ramani with wire fraud and wire fraud conspiracy in what prosecutors described as a scheme to commit insider trading by accessing and abusing confidential Coinbase customer information. More detail here.

UNDER THE HOOD:

Tuesday’s big, broad rally carried most indexes above their 50-day moving averages, which is potentially a good little baby step towards the blue skies investors have been craving. However, a little cold water needs to be poured on the giddy, over-optimistic nonsense that I saw, heard and read at times last week (see my “ARTICLE OF THE WEEK” for more about the charlatans who peddle this s**t, and - yes - they are still charlatans and it is still s**t even if these unlikely scenarios actually somehow come to pass).

As the major price indexes rally, trading volume is meaningfully contracting. In traditional technical ana…

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Get ready for an avalanche of recession warnings across all media platforms. That's the conclusion from last week’s Consumer Price Index (CPI) report, as inflation hit yet another 40 year high which almost guarantees that the Fed announces on July 27th that it will raise interest rates by at least another 0.75%, putting even more pressure on the economy.

Indeed, after the Bank of Canada last week hiked interest rates by 1.0%, by Wednesday evening US bond futures markets were pointing to a 78% probability of a full 1.0% raise by the Fed at that next meeting.

“Peak Hawkishness/Peak Inflation” is pretty much the first key to a potential stock and bond market bottom and a visibly declining CPI is the “proof” the Fed needs to believe that we’ve past peak inflation and that they can ease up somewhat. We are now going to have to wait at the very least another month before getting there, although every move higher does increase the hope among the optimists that the next time will finally be the data release that shows a peak has been reached.

The optimists’ case around the hot CPI report is:

* admittedly, inflation hasn’t peaked yet but they are hopeful that it’ll peak very soon (next month?) as recent falling commodity prices start to make themselves felt in the data

* the Fed won’t hike to a final level any higher than currently expected (it may hike faster, but the end result should be the same) and it will “stop” at around 3.50% by year end

* that the slowing economy will stop the Fed from “going too crazy” with rate hikes later in 2022 or early 2023, and in a year or so we’ll actually be talking about rate cuts.

However, in my view, here's the bottom line:  There was nothing in Wednesday’s report that even hinted at the fact that inflation has yet peaked and the peak inflation narrative was proved wrong again for the third month in a row. It may well show a lower headline rate in a month’s time but even a peaked inflation rate will still be very, very high. Interest rates are still going higher and will definitely continue to do so.

The idea that the Fed will automatically stop raising rates simply because it hits 3.50% by the end of the year seems illogical to me. The Fed has said that it will fight inflation to the death, not just knock it down by a percentage point or two, using interest rate hikes as its weapon and is prepared to plunge the economy into recession if need be to accomplish this. In my view, there’s nothing magical about a Fed Funds rate of 3.50% that will, of itself, give the Fed pause at year end.

Endless recession warnings and predictions will keep pouring out of all media outlets. All of this could well lead to continued volatility in the days, weeks, or even months ahead. Stay strong. You all know my advice. If not, call me and I’ll share it. Also see the “ARTICLE OF THE WEEK” below.

The week had gotten off to a rocky start on Monday as we learned that Macau will close down most businesses, including shuttering all its casinos, for at least one week following a COVID outbreak - while Shanghai will continue with massive testing in what is a signal that China’s Zero COVID policy is still very much in effect. 

There was then mostly confusion and nervousness in relatively low volume stock markets ahead of Wednesday’s CPI report and early Q2 earnings announcements. Markets tumbled late on Tuesday after a fake news report on the open sewer that is Twitter claiming to be an early leak of the CPI inflation data due the following day (showing a 10.2% annual rate of inflation) got such traction that the US Bureau of Labor Statistics was forced to come out and announce that it was a forgery. But by then the tweet had already triggered some program selling and had spooked a good number of traders.

When reality hit on Wednesday morning, we saw that CPI had in fact surged 9.1% from last year, up from the 8.6% rate in May and a lot more than the 8.7% increase analysts had expected. This was the highest annual inflation print since November 1981. The Core Rate, that excludes food and energy, rose 5.9% from a year ago, slowing fractionally from May's 6.0% increase. Analysts had expected a 5.7% increase. 

For the month of June only:

*   overall inflation was up 1.3%, the highest monthly increase since Green Day strolled down the Boulevard of Broken Dreams in 2005

*   energy inflation was up 7.5% (41.5% year-on-year)

*   inflation (without energy) was up 0.7% (6.6% year-on-year)

*   inflation in used cars and trucks was up 1.6%

*   inflation in rents was up 0.8%, the highest since The Pet Shop Boys first sung about hanging out with West End girls in 1986

*  owners’ equivalent rent, a CPI euphemism for house prices, was up 0.7%

As a result, real (inflation-adjusted) wages got crushed in June. They are down 2.9% from April 2021, and down 3.6% from December 2020. The average worker is taking real pay cuts. Wholesale inflation numbers (raw material costs to manufacturers as shown by the Producer Price Index - PPI) provided no relief when they were released last week, these prices are up 11.3% year-on-year.

