What a week…
A post-Thanksgiving rout followed by a Monday rally, a Tuesday sell-off, a big rally followed by a massive sell-off on Wednesday, a slow grind higher on Thursday… and an absolute capitulation on Friday.
The week-ending sell-off culminates after days of hedge funds acting exactly like the hedge funds we thought they were.
When I wrote about it Thursday, I asked, “When are these guys just going to lock in their epic year bonuses and take the month off? After all, that’s exactly what they did back in 2018.”
Well, maybe the answer is… now.
The narrative to lock in annual gains — well, other than the ominous Omicron Variant — was the huge swing and a miss in nonfarm payrolls…
Analysts expected job gains of 550,000 jobs in November, but data came in at less than 50% of that number…
Frankly, I’m not sure what analysts were expecting here with one of the weeks almost fully occupied by Thanksgiving.
And moreover, as a friend put it earlier with regard to government reporting, “I HATE holidays… It’s like the A and B teams are gone and they leave it to the D team to assemble the reports.”
Because when I cracked it open, I saw that the household survey reported a 1.1 million GAIN in employment… and yet not a peep in the statement.
That’s not as bearish as the headline miss would indicate. In fact, that’s pretty darn good…
But what we can’t know amid these mixed messages is what the government’s policy response will be.
At the end of the day, THAT is what will drive markets, not some media narrative centered around a terrible analysis of an economic data point they don’t fully understand.
Remember, the Federal Reserve’s mandate centers around inflation, which has been caused by two factors… an increase in the money supply and the bottleneck in supply chains.
More workers mean supply chains start to catch up, inflation falls and the Fed can say, “HA…told you it was transitory.”
But fewer workers mean supply chains remain bottlenecked, inflation persists, and the Fed will have to get even more hawkish than Chair Jerome Powell has indicated so far this week.
Let’s be clear… I have absolutely no idea how the central bank will interpret this.
So all we can do is think about the macroeconomic implications of both instances.
First off, we can see that inflation has been easing… All we have to do is look at crude oil prices.
Energy accounts for a big chunk of the Consumer Price Index – the Fed’s preferred metric to track inflation — and it has disinflated more than 20% from its cycle peak.
Other commodities have been faring similarly of late, though most are sticking at higher levels — as I’ve been expecting all year.
Absent any “help” from Fed tightening, I would expect these inflationary prices hold or decline a bit after slowing in Q1. With “help,” they likely decline faster.
And if more people are employed — which Friday’s jobs data clearly showed — then consumer spending growth should at least remain positive.
If the opposite is true and job growth IS slowing, then we will see a slowdown in consumer activity WAY sooner. And if the Fed “helps” by tightening policy at that point (it’s always at least a quarter behind), then we could see a serious market correction.
Until I see otherwise, I still expect the former — that consumer spending grows through the holidays and begins to slow in Q1 while inflation takes a pause.
And that means we want to continue focusing on consumer-oriented stocks like our retail names WOOF and CAL, and raw materials providers like the ones in XLB.
3 Sharp-Looking Stocks to Put on Your Radar
To that end, I want to bring three more companies to your attention…
The first is PVH Corp (NYSE: PVH), which you might know by its former name, Philips-Van Heusen. PVH is a brand holding company that owns names such as Tommy Hilfiger, Calvin Klein and Van Heusen. It also licenses other brands such as Kenneth Cole New York and Michael Kors
If you’re a regular middle-class, white-collar American male with a wife and two kids, then chances are you’re going to get some dress shirts under the ol’ tree this year. After all, you’ll be going back into the office in January sometime.
And more than likely, those shirts will be one of those brands.
PVH has gotten absolutely massacred for no reason since it reported fantastic earnings a while back.
During that call, it beat the Street’s estimates by over 30%, announced a $150 million share buyback program, reinstated the dividend and paid down debt.
And the company has been rewarded for its excellent management with a 20% reduction in share price…
That’s stupid, and we want to buy the dip… just not today, as this thing is a falling knife.
On that note, however, I want to stick in two other falling knives in a sector that will do REALLY well under both possible sets of macroeconomic conditions…
Shares of crypto wallet Coinbase (NYSE: COIN) and the blockchain-focused Amplify Transformational Data Sharing ETF (NYSEArca: BLOK) are also getting slaughtered this week.
That’s also stupid, and we want to buy the dip.
But again, patience matters here. And I’d rather wait and watch than act and lose money.
Updated watchlist below…
If you were buying UNG and ARCH on the dips this week, then Friday was a good day to sell some and pick up a little WOOF or XLI.
But again, keep sizes small this month.
Markets are telling us that the good hedge fund managers are trying to lock in gains, and the bad hedge fund managers are getting liquidated and sent home with their stuff in a box.
Despite my optimism around these companies and ETFs, these knives could very well keep falling through monthly options expiry on the Dec. 17.
That means there’s plenty of time to set up for the next earnings season… when all these guys will crush it.
Have a great weekend… and stay frosty!
All the best,