Inflation
The October CPI report came out Thursday morning and we finally had a good surprise, with inflation ticking down to 7.7%. Isn’t it extraordinary that it’s now a relief to “Only” have 7.7% inflation? It’s still a ridiculously high inflation rate.
I don’t like sounding negative, but I don’t expect another drop in inflation in November. Why? The Saudi’s have reduced oil production by 2 million barrels/day beginning last week. They want to have $100 oil. That’s where we are heading now. There is a dangerously low U.S. supply of diesel fuel, which is expected to impact us on Nov. 24th. Predictions are for diesel shortages at that time.
The markets rallied sharply on the CPI report. The rally won’t last long. Most likely it will be over early next week. I think we’ll see the peak Monday or Tuesday. We might go flat at the top for a bit, possibly.
S&P 500 stocks in Positive Trends have gone from 130 to 280 over the past week. There are another 65 or so poised to flip positive over the next day or two. Just another 1%-1.5% market move will get that done. When that move is done, this rally is over. That is exactly what we saw happen in the big rally last summer. When we got to 366 of the 503 stocks in the S&P in Positive Trends, that was the end of the rally. We are at 280 today, with 65 more likely by Monday. Not much juice left to fuel a rally at that point. With fuel shortages and gasoline getting more expensive, we could easily see the markets go re-test the S&P500 3500 level over the next 3-4 weeks.
The MidTerms
I am actually pretty pleased with the results from the midterms. It appears the R’s will take control of the House, so that means the crazy gov’t spending is over with. That will probably be the best thing that could have happened in regards to fighting inflation. It still boggles the mind that the D’s solution to reducing inflation was to pass the Inflation Reduction Act and spend hundreds of billions more. Reducing inflation is all about reducing demand. Excess gov’t spending is no way to fight inflation.
Inflation that is embedded into the economy is dreadfully difficult to eliminate. I don’t expect the Fed to reach it’s 2% inflation rate for at least 2-3 years, at best. The single best thing that could drive out inflation is if we got the number of drilling rigs in this country back to where it was pre-pandemic. We are 305 rigs short of that right now.
The slim win by the R’s is also good in the sense that it still leaves the D’s responsible for the economy, inflation, crime, the border, defunding the police, fentanyl, etc. If the R’s had had a resounding win, it would have made it easier for the D’s to point fingers as things deteriorate.
I still expect to see more market downside. Why? We have not yet seen capitulation in this bear market. It’s not over. Some capitulation in crypto this week, but that is still playing out.
There are still far too many stocks trading at high P/E multiple’s because there is still too much cash floating around looking for a home. Real estate was absorbing a lot of cash/liquidity. That is now off the table as home sales are at terrible levels due to higher mortgage rates. R.E. prices have come down, but not much yet. Mostly sellers taking offers below asking price at this point. Part of the improvement in the CPI report was rents starting to come down in some places.
Jobs
We are now seeing the beginning wave of layoffs. Facebook with 13,000, Intel with about 22,000. Twitter, Salesforce, and other tech firms are planning or doing layoffs. Bankers are laying off mortgage related staff. I’m not seeing near as many ads for temps needed for holiday retail sales. Certainly not as much as last year at this time.
Over 90% of CEO’s reportedly are planning for slower sales and many are planning on reducing staff. It’s time for the final leg of this bear market.
Russia-Ukraine
The Russians turned tail and gave up Kherson. It was the only Oblast (regional) capital they had captured. Now they have been driven out of Kherson. Ukraine appears poised to regain control of Crimea as well, which Russia took from Ukraine in 2014. Total humiliation for Russia, and likely we are getting to the end of the Putin era within the next year. Hopefully sooner.
I just hope that the world will welcome the Russian people back after Putin is gone, and we can start a new chapter in European history. It’s never been about the Russian people, so let’s blame Putin, forgive the Russian people, and start with a clean slate with them and their new leaders.
The smartest thing the Russians could do is join the West in regards toward China. That’s a big leap, but one that could totally re-shape Chinese aggression in their quest to dominate the world. Joining with the West would give the Chinese second thoughts about going after Russian oil & gas in the Far East. You can bet that China has been thinking about that given that Russia couldn’t beat Ukraine, and much of their military has been destroyed. It would be a prime time for China to go after that. Russia would do well to court the West when Putin gets ousted.
It’s all idle speculation on my part. Perhaps I have been reading too much Tom Clancy. But just think about it. It would make sense for China to make such a move.
Charts and Video
This weeks chart
Strength is in the Industrials and Financials.
This weeks video
This week (10/31-11/4) we saw a mixed market with almost equal numbers of sectors advancing as declining.
Let’s Go Get The Money
or at least keep what we have.
JimB