JP Morgan Chase (JPM) and Morgan Stanley (MS) fell hard on Thursday, taking most of the financial sector with them, after both suffered big declines in their investment banking businesses but market-volatility boosts to their trading operations. JP Morgan Chase CEO Jamie Dimon warned about a potential economic slowdown.

Consider that, on just Wednesday and Thursday alone, investors were hit with ..

* Much-hotter-than-expected inflation reports - both CPI and PPI,

* The openly-discussed possibility of a full 1.0% rate hike later this month,

* Highly underwhelming earnings from market giants (JPM & MS) and

* Increased turmoil in Europe (political machinations in both Italy and the UK as well as continued ugly developments in the conflict in Ukraine),

.. yet the S&P 500 finished the week higher than where it closed on Tuesday (although still down for the week as a whole). On the face of it, that resilient performance was impressive and certainly better than some of the relentless declines that we saw in April, May and June. It would seem that this degree of bad news has been already priced into the S&P 500, which remains in the previously-identified range pivoting either side of SPX 3800.

However, what is not yet priced in is the scenario of a serious economic slowdown in an environment of falling corporate earnings and that is where the risk lies, with the potential to drive prices down another 10%-20% or more. This could explain the lack of broad buying sentiment discussed in “Under The Hood” below.

Having said that, stocks did stage an impressive rally on Friday, partly due to a strong, but not-too-strong, retail sales report and the market processing the University of Michigan’s preliminary estimate of its closely-watched Consumer Sentiment Index (see “FINANCIAL TERM OF THE WEEK” below) that ticked higher to 51.1 from last month’s record low of 50.0. It was only the second time this year that the index has advanced and consumers’ pessimism about future inflation levels also eased somewhat. The Fed likes to see things like that.

Other News:

Great news for international travelers who are bad at math .. After last week’s foreign exchange market activity, one Euro is now essentially the same as one dollar.

Buyers pulling out .. Housing market deals are falling through at the fastest clip in two years, as home buyers are using a slowing market to try to renegotiate. In addition, buyers are backing out because higher mortgage rates mean they can no longer afford the home they agreed to buy. Roughly 60,000 home-purchase agreements across the country in June (almost one in seven of the total number homes that went under contract), fell through.

The desperate buyers of earlier this year were waiving inspections and appraisals as a tactic to jump the line and get the property they wanted. Now they are increasingly keeping these contingencies rather than waiving them. which can give them the flexibi…

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The stock market’s recession/inflation concern pendulum swung back towards recession last week as investors focused on what a recession may look like and how a benign one actually might not prove to be too bad.

One narrative doing the rounds last week was that if the oil price continued to come down (and maybe bring inflation down with it), the US economy might still enter a recession, but it could be a mild and short one which would give the Fed more room to respond in a more supportive manner, i.e., not having to raise rates quite as far or as fast.

This thinking was evident in the bond market's behavior as the 10 year Treasury interest rate drifted lower earlier in the week, before rebounding on Thursday and Friday.

The idea of this silver lining boosted stock prices in advance of Friday’s employment report with a generally quiet newswire and very little in the way of earnings or economic reports. Particularly perky were the more “risk-on”, beaten-down corners of the market, including from the wreckage that is profitless tech as well as internet and consumer discretionary stocks.

The release of the minutes of the Fed's June policy meeting did nothing to shake the suggestion that the interest rate hike at the next meeting later this month will be another 0.75% like it was in June. They revealed that the participants recognized the possibility that “an even more restrictive stance on interest rate policy could be appropriate if inflation remains high” and that“inflation pressures have yet to show signs of abating”. Although it should be said that the market seems to have baked this kind of hike into prices already.

The weekly jobless claims figures showed unemployment is on the rise, which is important data for consideration by the Fed as it has always said it will keep raising interest rates until the labor supply-and-demand picture comes back into balance at which point it can slow, stop or even maybe reverse its interest rate hiking policy. These numbers inch the Fed a little further toward that goal.

On Friday, the Labor Department released its monthly employment report (see FINANCIAL TERM OF THE WEEK below) for June showing that US employers added more jobs last month than economists had expected. Payrolls rose by 372,000 in June, fewer than May's revised gain of 384,000 jobs, but more than the expectation of 250,000. That’s still 524,000 fewer jobs in the economy than there were in February 2020, right before the COVID downturn hit. The unemployment rate held steady at 3.6%, in line with estimates.

The market’s takeaway from all that data was that while it did somewhat soothe fears of an imminent recession, it did little to relieve fears of considerable further Fed interest rate tightening. It did also contain a small nugget that suggested inflation may be peaking as average hourly earnings only rose 0.3% last month, up 5.1% from a year ago.

After the release of the report, investors seemed a little unsure as to how to respond and the indexes bounced around aimlessly all day but generally drifted a little higher to cap quite a successful week, particularly for the NASDAQ. Having said that, volumes were once again low and the somewhat unconvincing and rather directionless nature of the index price movements last week leaves us even more reliant than usual on the Under The Hood analysis (see below) for clues as to what is really going on.

