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Neil's Morning Update - 12/14/21

Dec. 14, 2021 9:15 AM ET
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Cbus Neil's Blog
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Neil's Morning Update - 12/14/21

Please excuse typos. Mornings are tilted more international, evenings more U.S. Continuing to try to make this more digestible for those who are not as familiar with the markets, lingo, etc. Feel free to leave your thoughts in the comments section, they are appreciated. Also, I don't discuss crypto extensively as I don't consider myself knowledgeable enough to talk intelligently on the subject (and there are plenty of other sources for that). As are reminder, this is a free blog I put out to try to help people get information, so no editors, etc.

A small glossary.

SPX = S&P 500

Naz = Nasdaq Composite

NDX = Nasdaq 100 (100 largest stocks in the Naz)

RUT = Russell 2000 (smaller stocks)

DMA = Daily Moving Average (the moving average over the given time period (20, 50, 100, 200 days normally)).

MACD = Moving Average Convergence Divergence (basically a trend indicator)

RSI = 14-day Relative Strength Index (basically what it sounds like)

Also, on my charts, the lines are 20-DMA (green), 21-DEMA (red), 50-DMA (purple), 100-DMA (BLUE), 200-DMA (brown)

Source abbreviations: BBG = Bloomberg; WSJ = Wall Street Journal; RTRS = Reuters; SA = Seeking Alpha; HR = Heisenberg Report


The hottest PPI print in over a decade dropping as the Fed kicks off its two-day policy meeting has stocks selling off in the US, with growth shares leading the declines. NDX is indicated down over one percent, while SPX and RUT are indicated down around six tenths and a half percent respectively. Bond yields are up very mildly though. Commodities are down basically across the board despite the dollar in the red also.

Also, one thing I forgot to mention is this week is a big options expiration (weekly, monthly, quarterly), so could see some increased volatility as we move through the week.

Here's the SPX futures this morning. Falling beneath the 20-DMA (green line). Daily technicals are mixed and weakening.

In U.S. corporate news (Argus):

Pfizer (PFE 54.80, -0.40): -0.7% despite confirming the robust efficacy of its COVID-19 oral antiviral treatment in reducing the risk of hospitalization or death. PFE shares did rise 4.6% yesterday. Apple (AAPL 177.33, +1.59): +0.9% after the stock was upgraded to Buy from Neutral at BofA Securities. Adobe (ADBE 646.70, -11.60): -1.8% after the stock was downgraded to Neutral from Overweight at JP Morgan. Neogen (NEOG 4 4.99, +4.87): +12.1% after announcing it will combine 3M's (MMM 176.40, +1.82, +1.0%) Food Safety business with its existing operations through a "Reverse Morris Trust" structure. The transaction implies an enterprise value for 3M's Food Safety business of approximately $5.3 billion, including new debt.

As BoA notes the big increase in cash we talked about on Friday.


Major equity indices in the Asia-Pacific region ended Tuesday on a mostly lower note. Japan's Nikkei: -0.7% Hong Kong's Hang Seng: -1.3% China's Shanghai Composite: -0.5% India's Sensex: -0.3% South Korea's Kospi: -0.5% Australia's ASX All Ordinaries: UNCH.

In news, China Beijing Think Tank opined that more rate cuts will be needed to ensure growth of at least 5.0% next year. The Bank of Japan conducted its second consecutive JPY2 trln repurchase operation in a two-day effort to counter a rise in short-term interest rates. China's National Development and Reform Commission pledged to increase the effective supply of raw materials to support the industrial sector.

In economic data, Japanese industrial production improved while S Korean import/export prices remained very elevated as did Indian WPI inflation.

Japan's October Industrial Production 1.8% m/m (last 1.1%) and Capacity Utilization 6.2% m/m (last -7.3%)

South Korea's November Import Price Index 35.5% yr/yr (last 35.8%) and Export Price Index 25.5% yr/yr (last 25.3%)

India's November WPI Inflation 14.23% yr/yr (expected 11.90%; last 12.54%) and WPI Manufacturing Inflation 11.92% yr/yr (last 12.04%)

Australia's November NAB Business Confidence 12 (last 21) and NAB Business Survey 12 (last 11)

New Zealand's November FPI -0.6% m/m (last -0.9%)

As JPM and Goldman reup their bullish China calls. BBG.

