Month: May 2022

With the S&P tumbling as low as 3,800 just over a week ago, briefly triggering a bear market, before exploding higher in yet another furious bear market rally, one may think that Wall Street’s (second) most bearish strategist (after BofA’s Michael Hartnett), Michael Wilson, is content with the market collapsing in line with his weekly prophecies of doom and gloom, and is finally calling for a bounce. No such luck: in fact, in his latest weekly note (available to pro subs in the usual place), Wilson first takes yet another victory lap writing that “consensus is now more in line with our bearish outlook”, and using that as his basis, asks rhetorically “what’s the bull case?” His answer: “outside of a peace agreement in Ukraine, it’s difficult to construct a case for more than a bear market rally” which according to Wilson could at best push stocks another 5% higher, and the main reason for his downbeat view – his gloomy view on the state of the US consumer who “remains focal point for whether recession is coming” (and as we discussed last week, it is).

Let’s go over his arguments, starting at the top, namely Wilson’s contention that “over the past few months, many clients, competitors and commentators have moved into our more bearish camp” i.e., that Wilson he was ahead of everyone, claiming that his “competitors” have even adopted a ‘Fire’ and ‘Ice’ narrative—i.e., Fed tightening into a growth slowdown—for their less optimistic outlooks. 

As Wilson noted last week, and as we first discussed in April, while sentiment has cratered and is extremely bearish (or as we first called it, “apocalyptic“) positioning remains extended for asset owners, perhaps on the assumption that sooner or later the Fed will step in and bail everyone out. Repeating what he said last week, Wilson says that he remains firmly in the bear market camp but relief rallies can happen at any time, and it appears we are now in the midst of one. Specifically, consumer discretionary stocks are exhibiting a strong tactical rally as shorts scramble to cover what has been one of the best one-way trades of the year.

Not only is the sector the worst performer YTD (-25%) but it’s broken a 10-year uptrend relative to the S&P 500. In other words, Wilson says that we were due for a rally in the sector, but at the end of the day, “it’s nothing more than a bear market rally that will eventually fade.”

The other sector having the most trouble this year is FAAMG (i.e., Technology and Comm Services ): neither has broken down as much as Discretionary but both have also rallied sharply over the past week. Here, Wilson’s view remains the same: both are vulnerable to a payback in demand and/or a cancellation of orders in the case of tech hardware and semiconductors.

The bottom line, according to Wilson, is that the market “achieved” his near- term minimum downside target of 16.5x EPS and 3800 on the S&P 500 so it’s not surprising we are now seeing some relief given how oversold the market had become as investors began to contemplate the growth/recession scare part of our narrative.

So the only question worth asking here, according to the Morgan Stanley strategist, is whether this could be more than a bear market rally, could the lows be in, and what’s the upside? If so, then market leadership is likely to change too from the extreme defensiveness exhibited all year.

Echoing what we said last week, namely that the proximal reason behind the surge is that investors are growing increasingly confident that Powell will pause rate hikes in September, Wilson says that “the Fed may be contemplating a pause in September as several governors have recently hinted.” Wilson does not agree: “While we don’t claim to have any great insight to what the Fed will ultimately do, we do not think they are anywhere close to achieving their goal of getting inflation under control.“

That said, the MS strategist says that he has been in the camp that the bond market may have overpriced how much hiking the Fed will need to do to get inflation back to a more reasonable level or to avoid a meaningful slowdown/recession in the overall economy.  To Wilson, the best argument is the decline already registered in financial markets and the dramatic slowdown in housing activity.