Faced with the backfiring of what was always just an obvious and not-very-clever PR stunt and having to pay a bloated $44 billion for an item currently worth a mere $28 billion, stock market genius Elon Musk is floundering around desperately looking for excuses to back out of his proposed Twitter purchase, including promoting the ridiculous notion that he didn’t realize how badly Twitter is infested by bots and fake accounts. But he might just have signed a couple of forms that he perhaps shouldn’t have, which may mean that he can’t just walk away from the deal. Ooops. Bummer.

Other News: Worldwide Edition

Japanese assassination .. Sadly, the former Prime Minister of Japan, Shinzo Abe, died after being shot twice in the back during a successful assassination attempt at a campaign stop. It has shocked the country, not least because Japan experiences almost no gun violence. He stood down as PM in September 2020 but was still highly influential in government, with the current economic policies of monetary easing, fiscal stimulus and structural reform being known as “Abenomics”.

Bye Bye Boris .. Following months of revelations about banging parties during lockdown, sleaze and sexual assault, jobs for the boys (and certain selected younger girls), jaw-dropping incompetence, endless lies and bungled cover-ups, Boris Johnson was finally forced on Thursday by his own Conservative party (along with the mass co-ordinated resignations of over fifty government ministers) to announce his resignation as the UK’s Prime Minister and gave a petulant, self-pitying and widely-derided resignation speech in front of Number 10 Downing Street.

It seems likely, however, that he will astonishingly remain in the role of top dog until his party has selected a new leader who will become the next PM, a process that could potentially not be completed until September or even early October.

This raises concerns about the shorter term outlook for a country still being run by an angry, unpredictable, self-absorbed lame duck for maybe many weeks, by a man continuing in office having been dumped precisely because he is so clearly unfit for that office, at a time that the country is on the brink of a recession and a cost of living crisis, is living through nationwide strike actions and is enduring some of the more challenging consequences of the Brexit decision.

For the many people over here who are understandably bemused by just what the f**k is going on over there and what happens next in a parliamentary system rather than the presidential one, the BBC published a handy guide.

Home invasion .. Another leader toppled last week was Sri Lanka’s Gotabaya Rajapaksa, who was forced to agree to resign on Saturday after thousands of protesters stormed his official residence and marched in the streets of the capital, Colombo.

Concerns at the IMF and BoE .. The International Monetary Fund (IMF) Managing Director said last week the global growth outlook has weakened significantly since July and she could not rule out a worldwide recession. Not directly related to the political chaos in the country, the Bank of England (BoE) last week issued a pretty apocalyptic report about the global economy and its prospects.

More Euro spending? .. French Finance Minister Bruno LeMaire said the European Union must reconsider its debt rules, allowing for more fiscal spending. At the same time the German government, which had just reported its first trade deficit since Bryan Adams informed us that everything he does, he does for you in 1991, was debating a restart of coal-fired power plants to reduce reliance on natural gas before winter demand kicks in. It is hoped that this would support regional economic growth in addition to dampening inflation.

Under The Hood:

Three weeks after the observation of some of the most oversold conditions of the current decline, buyers are demonstrating very little urgency. From the June 16 low in the S&P 500 through to last Friday’s close, the Net Spread between Lowry’s Buying Power and Selling Pressure has barely moved, hardly a demonstration of the typically robust and swift advance in Demand and rapid retreat in Supply evident after lasting market bottoms in the past. These turnarounds have historically been met by an unmistakable and crushing wave of indiscriminate Demand (“buy everything!!!!”), and this absence implies that prices have not yet gotten low enough to get everyone onto “Team Buy”.

Other important data points like the Percent Of Stocks Above 10- and 30-Week Moving Averages and Percent of Stocks 20% Or More Below Their One…

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Investor frustration and confusion at the fact that nothing’s sticking is growing. Authentic-looking rallies like what we saw the previous week end up having no value as they disappear in a puff of red smoke as happened last week. Back to square one as if the rally never happened. This low-traction environment seems (as suggested in my Under The Hood section last week) to be pivoting around the 3800 level for the SPX index (S&P 500).

The index is the at the same level now as it was in the second week of June having been 300 points higher and 300 points lower in the interim. We see inflows into stocks one week, then outflows a few days later. All that stress and those dashed hopes and nothing’s really changed. The bottom has not been found.

However, if you zoom out, you can survey the wreckage properly. The S&P 500 dropped 20.6%, for its worst first-half-year period since the one during which the Jackson Five, Simon & Garfunkel and the Beatles all had number one hits in 1970. The index fell 16% in the second quarter alone. Take a look at an amazing graphic representation of this here.

The declines of 29.5% from the Nasdaq Composite and 23.9% from the Russell 2000 (Small Cap stocks) are both indexes' worst first halves ever recorded. The “Agg” broad index of fixed-income securities (bonds), fell 10.7% since the start of 2022. That's also its worst first-half ever on record.

