Thursday, June 9, 2022

Morning Note: Those Starving Retailer Castaways...

That positive turnaround action threatened by yesterday's early session didn't play out, as, ultimately, stocks gave way to notable downward pressure. That ugly breadth reading I touched on in the video commentary turned out to be telling after all. 

Global equities struggled overnight with news that China was reinstituting lockdown measures in a section of Shanghai. While it's supposedly "only for the morning" and for the purpose of performing mass testing, one would presume that should a good number of positive results show up that further measures would be taken. Which conflicts with our view that Xi has huge incentive to creative a different narrative, and strategy, with regard to the handling of the Omicron variant. Tuesday saw the largest inflow into MCHI (a US-listed Chinese equity ETF) since 2011, which jibes with our present thesis...

The latest reports from some retail behemoths now has all eyes on inventories. Yes, like the starving castaway who, upon being rescued, eats himself into a miserable state, retailers, whose warehouses dried up when covid had the world largely locked down began devouring inventory the moment it became available. 

So, therefore, here's this week's news from Target:

"Target is canceling orders from suppliers, particularly for home goods and clothing, and it’s slashing prices further to clear out amassed inventory ahead of the critical fall and holiday shopping seasons."

Although, from the intro to the May Logistics Managers Index report:

"Warehousing and Inventory continue to grow at a similar pace to the one we have observed over the last 18 months. Inventory Levels are unseasonably high, packing warehouses to the gills and driving costs up for both inventory and warehousing."

Of course these are the seeds of some potential downward pressure on inflation prints in the months to come. 

Back to breadth, as I type the SP500 has, in a virtual replay of yesterday about this time, moved from notably negative to essentially flat. All the while its losing constituents are outpacing its winners nearly 4 to 1... We'll see how this one (this one session only, mind you) plays out...

Asian equities leaned red overnight, with 10 of the 16 markets we track closing lower.

Europe (on news that the ECB is set to hike interest rates next month [the first hike in 11 years]) is down across the board this morning, with all the bourses we follow in the red as I type.

US stocks are mixed to start the session: Dow (with 3 to 1 negative breadth) up 14 points (0.04%), SP500 down 0.07%, SP500 Equal Weight down 0.26%, Nasdaq 100 up 0.01%, Nasdaq Comp (also with 3 to 1 negative breadth) down 0.14%, Russell 2000 down 0.94%.

The VIX sits at 24.51, up 2.30%.

Oil futures are down 0.69%, gold's down 0.27%, silver's down 0.93%, copper futures are down 1.46% and the ag complex (DBA) is down 0.45%.

The 10-year treasury is down (yield up) and the dollar is up 0.06%.

Among our 38 core positions (excluding cash and short-term bond ETF), 11 -- led by AMD, carbon credits, consumer staples stocks, treasury bonds and AT&T -- are in the green so far this morning. The losers are being led lower by Latin American equities, Sweden equities, base metals miners, oil services stocks and uranium miners.

Once again (our oft-quoted quote):
"People get all excited about the price movements, but they completely misunderstand that there is a bigger picture in which those price movements happen. Price movements only have meaning in the context of the fundamental landscape. To use a sailing analogy, the wind matters, but the tide matters, too. If you don’t know what the tide is, and you plan everything just based on the wind, you are going to end up crashing into the rocks."

--Colm O'Shea 

Have a great day!