Speaking of pricing in the Fed’s tightening, Wilson believes that the bond market has already done a lot of the Fed’s job even before the Fed actually makes more progress on its rate hike path and shrinks the balance sheet. This is traditionally the way it has been, particularly since the Greenspan Fed and the practice of forward guidance. At the same time, Wilson believes that there is one major difference between this Fed and the Volcker Fed that Powell appears now to be trying to emulate to fight inflation— according to the MS strategist, this Fed is somewhat beholden to the idea that they can’t surprise the markets too much. Perhaps that has changed a bit with Chair Powell’s recent congressional testimony during which he expressed the Fed’s resolve to quash inflation, but as even Wilson admits, “the Fed is still unlikely to go cold turkey” and pretty much everyone on Wall Street agrees. That said, investors may be underestimating the Fed’s willingness to shock markets if necessary to achieve its inflation goals, according to Wilson, who however seems to ignore the collapse in housing, and reports of peak inflation and the upcoming crash in the labor market.”

In any case, Wilson’s bottom line is that “inflation remains too high for the Fed’s liking and so whatever pivot investors might be hoping for will be too immaterial to change the downtrend in equity prices, in our view. However, that’s not to say it can’t get animal spirits moving higher in the short term

So in case it wasn’t clear enough, Wilson again warns that “it’s hard for us to construct an upside case from here. In fact, the  probability of our bull case target of 4450 12 months out is looking less likely than when we published it just 3 weeks ago.” That said, one event that could increase those odds is a meaningful and lasting cease fire between Ukraine and Russia. If such a cease fire were to happen and could be sustained, “it would relieve a lot of pressure on global growth and commodity prices, thereby improving the outlook for equities.”

However, not even a (highly improbable) ceasefire would eliminate the core risk of Wilson’s ‘Fire’ and ‘Ice’ narrative, which is now too far developed to reverse. In other words, “inflation and growth risks are so embedded at this point, it’s going to be difficult to remove them.” Perhaps it might take some of the recession risk off the table but growth is still bound to slow, particularly for earnings where margins are now the biggest risk.

The other positive development for growth, of course, is China’s decision to move away from zero Covid, albeit gradually. The problem for markets, Wilson again spoils the party, “is that this may exacerbate inflationary concerns and keep the pressure on the Fed to remain max hawkish. Nevertheless, it is one of the other external shocks that could lead to a more sustainable rally than we are currently expecting.”

In conclusion, Wilson’s base case is that “last week’s strength will prove to be another bear market rally in the end” and Morgan Stanley sees “maximum upside near 4250-4300 in S&P 500 terms” with Nasdaq and small caps likely to rally more on a percentage basis as is  typical during such rallies, “i.e., more heavily shorted areas do the best.”

In terms of catalysts, Wilson is confident that “the turning point for the next leg of the bear may coincide with the next Fed meeting where it will likely be clear they are far from dovish” and while that may be the case for June and even July, we would counter that by September we will have the infamous Jackson Hole pivot and the Fed will be fully dovish again. In any case, Wilson stands by his call that the S&P 500 will trade close to 3400 by the end of 2Q earnings season — i.e., mid August.

One final point, and this goes beyond merely the day to day whims of the Fed, Wilson addresses the fundamental reason behind his bearish view, which now focuses on slowing growth (but apparently not slow enough to spark a recession and crippled inflation), and his view that earnings estimates are too high: “some of this is due to the payback in demand that transpired during the lockdowns while the other risk is related to profitability and the negative operating leverage many companies are now facing as cost inflation is rising faster than end market pricing. None of this assumes an economic recession which will only make the downside worse.”

On that score, Wilson notes that regional PMIs have come in well below expectations this month and point to lower ISM readings that will be out later this week. How low? Based on the regional PMIs, our economists estimate the May manufacturing PMI to come in at 50.8 or -4.6 points from April’s reading of 55.4. Using Wilson’s remarkable chart correlation and goalseek skills, the y/y change in the S&P 500 is projected to drop to a level of approximately 3600.”

Of course, this is really just a charting exercise and Wilson admits as much, saying he doesn’t know how the ISM will come in (it has held up better so far than the regional PMIs) but ultimately Wilson speculates that “it’ss likely to catch down.” In other words, if not this month, it will likely be July or August, and based on the relationship shown below, it’s just another reason why Wilson still believes that markets can trade toward our 3400 target in the short term. And while this argument is valid, the only problem we have with this line of thought is that as Wilson admits in his very first sentence, his bearish cases is now consensus, and if anything we are far more likely to see a continuation of the bear market rally, one where a few more percent of upside will become a self-fulfilling prophecy that the bear market is now over.

