CONTINUED CHANGES

Last week, we wrote and stated several times that inflation was peaking but also inflation was peaking because it has flushed out severe weakening of the economy. It is continuing to happen and happening in a big way. We saw it with our channel checks but more importantly, saw it in price movements.

Back in Oct/Nov, everything we bought and paid for…skyrocketed. Yields we borrowed on…skyrocketed. This tanked asset prices, especially growth stocks.

The opposite is now occurring and stunningly quick.

COMMODITIES of all stripes are topped and now heading lower, some heading much lower. Same for the most important commodity…oil. Now down about 15% off the recent highs with oil stocks being crushed after leading since beginning of the year. The move in oil stocks back down has been stunning. If nothing changes, prices at the pump should be down towards 50 cents/gallon soon. As we stated last week, copper, iron, steel, lumber,wheat, corn, soybeans and cotton had all put in tops of differing levels. They are now becoming tops of import. We have no clue what is going on with cotton today but the symbol BAL, a cotton ETF, is down over 11%. Cotton prices look to be down almost 5% today. Yes…cotton matters.

Because of this, yields have continued to back down. The 10 year is under 3.1% when just over a week ago, was almost at 3.5%.

All this is forecasting a recession or quite close. Of course, Reagan had the best line on recessions. A recession is when your neighbor loses his or her job. A depression is when you lose your job. We have no clue yet on whether it will be a deep recession but when you have so much debt and leverage in the system, nothing is off the table.  The hope is that it is shallow and short-lived.

This has everything economically sensitive worsening in the market. This includes energy, commodities, travel-related, heavy machinery, industrials and because rates are coming down, financials remain under pressure. Short rates going up and long rates coming down squeezes financial’s margins. On the industrials and machinery, just go look at Deere, Caterpillar and AGCO croaking into new yearly lows today. This says a bunch. Semiconductors also labor as they are also quite economically sensitive.

Lower yields should help the beaten down housing and housing related names as well as some retail. They have been in a big bear. Lower yields can stanch the bleeding in any number of groups.

The big help and it may be starting right now is in the higher beta growth arena that has been absolutely bombed out with many names down 50-70%+. We are definitely seeing many of those names holding the lows the past few weeks while the indices kept going lower…a potential positive divergence. Watch the NASDAQ versus the DOW every day. If you start to see the NASDAQ up 1% but DOW up only 0.25%, you will know growth is starting to outperform.

If commodity prices stick to the downside, for sure, inflation numbers are going to come down and if they are smart, the fed will recognize it. Of course, they have not been so good at recognizing anything. If they were smart, if these commodity prices stay down, they would come off big rate hikes going forward. They would just let the market forces dictate like they are supposed to. Unfortunately, the fed continues to believe they are smarter than the market.

And of course, everything is a moving target. There is so much out there that can change things.Just know our thoughts of what we started to interpret last week of a change in the inflation complexion is not only coming to fruition but at hand. As always, if we see anything changing, we will let you know.

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