If you are planning to host a quiz night with your friends and family on the theme of The First Half of 2022, you may find the following useful:

Best-performing sector – Energy +37.7% Worst-performing sector – Consumer Discretionary -11.5%Best-performing S&P 500 stock – Occidental Petroleum +103.1%Worst-performing S&P 500 stock – Netflix -71.0%Best-performing stock in the Dow Jones Industrial Average – Chevron +23.4%Worst-performing stock in the Dow Jones Industrial Average – Disney -39.1%Best-performing market worldwide – Chile +4.9% (in USD)Worst-performing market worldwide – Russia -41.8% (in USD)Best-performing commodity – Kerosene (jet fuel) +91.3%Worst-performing commodity – Hot-Rolled Coil Steel -34.2%Bloomberg Barclays U.S. Aggregate Bond Index -10.7%10-Year Treasury Yield +1.477 percentage points CBOE Volatility Index (VIX) +73.5%Gold -1.3%WTI Oil +40.6%U.S. Dollar +9.2%Bitcoin -60.3%

One possible silver lining is that on the previous five occasions that the S&P 500 has fallen at least 15% the first six months of the year (1932, 1939, 1940, 1962 and 1970), it has risen an average of 24% in the second half. Please take this stat with six large bags of salt and do not make any investment decisions based on it. In fact, you know what? Just forget I even mentioned it.

As is customary at this time of year, trading volume is slowing fast going into the summer with about 4 billion shares changing hands on the New York Stock Exchange on Friday versus typical daily volume of closer to 5 billion. The problem is that thinner volume tends to magnify market moves as it takes less firepower to push a stock price around.

Last week’s price reversal started when the University of Michigan study revised its inflation expectations lower from 3.3% to 3.1% for the next five to 10 years, but that’s still solidly higher than the Fed’s old 2% target. Also, consumers’ short-term outlook for the U.S. economy dropped sharply to its lowest point in nearly a decade. Consumer confidence also fell for a second consecutive month as Americans continue to assess the impact of high prices and rising rates.

The big release, though, was the Fed’s favorite data point, on which it bases most of its decisions, the Personal Consumption Expenditures Index for the month of May, showing prices rose 0.6% last month, accelerating from a 0.2% increase in April. The index was up 6.3% from last year, the same year-over-year rate as the month before, still near a 40-year high. The latest readings offered little indication of easing price pressures, with inflation continuing to run hot at a highly elevated rate.

Meanwhile, consumer spending, which accounts for more than two-thirds of economic activity in the US and has held up tremendously well recently, slowed significantly in May, decelerating to a 0.2% growth rate in May from 0.6% in April.

This data combo indicates that consumer spending is slowing much more quickly than inflation is peaking, inevitably raising the volume of those crying recession. The stock market shook its head gloomily and basically wiped out most of the previous week’s gains.

On the plus side, China last week announced it was reducing its quarantine rules for those entering the country. cutting back from two-to-three weeks to ten days. A brief bounce in stocks ensued, but it was a market grasping at straws and it soon fell back again.

To reiterate, my advice to clients is not really changing. Longer term portfolios (time horizons of at least twelve years or more) should be, at a minimum, maintaining their levels of recurring systematic purchases of index exchange traded funds (ETFs) or, even better, selected, sensible factor ETFs (see FINANCIAL TERM OF THE WEEK below). If cash flow allows, the amount being purchased should be stepped up to ensure that you are buying in at a lower weighted average price.

For even longer time horizons (like, for example, retirement $$ for people aged 40 or younger), it’s my opinion that you should be backing up the truck right now, but you need to be buying the right kind of ETFs and avoiding others as well as not individual stock-picking. Your future self will be glad you did.

Happy to discuss further with clients.

Other News: Sorry, yet another crypto edition

The Walking Dead .. Bitcoin has now plunged about 40% in just the last four weeks diving below $19,000, it just experienced its worst month ever, its worst quarter since 2011 and it’s now down over 70% from its late 2021 high. Almost a trillion dollars (that’s trillion with a “t”, that’s $1,000,000,000,000) has been wiped off its value.

The situation was not helped last week by the Securities and Exchange Commission (SEC) rejecting two more applications for a spot Bitcoin ETF and the arrival on the market of an inverse Bitcoin futures ETF which makes it easy for traders to bet on the price of Bitcoin futures going lower.

And that’s just Bitcoin. Ethereum and all the shitcoins have, for the most part, been crushed even harder, some into terminal oblivion. And right now NFT may as well stand for Nightmare, Fear, Trauma.

The vision of a de-centralized, utopian financial heaven has been replaced by the reality of very old-school Wall Street-like greed, depravity and corruption and Bernie Madoff-style deceptions and dirty schemes all throughout the space. Rebuilding trust beyond the bubble of Bro-World is going to take a long time.