More in the full note available to professional subs.

By Jeffrey Jones of Gallup

Gallup’s Economic Confidence Index measured -45 in May, down from -39 in each of the previous two months. It is the lowest reading in Gallup’s trend during the coronavirus pandemic, and likely the lowest confidence has been since the tail end of the Great Recession in early 2009.

Gallup’s Economic Confidence Index is a summary measure of Americans’ perceptions of current economic conditions and their outlook for the economy. It has a theoretical range of +100 (if all respondents say the economy is excellent or good and that it is getting better) to -100 (if all say it is poor and getting worse).

The latest results are based on a May 2-22 Gallup poll, conducted at a time of record-high gas prices, elevated inflation, government reports of declining economic growth in the first quarter, and a slumping stock market. Low unemployment is a rare bright spot, but employers are still struggling to find workers to fill needed jobs, which is contributing to ongoing supply chain problems.

Gallup has measured Americans’ perceptions of the economy on its multiday telephone surveys since 1992, but did so infrequently between 2009 and 2017. It is possible that confidence was lower at some point during those years than it is now.

Confidence was clearly lower than now in February 2009, when the index registered -64 in that month’s Gallup survey.

Americans Less Positive About Current Conditions

Currently, 14% of U.S. adults rate economic conditions as either “excellent” or “good,” while 46% say they are “poor,” with another 39% rating them as “only fair.” The Confidence Index takes into account the net of excellent and good versus poor responses, which is -32 this month. In April, 20% of Americans rated the economy positively and 42% said it was poor, a net of -22.

Meanwhile, 20% of Americans say the economy is getting better and 77% say it is getting worse, essentially the same as in April and March.

Inflation Continues to Rank Among Top U.S. Problems

Although not nearly as common as during the 2007 to 2009 recession, economic concerns figure prominently when Americans are asked to name, without prompting, the most important problem facing the U.S. Eighteen percent mention inflation specifically and 12% mention the economy in general terms. Inflation essentially ties the government as the top overall problem, with 19% naming the government.

Other frequently cited problems include immigration, race relations or racism, abortion, unifying the country, and crime and violence.

Mentions of inflation have leveled off since March, with readings of 17% or 18%, after increasing throughout the fall and winter months. They remain relatively high compared with recent history but have been higher in the past, including 52% in October 1981, 49% in January 1982 and 31% in April 1982, around the time inflation was last at its current rate. Inflation had been named by an average of 1% of Americans between 1990 and 2021.

More generally, responses to the most important problem are similar to April. The main exception to that is abortion, which increased from 1% to 5% after a draft opinion of a Supreme Court decision that would overturn Roe v. Wade was leaked. Most of those mentioning abortion are Democrats or lean Democratic, indicating that the response mainly reflects pro-choice Americans’ concerns about overturning the decision, rather than Republicans’ concerns about abortion per se.

The 5% mentioning abortion is small in absolute terms but is the largest Gallup has measured for the issue since it began tracking mentions of it in 1984. Ten percent of Democrats and Democratic leaners name abortion, putting it on par with mentions of inflation (13%) and race relations (10%) among this group, but still behind the government (17%) as the top problem.

Bottom Line

Americans’ economic pessimism took a turn for the worse this month, and it is likely the lowest it has been since the end of the Great Recession. Last year, as inflation began to increase, most other economic factors remained healthy, including economic growth, stock values and unemployment. But economic growth contracted in the first quarter, and if the second quarter shows a similar decline in economic output, the U.S. will meet the usual definition of a recession used by economists. Such a designation could erode U.S. economic confidence even further.

Government leaders in the besieged Ukrainian city of Severodonetsk in the Donbas region are urgently telling residents to stay inside their homes and shelter in place after huge plumes of smoke containing Nitric acid was released into the air.

