(Justin Vaughn, Editor, Options Trading Report)
After the market finished lower on Monday, and after investors and traders had time to digest recent financial announcements, a ‘bit’ of confidence began to emerge on Tuesday. The Federal Reserve Vice Chair, Jael Brainard, cautiously remarked that maybe a move to slow rate increases would be ‘befitting’ moving forward. That comment gave the market a significant boost with all three indices moving upward. Other news sparking the market was President Biden’s meeting with China’s Xi Jinping in Bali, with the two world leaders showing respect and cooperation, amid a strained relationship, Stocks move higher on Tuesday, as investors’ confidences were buoyed by indicators inflation may have finally made the ‘turn,’ as each of the past three months it is dropping. And as the inflation rate falls, the indexes have seen several ‘record’ days, dispelling thoughts that the Bear is taking charge. Consumer spending has remained strong, as October sales were up 1.3%. Even as large retail corporations’ quarterly reports have shown overall sales increases, profits have slipped. “Part of the relative strength in the retail sales versus some of the reported earnings is that it isn’t an inflation-adjusted series,” Ian Lyngen, head of U.S. rares strategy at BMC Capital Markets. “Yes prices are higher and that’s creating higher nominal sales. But in real terms, it’s not as strong as headlines might suggest.”
By Wednesday ‘doom and gloom’ began to infect the market, as investors and traders worried that higher interest rates are putting pressure on capital spending, as housing and home improvement starts are coming to a stall. As mortgages accelerate to near 7%, the real estate markets are flat, with home buyers disappearing and only the wealthy able to transact.
The Bond market, a true barometer of possible recession directions, saw the 10-year Treasury note yield dropped to 3.693% from 3.798% on Tuesday and the two year note edged up to 4.363% from 4.359%. As noted by the Wall Street Journal, “yields fall as bond prices rise.”
The price of Diesel Fuel is Accelerating…Demand for diesel fuel is dropping alarmingly, as freight hauling and agricultural needs are at ten-year lows at this time of the year. According to AAA/Opis gasoline is up 14% and diesel has soared 50% this year, with diesel selling at $5.35 a gallon. The Energy Information Administration recently reported that the country had only 25 days of diesel in reserve- lowest in 14 years. “Tom Kliza, global head of energy analysis at the Oil Price Information Service, a Dow Jones Company, said, “The world finds itself with a reasonable supply of crude oil and gasoline, but some distinct problems with diesel, heating oil, jet fuel, and kerosene. The four products are fetching prices of $150 to $200 a barrel, while crude-oil benchmarks are largely ranging from $85 to $100,” he says, and of those four, diesel is the ‘most critical.’ “
England is bracing for an economic crisis…High energy prices, poor policy choices, and an economy that is and has experienced runaway inflation. Add in the political disruption and you have all the earmarks for recession. Energy prices are soaring, and supplies\ are minimal for the winter. Russia has halted much needed natural gas as the fallout of the Ukraine war, with the U.K. losing favor of Putin. The Bank of England predicts a shrinking economy of 2.9% in the next year with a recession that could take until 2026 to achieve pre pandemic levels.
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RUMBLINGS ON THE STREET
Carl Icahn, Billionaire Investor, Barron’s “A rally like this is of course very dramatic to say the least, but you have them all the time in a bear market…I am still very, quite bearish on what is going to happen.”
Julian Emanuel, Evercore ISI strategist, Barron’s “The uncorrelated outcomes of elections across the U.S. reinforce the idea that, much like stocks in 2022, voters prefer governance and local-issue alpha over political party big-picture beta,” explains Mr. Emanuel.
Jim Reid, Deutsche Bank strategist, Barron’s “A 30-year mortgage market with the ability to constantly refi at lower and lower rates is a boon in a falling rates market, but if rates gap higher as they have this year, you create valuation gap risk in house prices,” Reid writes, “It just depends if there’s a catalyst for this to correct quickly or if the air will leak out of the bubble more slowly. Regardless, housing looks extremely expensive if rates stay at these levels.”
Robert Wood, an economist at Bank of America, WSJ “A series of unfortunate events and policy choices have cut U.K. potential growth.”