China’s battered stocks present a buying opportunity, as most of the headwinds facing the country’s economy are now priced in, according to Goldman Sachs Group Inc.

“Although risks around the Chinese growth outlook remain due to the zero-tolerance Covid-19 policies and regulatory tightening, Chinese equity markets already reflect some of those risks, offer attractive valuations and continue to be underinvested,” Goldman Sachs strategists led by Christian Mueller-Glissmann wrote in a note dated Monday.

Their overweight call echoes that of JPMorgan Chase & Co. strategists, who upgraded China’s stocks this week, saying they expect a “major” rebound in offshore Chinese equities next year.


As of 8 am Eastern, major European indices trade just above their flat lines while Spain's IBEX (+0.9%) outperforms. STOXX Europe 600: +0.1% Germany's DAX: +0.1% U.K.'s FTSE 100: +0.5% France's CAC 40: +0.1% Italy's FTSE MIB: +0.5% Spain's IBEX 35: +0.9%.

In news, Bank of England Governor Bailey cautioned that corporate debt vulnerability increased during the pandemic. More than 70 Conservative MPs are expected to vote against British Prime Minister Johnson's plan to tighten restrictions. However, the plan is expected to pass due to support from the opposition. Germany's ifo Institute raised its domestic growth forecast for 2022 to 5.1% from 3.7%. Q4 growth is expected to contract 0.5%. Italy sold 3-yr debt while Spain sold 3-month debt to good demand. Hungary Central Bank raised its overnight deposit rate to 2.4% from 1.6%.

In economic data, EU October industrial production improved from September coming in just under estimates fueled by capital goods orders. UK employment came in on net a little weaker than expected but wages above expectations.

Eurozone's October Industrial Production 1.1% m/m (expected 1.2%; last -0.2%); 3.3% yr/yr (expected 3.2%; last 5.1%).

In the euro area in October 2021, compared with September 2021, production of capital goods rose by 3.0%, durable consumer goods by 1.7%, non-durable consumer goods by 0.4% and energy by 0.1%, while production of intermediate goods fell by 0.6%.

In the EU, production of capital goods rose by 3.0%, energy by 1.7%, durable consumer goods by 1.3% and non-durable consumer goods by 0.7%, while production of intermediate goods fell by 0.3%. Among Member States for which data are available, the highest monthly increases were registered in Germany and Slovakia (both +3.0%), Greece (+2.5%) and Denmark (+2.1%). The highest decreases were observed in Estonia (-2.4%), Latvia (-1.5%), the Netherlands and Romania (both -0.9%).

U.K.'s October Average Earnings Index + Bonus 4.9% yr/yr (expected 4.6%; last 5.9%). October three-month employment change 149,000 (expected 228,000; last 24 7,000) and October Unemployment Rate 4.2%, as expected (last 4.3%). UK Claimant Count Rate Nov: 4.9% (prev 5.1%; prevR 5.0%); Jobless Claims Change Nov: -49.7K (prev -14.9K; prevR -58.5K)

Swiss November PPI 0.5% m/m (last 0.6%); 5.8% yr/yr (last 5.1%)

As European nat gas prices continue to surge while new German Chancellor Olaf Scholz promised that his government will “do everything” to ensure that natural gas continues to flow through Ukraine. BBG.

European natural gas surged again after closing at a record high on Monday as uncertainty over Russian supplies threatened to extend the energy crunch into next winter.

Power prices have also surged in recent days. German electricity for delivery next year traded near record highs, while futures for first quarter on 2022 in the Nordics climbed to a all-time high.

“Spot gas and power prices have quadrupled, reflecting market fears of gas shortages over the winter to come,” Antonella Bianchessi, an analyst at Citigroup Inc., said in a report.