Ukraine says the contamination happened after Russian forces struck a tank containing nitric acid at a large chemical plant. Emerging videos on social media show thick orange smoke in the form of a mushroom cloud rising high into the air over the city, reminiscent of the deadly Beirut port warehouse explosion of 2020 that involved ammonium nitrate. The below is among the first unverified clips of the Severodonetsk tanker explosion aftermath:

Video for the explosion of a tanker containing nitric acid at a chemical plant in #Severodnetsk.#Russia #Ukraine #Russia_Ukraine pic.twitter.com/fBtFd0gUBJ

— خالد اسكيف (@khalediskef) May 31, 2022

The local governor of the Luhansk region, Sergiy Gaiday, alleged that pro-Russian forces “hit a tank with nitric acid at a chemical plant”,

He warned residents further that “Nitric acid is dangerous if inhaled, swallowed and in contact with skin,” and added: “Do not come out of shelters!”

Additionally, according to the AFP, he ordered citizens who have remained even as Russian forces have penetrated deep into the city to “prepare protective face masks impregnated with soda solution”. There are an estimated 15,000 civilians still in the city amid heavy fighting.

The Russian military has offered a possible contrasting version of events, saying it remains that Ukrainian forces in control of the plant:

Pro-Moscow separatist authorities said the tank had “exploded” on territory controlled by Ukrainian forces.

“At the Azot chemical plant, a container with chemicals was blown up. Preliminarily, it is nitric acid,” Rodion Mironchik, a representative of the self-proclaimed Lugansk People’s Republic, said on Telegram.

But there’s a likelihood that the tanker and highly volatile chemical or possibly fertilizer it contained was shelled as Russia attack Ukrainian frontline positions.

⚡️During an air strike on Severodonetsk, the Russians hit a tank with nitric acid at a chemical plant, – the head of the Luhansk Regional Military Administration Serhii Haidai says. pic.twitter.com/Rj6MQsFcGe

— Flash (@Flash43191300) May 31, 2022

Russian forces have meanwhile reportedly seized most of Severodnetsk city in eastern Ukraine, which represents the last Ukrainian stronghold and major city of the Luhansk region. Less than 24 hours ago, multiple international outlets reported Russian forces had gained half the city.

Authored by Robert Bryce, host of the Power Hungry Podcast, executive producer of the documentary, “Juice: How Electricity Explains the World,” and the author of six books, including most recently, “A Question of Power: Electricity and the Wealth of Nations.”

America’s electric grid is being mismanaged and consumers will pay a heavy price for that mismanagement…

 

More evidence of that came with the recent closure of the Palisades Power Plant in Michigan. The 811-megawatt nuclear plant was shut down on the same day that the North American Electric Reliability Corporation (NERC) issued a report saying the U.S. electric grid doesn’t have enough generation capacity and that blackouts are almost certain to occur across the country this summer.

Closing nuclear power plants while keeping coal-fired plants open is just crazy. Plain insanity.

— Javier Blas (@JavierBlas) May 30, 2022

In particular, NERC noted that the Midwest is facing a capacity shortfall that could lead to a “high risk of energy emergencies during peak summer conditions.” Palisades was located in the heart of the Midwest, immediately adjacent to the area served by the Mid-continent Independent System Operator (MISO), the region that NERC identified as being particularly short on juice. NERC said the MISO region has 3,200 megawatts less generation capacity this summer than it did in 2021. Despite this loss of generation capacity, NERC expects demand in the region to increase by about 1.7 percent this summer and warned that “extreme temperatures, higher generation outages, or low wind conditions” will mean that MISO will have a “higher risk” of “load-shedding to maintain system reliability” — the industry’s preferred term for rolling blackouts.

In a phone interview, Meredith Angwin, author of the 2020 book, “Shorting The Grid,” told me, “It is shocking to me how people can pretend this isn’t a problem. NERC just said the Midwest is headed for trouble this summer because the region doesn’t have enough reliable generation — and yet, they are closing Palisades. It doesn’t make any sense.”