And now the last crypto shoe seems to be dropping. After its initial collapse, reported in my weekly review two weeks ago, crypto hedge fund Three Arrows Capital (3AC) entered complete liquidation last week, following a court order issued in the British Virgin Islands after creditors sued the hedge fund for its inability to repay debts amid the broad and deep decline in cryptocurrency markets and ridiculously excessive leverage and margin used by the fund (seriously, if you really believe the price of an asset is going to move from $50,000 to $500,000 and you’re right, you’ll get very rich by just buying in cash without margin or risking 10x, 50x, 100x leverage - which could kill you if your prediction fails and the price falls .. exhibit A).

3AC had pursued an aggressive trading strategy that included placing highly leveraged bets on various cryptocurrencies. The firm also had heavy exposure to the “stable”-coin (serious mis-nomer) Terra USD along with its sister coin, Luna, which fell to pieces, collapsing in value last month, incinerating millions of dollars of client money overnight.

3AC’s co-founders, Zhu Su and Kyle Davies, like Terra’s infamous founder Do Kwon, are among the more obnoxio…

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The R-word rhetoric got stepped up last week. In between increasingly tiresome inflation anecdotes that seem to pop up everywhere from social media to groups of smokers in front of NYC bars, the hot topic has been The Recession.

In today’s report I’m going to dig a little deeper in what a recession is, what it isn’t, how to recognize one and why it just may not be the stock market catastrophe that it is usually portrayed as.

Given the previous week’s carnage and a pretty news-deficient long weekend, a bounce back from oversold conditions on Tuesday was completely unsurprising. There even seemed to be some evidence of a bit of old-school BTFD (remember when that was a thing?).

The Three Keys to a Bottom (peak Fed hawkishness, peak inflation, declining geo-political risk) remain in effect and none have yet been fully triggered although we could start to see some improvement in the first two as the Fed’s favored measure of what it would call true inflation, the Personal Consumption Expenditures index, comes out this week. A benign reading would indicate the inflation could be peaking, potentially reducing the need for such a hawkish stance from the Fed and will cheer Wall Street. But if more of the same, skyrocketing inflation for at least another month with no end in sight, is indicated - look out below.

Fed Chair Jerome Powell, talking to Congress, continued to stress that he believes that the economy can handle higher interest rates. However, he also admitted in response to Senator Elizabeth Warren's questioning that higher interest rates are not going to do anything to help with lower food and energy prices. Finally! Someone actually came out and said what we have all known for months!

Powell said that while it was possible that the Fed could help orchestrate a "soft" economic landing and avoid a recession it was important to understand that “recession is certainly a possibility. Frankly, the events around the world over recent months make it [the soft landing] harder” clearly referring to the war in Ukraine and lockdowns in China that are exacerbating food and energy inflation and the world’s supply-chain problems.

Markets didn’t respond well to all this long overdue honesty and an unexpectedly frank assessment and what was shaping to be quite a nice follow-up to Tuesday’s bounce began to fizzle fast as Powell’s words were digested and Wednesday ended up in the red after a late collapse.

Later in the week, however, we saw a quite meaningful rally in stock prices, as oversold conditions proved too tempting to ignore while the financial newswires were generally quiet and we began to see the (mostly stock market-positive) effects of both index and portfolio rebalancing as well as window-dressing (see FINANCIAL TERM OF THE WEEK below) in advance of the upcoming end of Q2.

It also didn’t hurt that on Friday, the U.S. Federal Reserve released a report showing that all major U.S. banks passed its stress-testing Comprehensive Capital Analysis and Review. This is welcome news for the market with recession on everyone’s mind.

So let’s turn to the R-Word. Broadly speaking, a recession is popularly defined as two consecutive quarters of negative GDP growth as determined by the National Bureau of Economic Research (NBER), although technically there are other factors that may be taken into account in determining if a recession has “officially” occurred. The point here is that it’s very much a backward-looking endeavor that’s mainly aimed at economic historians years from now and posterity in general. It is not intended for present day consumption or decision-making and certainly has no predictive qualities whatsoever. Recessions are often identified by NBER as having been in place long after the real slowdown in the economy has ended and the recovery is in fact already underway.

Frankly the only way to really know we are in a recession in real time is anecdotal. Friends and family members start getting laid off or having a difficult time of it at work. You see abandoned construction sites in your town. Stores close. Yes, there are a few stats that can indicate a concurrent recession (Purchasing Managers Indexes falling below 50, unemployment numbers starting to spike) but it’s remarkably tricky to know if one is currently experiencing one.

By virtue of her tweet: “When y’all think they going to announce that we going into a recession?”, we know that Cardi B for one is breathlessly waiting for an official recession announcement at some imminent Treasury press conference or something. Sorry Cardi, that just isn’t going to happen. If we are currently in a recession today, we’ll probably find out for sure about it towards the end of the year - by which time we may well no longer be in recession.

So what you potentially have is an extremely forward-looking animal (the stock market) colliding with a very backward-looking one (an official recession declaration) and that can often mean that the damage and the pain can be mostly over by the time we know for sure what the reason for it is. The stock market may well be looking beyond any recession very soon and that is why we need to focus on what is stirring beneath the surface of the market in terms of broad supply and demand rather than reacting to real time events when it comes to figuring out when the skies are beginning to clear. And you’ll find that in my ”Under The Hood” section every week in this report.