Benchmark European gas traded in the Netherlands jumped as much as 5.9% and was 2.5% higher at 119 euros a megawatt-hour as of 12:40 p.m. local time. The U.K. equivalent gained 2.4% to 301.46 pence a therm.

European Union leaders will on Thursday hold a summit to address the situation. They will discuss ways to respond to the energy crisis, the resurgence of the pandemic and Russia-Ukraine position. In what could be another flashpoint, the bloc wants to set a deadline to end long-term gas supply deals that are favored by Russia.


Bonds - Yields are trading around flat levels. 2-year bond yields are up one basis point to 0.66%, while the 10-year is up one basis point to 1.44%.

As market implied odds for first rate hike in March are up to 40%. Like I've said a very hawkish Fed is priced in. (h/t @LizAnnSonders).

As a policy mistake remains traders biggest fear (after runaway inflation so they've got both sides covered).

Dollar (DXY) - Pulling back to the rising 20-DMA which it has ridden for a couple of weeks. Currently at $96.24. Remains in intermediate-term uptrend. Daily technicals remain tilted negative.

VIX - Pushing up again this morning to 21.82.

Crude (/CL) - Down this morning with equities as it continues to bounce between overhead resistance and the support of the 200-DMA which it is currently testing. Currently at $70.23 WTI. Daily technicals mixed.

And we noted yesterday that OPEC's monthly report showed a smaller surplus in 1Q22. The International Energy Agency goes the other way in their monthly report released today saying we're already in surplus. I should note at this point that OPEC has been much more accurate than the IEA last few years. BBG.

Supplies are rebounding around the world -- from the current OPEC+ ramp-up and sales from strategic reserves, to record output in the U.S., Canada and Brazil next year -- the IEA said. With jet fuel demand also faltering amid the new virus strain, global oil inventories could swell at a rate of 1.7 million barrels a day in the first few months of 2022.

“Much-needed relief for tight markets is on the way, with world oil supply set to overtake demand starting this month,” the Paris-based agency said in its monthly report. “The steady rise in supply, combined with easing demand, has considerably loosened our balances.”

“The surge in new Covid-19 cases is expected to temporarily slow, but not upend, the recovery in oil demand that is under way,” it said.

But the combination of a seasonal pullback in fuel demand, deepened by the effects of omicron and coupled with resurgent supply, is setting the market up for a potential glut early next year. The IEA lowered forecasts for global oil demand in the first quarter by 600,000 barrels a day.

And we noted last night the dramatic pullback in the premium between current and future prices (called backwardation). Here's a visual.

As preliminary estimates show global November inventories remaining well below 5-year averages (@staunovo).

As Japan is waiting for the right time to do its SPR sale.

As Saudi Saudi Arabia’s energy minister warned traders against shorting oil prices in his typically humorous fashion. BBG.

“Thanksgiving was a Thanksgiving day for the speculators,” the minister said. “But let them dare to do another Thanksgiving. They will be ouching like hell.”

Nat Gas (/NG) - Weakening this morning as it trades towards the bottom of the range from the past week beneath the 200-DMA. Not a lot of support here. Currently at $4.04. Daily technicals remain negative.

Gold (/GC) - Continues to remain in the range of the last couple of weeks below resistance. Currently at $1772. Daily technicals mixed.

Copper (/HG) - Weakening this morning pushing down towards the uptrend line that defines a two-month wedge it has traded in. Getting into the nose of it though so will need to break one way or the other before long. Daily technicals are neutral.

Lithium - Prices continue to move higher. WSJ.

Lithium prices are rising at their fastest pace in years, setting off a race to secure supplies and fueling worries about long-term shortages of a vital ingredient in the rechargeable batteries that power everything from electric vehicles to smartphones.

An index of lithium prices from research firm and price provider Benchmark Mineral Intelligence doubled between May and November and is up some 240% for the year. The index is at its highest level in data going back five years.

Driving the run up are bets on continued scarcity. Demand is multiplying as Tesla Inc. and other auto makers ramp up sales of electric vehicles. Supply, meanwhile, has been constrained by limited investment in new projects following a recent bear market and supply-chain bottlenecks. Producers often face environmental opposition and cumbersome permitting processes when trying to extract the silvery-white metal.