Palisades was a zero-carbon workhorse. As Tim Cavanaugh of the Mackinac Center for Public Policy explained recently, Palisades was producing about 7 terawatt-hours of juice per year. That’s more energy than is generated by all the wind turbines in Michigan. It’s a key comparison because the backlash against the wind industry has been fierce in Michigan. Among the latest examples, last month the town board in Fulton Township voted unanimously to reject a project proposed by Chicago-based Invenergy that would put several dozen wind turbines in and around the township.

As I reported last month, the planned closure of Palisades was known for years and several politicians, including Energy Secretary Jennifer Granholm and Michigan Gov. Gretchen Whitmer, have said they wanted to prevent the closure. On April 20, Whitmer said, “Keeping Palisades open is a top priority.” She hoped to tap some of the $6 billion available in the Department of Energy’s Civil Nuclear Credit Program, created through the bipartisan infrastructure bill that President Biden signed into law in November. In a letter to the Department of Energy, Whitmer said stopping the closure of Palisades would “allow us to shore up Michigan’s energy supply to prevent price spikes on working families and small businesses.”

But, since the plant was closed on May 20 — 11 days earlier than expected because of a mechanical problem — Whitmer’s office has not issued any statements. Nor has there been any public statement from the Biden administration about trying to rescue the plant, whose decommissioning could take two decades. Biden’s climate envoy, John Kerry, repeatedly has called climate change “an existential threat.” If he believes that’s true, why hasn’t Kerry raised a stink about the Palisades closure?

There’s no doubt that the plant’s closure will result in more greenhouse gas emissions. When nuclear plants close in the United States, they are replaced by gas-fired generation. That happened in New York after the closure of the Indian Point Energy Center, and in Vermont after the premature shuttering of Vermont Yankee. The closure of such plans increases electricity costs because generators must burn more natural gas to produce power and gas prices are soaring.

Just like last year’s premature closure of the Indian Point, the loss of Palisades, which has been operating safely since 1971, is an inexcusable government failure. By any relevant metric — climate action, energy security, or resilience — the loss of Palisades is a blunder that could have and should have been avoided because it will further weaken our electric grid. The grid is the Mother Network for all of our critical systems: health care, GPS, communications, traffic lights, water, and wastewater treatment. Essayist and podcaster Emmet Penney had it right when he declared last year that “there is no such thing as a wealthy society with a weak electrical grid.” 

In short, the closure of the Palisades Power Plant will increase emissions, reduce energy affordability, and hurt the resilience and reliability of America’s electric grid. That’s a lousy quadfecta.

Robert Bryce is the host of the Power Hungry Podcast, executive producer of the documentary, “Juice: How Electricity Explains the World,” and the author of six books, including most recently, “A Question of Power: Electricity and the Wealth of Nations.” Follow him on Twitter: @pwrhungry.

A day after European leaders agreed on a wishy-washy partial ban on Russian oil imports, OPEC+ leaders are reportedly considering offering Russia an exemption from its production goals amid global sanctions threats.

The Wall Street Journal reports that some OPEC members are exploring the idea of suspending Russia’s participation in an oil-production deal as Western sanctions and a partial European ban begin to undercut Moscow’s ability to pump more, OPEC delegates said.

Exempting Russia from its oil-production targets could potentially pave the way for Saudi Arabia, the United Arab Emirates and other producers in OPEC to pump significantly more crude.

The algos sold first without thinking, smacking WTI down from $120 to below $115…

Notably, at the same time, Bloomberg reports that, according to other delegates, OPEC+ will likely hold firm to its oil production plans this week even as the European Union moves to sanction group member Russia.

If Russia is exempted from the OPEC+ production goals… and UAE/Saudis increase production to fill that gap… then the difference from current OPEC+ output and post-exemption output will be minimal at best

We also point out that these headlines are coming shortly after Russian foreign minister Lavrov visited The Kingdom.