When looked at in this context, recessions aren’t necessarily always the stock-killers they may seem. Tom Essaye’s Sevens Report ran the numbers which showed a surprising outcome. Using periods beginning six months before the official recession start dates and ending six months after the official recession end dates, he found that, of the eight official recessions since 1969, five of them saw pretty meaningful S&P 500 price increases over those time periods, moving higher, on average, by a very healthy 14%.

It should said that the other three (1970s stagflation, the dot.com crash of 2001 and the late 2000s financial crisis) did indeed inflict long-lasting and intense damage to stock markets, but the assumption that a recession and a hefty stock market crash inevitably march hand-in-hand in simultaneous lockstep is simply not borne out by the data.

Summing up, while recession is a major buzzword right now, don’t let it significantly scare you. Recessions themselves are arbitrary designations and the economy slows well ahead of them and market declines tend to occur a long time before they are declared. By the time the economy is deemed to be in one, stocks can often have already bottomed out and are looking towards the recovery.

What matters far more than whether a recession exists or not is its duration once it has been determined that it is in place. The three “bad” ones each lasted for a long time and proved far more destructive than the other shorter ones. A short recession, even if it is intense, is going to hurt far less than a long-drawn-out affair that may never reach that level of intensity, but just drags on and on.

Other News:

Falling sales, rising prices .. Record-setting prices and rising mortgage rates sent sales of previously-owned homes to their lowest level in almost two years. The number of existing home sales 3.4% from April to May, the fourth consecutive monthly decline and the fewest sales since June 2020. That’s 8.6% lower than a year ago. The amount of home sales have essentially round-tripped back to levels seen in early 2019 before the COVID outbreak.

Further declines in sales should be expected in the coming months because of the industry euphemistically calls “housing affordability challenges”. The median price for an existing home went above $400,000 for the first time ever, reaching $407,600, a 14.8% rise over the last year.

Bye, bye Juul .. The U.S. Food and Drug Administration (FDA) announced plans last week to limit nicotine levels in cigarettes and then ordered Juul to be completely sh…

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The Federal Reserve has now shifted to a full-on, break-the-glass emergency footing on inflation. It’s busting out the big guns in the form of a lumpy interest rate increase and very loud threats that it will not stop until the beast of high inflation is finally slain. And if that remedy pushes the country into a recession, well then so be it. The result was the worst week for the stock market since those scary days back in February 2020.

Markets moved seamlessly from the ghastly Friday of the previous week to an equally dire Monday of last week, plummeting further as speculation began to grow of the need for a 0.75% interest rate hike by the Fed after being spooked by Friday’s hotter-than-expected May Consumer Price Index (CPI) growth. Monday’s plunge took the S&P 500 into official bear market territory (down over 20% from the high).

It is said that the stock market has a memory and it could well have been that it was remembering what had happened just a month ago, at the time of the last Fed meeting. As a reminder to those who don’t live and breathe this stuff 24/7, the 0.50% increase in rates that day was met in the hours following the announcement and press conference by smug, nodding approval from the usual talking heads on CNBC and elsewhere (“this is exactly what they should have done, the market will be happy”) and Fed chair Jerome Powell said in his press conference that the possibility of more than 0.50% had never even been considered.

And indeed, the market did party nicely higher for the rest of that day. But the next day saw an absolute bloodbath - markets slaughtered across the board with nowhere to hide. The exact same set of facts that been widely accepted as good news at 2:30pm on a Wednesday turned out to be disastrous by the opening bell on a Thursday.

Surely that exact market scenario couldn’t play out again identically just weeks later. Could it?

The frenzied speculation of the 0.75% hike grew to a near-certainty by Wednesday morning last week, with trader positioning in the futures market showing the probability of this outcome moving from 4% to 97% in the space of three working days and the Fed duly obliged in the afternoon with officials announcing a 0.75% rate rise, which increased the Fed’s benchmark federal funds rate to a range between 1.50% and 1.75% and the median expectation among officials for the mid-point of the fed funds rate to be 3.375% by the end of the year.

Interestingly, the Fed removed the long-used phrase indicating that it “expects inflation to return to its two percent objective and the labor market to remain strong.” from its post-meeting statement. Powell claimed in the press conference that the phrase was removed because it gave the false impression that the inflation rate in the US was uniquely dependent on Fed actions when it is clear that events beyond the Fed’s control in China, Ukraine and at supply chain ports around the world are having a significant impact on US inflation.

In terms of expectation-setting, he also said that he doesn't anticipate hikes of this magnitude to be "common". However, he hedged nicely by stating that the July meeting could see an increase of “between 0.50% and 0.75%”. Well played, sir. But we haven’t forgotten what you said in your press conference in May.

