Monday, September 12, 2022

Morning Note: Beyond CPI

Markets will be intently focused on tomorrow's CPI report... Anticipation of a softer-than-forecast reading coming off of uber-bearish investor sentiment (along with a large net short position among SP500 futures speculators, and options dealers positioned to provide some oomph should the index push above 4,000) combined last Friday to offer up a preview of what to expect should, indeed, August's inflation come in the least bit cool. Of course a hot reading would likely inspire the opposite.

Thing is, beyond how traders treat Tuesday's headline, inflation cooling -- (albeit not remotely to the point that would have the Fed turning tail, and, oh by the way, there may be components (like rent) that serve to offset those coming off the boil (like gasoline) -- is actually consistent with our current assessment of overall general conditions, which essentially has recession risk notably elevated going forward.

In which case, corporate earnings (they decline during recessions) are in jeopardy of being the equity market's next shoe to drop.

Bloomberg macro analyst Cameron Crise concurs: 
"...the big challenge for US markets will be navigating an earnings shortfall, which continues to seem likely within the next few quarters."
On another note, despite some all-too-obvious political headwinds, we continue to like Latin America (Brazil in particular right here) for the patient long-term investor.

As does Bloomberg foreign exchange analyst Davison Santana:
"Latin American stocks have been heavily beaten up amid global volatility and are now so cheap they’re hard to resist.
* The MSCI EM LatAm forward price-to-earnings ratio is only a fraction above levels seen during the 2008 financial crisis.
* Stock prices in Brazil, Mexico, Chile and Colombia don’t reflect the resilience corporate earnings are expected to show. The broad P/E ratio is currently 48% lower than its 10-year average.
* Nobody is questioning why investors initially sold risky positions in satellite countries. But the time to panic is now behind us.

* And there are reasons why a turnaround in fortunes may be imminent. First, many of these countries are already deeply advanced in their tightening cycles.
* Brazil started hiking in March 2020, a full year before the Fed, and is already done. Chile and Colombia probably only have two more hikes ahead. What follows is adjustments to the long
end of the curve with valuations pushed higher as traders start discussing cuts.
* Commodities remain a critical driver. And while prices remain volatile, a rebound to this year’s highs seem more likely than further declines.

Asian equities rallied overnight, with all but 1 of the markets we track closing higher.

Europe's solidly green so far this morning as well, with 17 of the 19 bourses we follow trading up as I type.

US stocks are rising to start the session: Dow up 143 points (0.44%), SP500 up 0.68%, SP500 Equal Weight up 0.71%, Nasdaq 100 up 0.72%, Nasdaq Comp up 0.77%, Russell 2000 up 0.83%.

The VIX sits at 23.25, up 1.93%.

Oil futures are up 1.65%, gold's up 0.63%, silver's up 4.15%, copper futures are up 0.64% and the ag complex (DBA) is down 0.22%.

The 10-year treasury is up (yield down) and the dollar is down 0.58%.

Among our 35 core positions (excluding options hedges, cash and short-term bond ETF), 32 -- led by silver, Sweden equities, Eurozone equities, Brazil equities and Disney -- are in the green so far this morning. The losers are AMD, Albemarle and ag futures.


Big, messy problems rarely have perfect solutions. Inevitably, you must work with inadequate information to make very difficult decisions that almost certainly will have unintended, and frequently bad, consequences; the alternative is not to act at all, which is far worse.

--Paulson Jr., Henry M.. On the Brink 

Have a great day!