It Seems The Glass Is Half Full.

The market appears to have decided that the glass is half full, for the moment at least. Last week’s stock price declines, mostly concentrated on Friday, can essentially be put down to the seriously overbought conditions brought about by four straight weeks of gains and two months of solid progress. There wasn’t a whole lot else behind the price slump. Yes, perhaps economic data out of both New York state and China disappointed to start the week and some late-week Fed-speak attempted to dampen recent exuberance generated by the growing view that the days of rate hikes of more than half a percent at a time may now over. But the intense pessimism of the first half of 2022 now seems a distant memory already. War in Europe, runaway inflation, an inevitable collapse in corporate profits, a bumbling, behind-the-curve Federal Reserve forced to push the economy into recession; you don’t hear about all this nearly as much these days. A string of solid employment and, more recently, inflation data, much better-than-feared Q2 earnings and a tangible pullback in commodity prices are behind the shift. The latest Bank of America Global Fund Manager Survey reported that sentiment remains bearish among investment professionals, but is easing for the first time in a good while. Retail earnings kicked off the week with some good news as both Walmart (WMT) and Home Depot (HD) reported better-than-expected results for Q2. Shares of both retailers have been punished at times in 2022 as investors worried about inflation and a slowing economy. But these earnings provided a sigh of relief. Target (TGT) and Lowe’s (LOW) numbers weren’t as robust, but since investors are currently sporting rose-tinted spectacles, they were relatively forgiving. U.S. consumers continued opening their wallets last month, shifting savings from falling gas prices to purchases of everyday goods as they continue to weather high inflation and a slowing economy. Overall retail sales were flat in July compared with the prior month’s revised 0.8% increase but the measure of spending that strips out gasoline and auto sales rose 0.7% last month, showing shoppers maintained the ability to spend with much of the spending moving online. Minutes from last month’s Fed meeting released last week showed the members agreed that inflation was still too high and decided to increase the Fed’s key lending rate by 0.75% to a range of 2.25% to 2.50%. Officials see the fight against inflation as far from over. Recent declines in oil and other commodity prices can be largely dismissed, officials said, because they could quickly rebound just as easily, while gains in stickier categories like rents are expected to be ongoing. However, the participants indicated that as monetary policy tightened further, “it likely would become appropriate at some point to slow the pace of policy rate increases” while the Fed analyzed the effects on economic activity and inflation. In other words, wait and see. Frankly, I don’t see any policy shift here or indeed anything new at all and I was a bit puzzled as to why the market reacted so favorably to the release as if it represented some kind of new set of positive information or a sign of movement in a favorable new direction. A steep late-week fall in stocks suggested that maybe some kind of reassessment of this initial impression was going on. The year-end Fed Funds interest rate (the “terminal rate”) is still expected to be between 3.00%-3.50%. This expectation has not changed for a good while now. Regarding September’s hike in rates, it’s now considered more likely to be half a percent although three-quarters is still on the table. Put simply however; in order for the Fed to declare the rate hike cycle is ending (the holy grail of peak Fed hawkishness), it’s got to be very confident that: * the labor market will return to a better state of balance between job vacancies and the number of unemployed Americans (not happening yet). * that inflation will gradually be on course to return to the 2% target (not happening yet). * that future inflation expectations will remain well anchored at least near 2% (not happening yet). We have weeks for these pieces to fall into place, but the recent pace of progress cannot afford to show any signs of slowing down. Otherwise that half-full glass might very quickly start to look a lot emptier. OTHER NEWS: Housing grab-bag .. Housing appears to be transitioning from a tailwind to a headwind for the US economy and could well actually subtract from real GDP growth over the next year. Higher mortgage rates and soaring property prices means that, even as they spend more at Home Depot and Walmart, Americans are no longer spending so lavishly on buying new homes. And that's causing home builders to make adjustments. New home construction fell more than expected last month as demand slowed substantially. Housing starts declined from June to the fewest since February 2021. Starts for both single-family homes and multi family units dipped 10%. Every region in the country had a drop in starts, except the Northeast. Building Permits also were down, sliding 1.3% to a 10-month low. The National Association of Home Builders (NAHB) said confidence among its members was the lowest since May 2020. Sales of previously-owned existing homes slid 5.9% in July from the prior month to a seasonally adjusted annual rate of 4.81 million, the weakest rate since November 2015, not counting the pandemic-related drop in 2020, the National Association of Realtors said Thursday. July sales fell 20.2% from a year earlier. This was also the sixth consecutive month of existing home sales declines. The last time that happened, Miley’s wrecking ball was swinging through the Billboard charts in 2013. The number of home sale cancelations also soared in July to another two-year high as buyers continue to pull back. About 63,000 home sales were canceled last month, that’s about 16% of homes that went into contract. Meme stock nonsense is back again - with the same result .. Bed Bath & Beyond (BBBY) shares had their worst day ever on Friday, falling more than 36% in a matter of hours. Self-styled meme stock influencer Ryan Cohen’s RC Ventures announced Thursday evening that it had sold its entire position in the company. Cohen, who is also the chairman of GameStop, had owned about 12% of the firm’s entire float of shares and had been a guiding light to this latest iteration of the Reddit meme stock crowd who focused on buying up the stock using the Gamestop/AMC January 2021 playbook. On Tuesday, its stock price soared almost 70% intraday because of a short squeeze (see EXPLAINER: FINANCIAL TERM OF THE WEEK below). It finished the day up 29%. From that point to Cohen’s announcement late Thursday, it gained another 17%. At one point on Thursday, the stock was up almost 450% in August alone. The seemingly-doomed retailer spent 2021 and most of 2022 closing stores all over the place and massively reducing its workforce. It ended its most recent quarter with a little more than $100 million in cash to stay alive. Analysts now question whether vendors will agree to ship all the holiday merchandise Bed Bath & Beyond needs because of its awful finances. Needless to say, Ryan Cohen isn’t quite as popular with the retail meme stock crowd now that he has dropped them all like a hot potato, pocketing an estimated $68m in seven months for himself along the way. Please be careful who you blindly follow like a financial groupie. Problems in the Metaverse .. Meta’s Mark Zuckerberg has once again been publicly blasted on Twitter and elsewhere and this time it’s not over product-placing his favorite barbecue sauce. Last Tuesday, he Facebook-posted a screenshot from the company’s Horizon Worlds celebrating the game’s release in France and Spain. The image shows his awkward, dead-eyed avatar standing in an empty landscape populated only by a small version of the Eiffel Tower and Barcelona’s unfinished Sagrada Familia. The reception w… This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit simonbrady.substack.com