AM Brew, Jun 8th, 2022
Risk assets are a tad weak ahead of tomorrow's ECB - European markets & US Futures are trading down -25 bps to -50 bps. The ECB is expected to slow trillions of asset purchases in a significant tightening.
Oil is now trading above $120 and we are seeing stories with $145 and $175 oil predictions. As we have been saying for the past 3 weeks: oil is the key to inflation and aggregate demand is not down enough to offset the Russian supply shock. In fact, the reopening of China suggests that aggregate demand may be growing. Of course, there is still good news out there. Yesterday Taiwan Semi said that forward sales are likely to accelerate to approximately 30%. Wow.
Today's pre-market news is the lightest we have seen. The front page of wsj.com doesn't have even one new news item that is investment-worthy. These are not investment-worthy stories: Waltons buy the Broncos, Tech Dominance Ends, Yellen expects Inflation to Persist, Lucid & Rivian CEOs made $400 million, SPACs mislead Investors, SanFrancisco Rising Murder Rate, Ukraine Cities Turning into Ghost Towns. Its a quiet day.
With the lack of short-term news, is there any longer-term news to contemplate? Well, the airline situation is disruptive. Stories about "revenge travel" are common, with some couped up people paying almost any price for their summer holiday. SkyWest Airlines is terminating service to 29 smaller cities - in most of these cities, they are the only airline flying, rendering these airports into ghost towns. Williamsport PA, a small city of 30,000, lost its only commercial flight - this is a picture of its airport shown by the WSJ:
Evidently a lot of pilots were encouraged to retire early in the pandemic, and new rules making it tougher to become a pilot has led to a massive pilot shortage. With fuel prices rising and a pilot shortage, air travel is becoming a lot more expensive.
Not everything is bad on the inflation front, but as can be seen, fossil fuels are the current inflationary problem right now, as housing, rental cars, lumber are not a problem:
Yesterday, our DeMark Technical team published a thesis of long bonds, long AAPL & GOOGL once the 13 sequence completes, and covering the energy short.
In today's inflationary economy, people are cutting back. Are you cutting back on your lawn-care service, dining out, or driving? Don't be surprised to see weak earnings from some health care sectors as people cut back on semi-discretionary healthcare. We are spending more time analyzing sectors that appear to have pricing power without volume impact: Lithium miners are an example. Try increasing your EV battery order by 1 million units - you are not negotiating price. In a sign of a market that wants to rise, Target came back yesterday from its scary pre-release - stay away from buying these weak names on the first or even second break. Bear markets take time to develop. Target needs to be promotional to rid itself of excess inventory. There are 2 economies out there. Allocate your capital to the strong, avoid the weak. The time for bottom fishing will be coming soon, maybe in 8 months.
Futures this morning as of 8:20 am New York time are very quiet - really nothing going on anywhere. Maybe oil doesn't rise today - lets hope !