The immediate reaction on Wednesday afternoon, just like last month, was a reflexive rebound in stock prices. However, considering the prior string of five, sometimes intense, consecutive losses, there was a sense that this response may be little more than a reaction to oversold short term conditions, especially considering it was led by the biggest loser names and no-one was really fooled.

Then, in an eerie echo of events just a month earlier, markets cratered the next day with profit-less tech and Small Cap stocks in general getting mauled the hardest and the least badly-affected being the defensive stocks like consumer staples and utilities. As I have said before in previous reports, this type of sector price action does not typically reflect a market on the brink of recovery.

If you wanted to sum up this week’s action in one sentence, it would read something like: The market appears to be desperately trying to reprice itself lower to discount in advance the growing likelihood of a recession caused partly by the acceleration of interest rates deemed necessary to fight soaring inflation.

Short term gyrations don’t matter much, though. What investors really want to know is; when is all this s**t going to end? No-one knows of course, but on one hand, if the Fed is right and inflation is essentially a 2022 problem that fixes itself in 2023, then the end of this decline in stocks is much closer to the finish line than the starting line (not to say that the bottom is in yet).

On the other hand, if the Fed is wrong (which it has been pretty much all along when it comes to inflation .. remember “transitory”?) then we are not close to a bottom yet because the past six months of reactionary, growing Fed hawkishness at every turn is only going to continue.

If that’s the case, and if it is true that the market has memories, we could well be looking at a base case of completing a total round-trip to the immediate pre-COVID-crash levels of February 2020 (for the S&P 500 that’s SPX 3383, about another 8% fall from here). For reference, the COVID-low of March 2020 is SPX 2237, still another 39% below where we are.

A quick look at the other main drivers of stock market performance doesn’t really provide much comfort. It is becoming clear that China is not abandoning its zero-Covid policy and as a result the market must continue to consider the possibility that new lockdowns could be enacted at any time and with little or no advance notice. And the Ukraine conflict drags on and on with no sign whatsoever of any kind of imminent conclusion.

On the economic data front, the Producer Price Index (PPI) measure of wholesale inflation was a little better than expected but retail sales dropped unexpectedly.

The housing market is starting to seize up with buyers, sellers and builders all looking to be on the brink of basically going on strike.

Mortgage rates have essentially doubled this year, tossing millions of potential buyers onto the scrapheap with home prices where they are. Sellers suddenly face the prospect of trading in their lovely, recently-refinanced 2.75% mortgage for a 6% one if they sell their home and buy another. Many figure that they’d be a lot better off by taking their home off the market and maybe spending some money on renovation instead (despite a raw material shortage and enhanced labor costs). Figures last week showed housing starts fell nearly 15% between April and May and the number of building permits issued dropped 7% over the same period.

So we have less inventory, crippled buyers and de-motivated sellers. Not a great combo. Major real estate brokers Redfin and Compass reacted last week by each laying off close to 10% of their staff.

Other News: Crypto edition

The price of Bitcoin is in free-fall, last week sinking below the 20,000 level as well as breaking below its 2017 high and has now shed well over two-thirds of its value in just eight months (in what is still only the fourth worst sell-off in its short history). Other digital coins are getting completely slaughtered as well.

Only a year out from its Initial Public Offering (IPO, see FINANCIAL TERM OF THE WEEK below), Coinbase has already had to come out and deny rumors of bankruptcy (at which time we learned via regulatory filings that the company reserves the legal right to potentially seize its own customers’ crypto assets invested on the platform to help pay off its own creditors if it ever did happen) and the stock price has fallen even further since these rumors first emerged. The company also announced just last week that it was laying off over a thousand employees in cutting its workforce by nearly 20% and has been reneging on job offers it had made to …

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Last week saw some damaging backsliding for two of the three primary market drivers (how hawkish the Fed needs to be and China lockdowns) and no meaningful sign of progress in the third (Ukraine).

After the market indexes kind of meandered around without much direction early in the week, a sense slowly began to build that Friday’s inflation number might end up being more troubling than had been previously assumed. This was perhaps triggered by a second warning in the space of three weeks from Target (TGT) on Tuesday that the company would be forced into cutting prices — and profits — to pare down the retailer's excess inventory of goods that are not selling and added that "decisive" action was needed to keep these problems from lingering until later in the year.

Remember, the prevailing view until recently had been that we may well have hit peak inflation in April and that May’s data release would finally signal a beginning of the end of these current spiked inflation levels. But doubts began to emerge as the week went on.

The fears proved well-founded. On Friday morning, the Consumer Price Index (CPI) measure of retail inflation came out and showed no such positive signs. It rose by 1.0% in May alone and 8.6% from May 2021, the highest since Olivia Newton John was getting physical with everyone in December 1981. These numbers were even worse than in April and also higher than consensus expectations. Surging prices for energy, housing, and food contributed the most to the increase, with the energy index alone jumping 3.9% last month after actually declining in April. Core CPI, which excludes more volatile food and energy prices, climbed 0.6% in May, and was up 6.0% from last year, also higher than expected.

