The Red Or Blue Pill?
Aka inflation CPI Thursday
Take the Red Pill (inflation) or the Blue Pill (inflation peaked)
Thursday the US Government will release CPI for January. It is expected to be up 0.5% month to month and 5.9% year over year (versus prior month 5.5%, so an acceleration). There is some “thought” that it could be up less month to month given the drop in airfare pricing, used autos and some other soft goods. We all know the debate: Will the Fed be raising 4 times or 7 times? The market is pricing in 6-7 and the more recent fly in the ointment is all global central banks are now hawkish and in quantitative tightening mode via rate increases and balance sheet reductions. On a daily basis you can see the absolute skittishness of technology stocks versus energy versus opening stocks versus financials. Good news seems to get rewarded a bit ($AAPL $GOOG $AMZN $NOW $TSLA), only to retreat thereafter as the constant valuation battle persists. Can you own a stock a 20x sales or 30x P/E in a rising rate environment? Yes! Do we need to get thru this period of adjustment and more certainty on the rate path forward and if the Fed will crimp growth? Also Yes!
The 2022 markets are by no means “easy” to navigate. We all are learning some lessons on what type of stocks can absorb the rate of change in the monetary policy of the Fed. We can be tempted to buy energy stocks as the tightness in those markets along with massive FCF is just so enticing even if we are probably at peak oil demand. The $IWM, which tracks small caps, has been the worst performing index for awhile but appears to have stabilized. FAANG lost a couple of wheels with $FB and $NFLX while we can just add $TSLA and make the N for $NVDA and call it TAANG!
To summarize, uncertainty is bad and that is what we have in 2022. A good CPI or bad number Thursday will likely create a more certain environment for better or worse. Our sense from trading volumes is that most trading oriented funds are reducing their gross and net exposure into this print, so expect pretty heavy fireworks however the # comes in.
The good news is volatility is quite high and options are pricing high weekly volatility such that you can create synthetic longs and shorts while allowing for cushion. We favor this strategy short term until there is more clarity in the markets.