Obviously, these numbers aren't convincing anyone that things are getting any better. Peak inflation is very much not here – not yet, anyway. The Fed has told us all that it is going to continue stomping on the brakes but the prices of essentials like shelter, meat, bread, eggs, gas etc. with relatively inelastic demand (and, notably, which interest rate adjustments don’t really help to cool), are still rocketing higher with no end in sight. Additionally, the ongoing war in Ukraine pretty much rules out a material fall in food and energy prices any time soon.

The issue is whether we are going to get an old-fashioned “bust” before short term rates get raised high enough to start having an effect on inflation. The previously-trending idea of a Fed “pause” after 0.50% hikes at each of its two upcoming meetings next week and in July seems to now be pretty much in tatters.

Inevitably, the yield on the 10-year Treasury note jumped back above 3% to its highest level in a month, but the closely-watched spread between the 10 year rate and the 2 year rate narrowed sharply and is now less than 0.1%. Many believe that the tighter this spread gets (and indeed, ultimately crosses over whereby the 2 year rate becomes higher than the 10 year), the more inevitable a recession becomes.

At the same time, the University of Michigan's Consumer Sentiment Index hit the lowest level in its history as Americans expressed significant concerns about rising prices, especially at the gas station, with 46% of respondents attributing their negative views about the economy to inflation.

Because markets had somehow swallowed the story of the arrival of a peak in both inflation and the Fed’s hawkishness and already priced it in, stocks had the s**t kicked out of them on Friday. The downward path of least resistance was not helped by news out of China. Shanghai's government said it would place a district in the southwestern part of the city under restrictions for mandatory mass COVID testing, starting Saturday. Then another outbreak of COVID was reported near Beijing on Thursday.

Further reducing the number of places to hide, the European Central Bank announced it will raise interest rates next month for the first time in eleven years and could make an even bigger hike after that in an effort to slow soaring inflation in the EuroZone. It is also ending its bond purchase program put in place during the COVID crisis to boost the economy. Worth bearing in mind: the first hike will likely raise rates to zero.

The bottom line is that inflation has to not only peak but also show evidence of starting to meaningfully recede for the skies to begin to clear and after Friday’s data, no-one has any idea when this will happen. The Fed has made it clear that it regards inflation as a far bigger enemy than recession and will definitely risk the latter in trying to crush the former. Each time the inflation data shows no relief, the Fed is going to further double-down on its mission.

Other News:

Doing the splits .. Amazon (AMZN) split its stock this week stock at a rate of 20:1. (see FINANCIAL TERM OF THE WEEK below) and Tesla (TSLA) announced that it would do the same, but at a rate of 3:1. The forward stock splits will increase the total number of outstanding shares in the company while at the same time reducing the share price by the same multiple.

As a result, while eligible shareholders with shares at the time of the split will receive more shares, the total dollar value and cost basis of their positions will not change. A stock split neither creates nor destroys value. The total amount of pizza doesn’t change whether the pie is cut into four slices or eight.

Speculation is that the move is primarily designed to make it easier for these firms to be incorporated in the calculation of Dow Jones Industrial Average of just thirty stocks, which, uniquely (and ridiculously!) among stock market indexes, is a price-weighted average that would be blown out by the inclusion of these stocks at their current elevated prices.

Stores filled with the wrong items? .. Shoppers have shifted spending from the casual clothes and home items that had been in demand during the height of the pandemic, catching most retailers off guard and leaving them with excess goods that now need to be marked down so they can be moved. Target (TGT) wasn’t the only retailer to point this out. Joggers are piled up at Gap (GPS), Macy’s (M) has too much activewear and Kohl’s (KSS - an apparent target last week of a takeover by the owners of the Vitamin Shoppe) is full of fleece. But Macy’s said markdowns to clear the excess inventory would weigh heavily on profit margins, and warned of higher promotional levels throughout the industry as other retailers do the same.

Credit card worries .. There is growing concern about rapidly increasing credit-card usage by consumers amidst rising interest rates. As rates go up, credit-card companies charge even more for balances carried by consumers. Those levels are usually extremely high since, unlike mortgages and car loans, there is no collateral involved. The average interest rate currently being charged is 16.7%. That's the highest level in two years.

The latest revision of first-quarter gross domestic product showed US Household Disposable Income is down 5.5% compared with the same period a year ago. That points to rapidly shrinking spending power for American households.

This is a potentially toxic combo of circumstances as disposable income will shrink further and faster as higher debt needs to be serviced at higher interest rates. If this dynamic doesn't change, it could easily help push the economy into a recession.

Under The Hood:

What technical indicators should we be looking out for when it comes to signs that the market may have bottomed out?

The ideal setup for a lasting bottom is usually a fully oversold market where anything and everything is indiscriminately dumped by investors resulting in the complete exhaustion of Supply, immediately followed by a powerful and sustainable reversal that takes important core indicators back above recent highs.

Further evidence that the primary trend is actually changing from negative to positive may be found in this reversal being confidently led by …

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https://podcasts.apple.com/us/podcast/shock-your-potential/id1336097089

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