While there is plenty of lithium in the world, converting it into battery-grade chemicals is a long, expensive ordeal. With traders and corporate buyers riding momentum, prices are prone to big moves in both directions.

“It’s like being in a hot real-estate market,” said Jon Evans, CEO of Lithium Americas Corp. , a startup working to produce lithium in Nevada that also co-owns a project in Argentina with a Chinese partner. “There’s a mad scramble.”

US Data

We've had both major reports at this point - November NFIB and PPI. NFIB came in right as expected a tiny improvement over October. PPI on the other hand came in well above expectations accelerating from October levels.

US NFIB Small Business Optimism Nov 98.4 (est 98.4; prev 98.2)

- US PPI Final Demand (M/M) Nov: 0.8% (est 0.5%, prev 0.6%) - PPI Final Demand (Y/Y) Nov: 9.6% (est 9.2%, prev 8.6%)- US PPI Ex Food And Energy (M/M) Nov: 0.7% (est 0.4%, prev 0.4%) - PPI Ex Food And Energy (Y/Y) Nov: 7.7% (est 7.2%, prev 6.8%)


Random stuff:

And great news on the Pfizer pill - found to be highly efficacious against hospitalization, but didn't meet the endpoints for stopping milder symptoms.

Preliminary laboratory tests gave encouraging signs that Pfizer Inc.’s experimental Covid-19 pill could work against Omicron, the company said.

Pfizer also said Tuesday that a final analysis of late-stage study results confirmed the drug, named Paxlovid, was 89% effective at reducing the risk of hospitalization and death in adults at high risk of severe Covid-19.

The positive results come as the Food and Drug Administration reviews whether to clear use of Paxlovid in high-risk adults, a decision that could come before the end of the year. "This was a real home run, gives tremendous hope for another highly effective intervention,” Pfizer Chief Scientific Officer Mikael Dolsten said in an interview.

Researchers suspected Pfizer’s pill would hold up well because it stops the virus by blocking the activity of a key enzyme, known as protease, that the virus needs to replicate and isn’t believed to be mutated in Omicron.

The final study analysis of another oral antiviral, from Merck & Co. and partner Ridgeback Biotherapeutics LP, showed a 30% risk reduction, lower than the 50% found during an early look.

As is the two-shot dose from Pfizer and/or JNJ's one-shot vaccine (although it is only 33% effective against infection). The study also found that Omicron was less severe in general than Delta (by 29%) although it appeared it could be more severe for children (but a low sample size there). BBG.

Pfizer Inc. and BioNTech’s Covid-19 vaccine, as well as the shot developed by Johnson & Johnson, appear to prevent severe disease from the omicron variant, South African studies show.

The two-shot Pfizer course may offer 70% protection against being hospitalized with the variant that is driving the country’s fourth wave of infections, Discovery Health Ltd., the country’s largest medical-insurance provider, said on Tuesday.

That protection is maintained across age groups and in the face of a range of chronic illnesses, said Ryan Noach, the chief executive officer of Discovery Health. Pfizer is 33% effective against infection by the omicron variant, he said in a briefing.

Part of the reason for the lack of severe illness among residents of South Africa could also be the level of prior infection, where 70% or more of the population has been exposed to Covid-19 at some stage during the past 18 months.

As we're not quite past the supply chain issues I see.

As the S&P real (inflation adjusted) earnings yield now at record lows.

As housing market remains red hot with 31% of sales "immediate".

And Jason Furman notes that while goods spending (and prices) will likely fall, services, which make up 61% of CPI could rise to pre-pandemic trend which will keep pressure on prices.

And "journey" is the new hot buzzword for your corporate conference call.

As corporate executives grapple with the pandemic, rising inflation and stubborn labor shortages, they all can agree on one thing: It’s been quite a journey.

Mentions of the word “journey” by S&P 500 executives on conference calls this year have soared almost 70% to 3,091, making it one of the fastest-growing corporate buzzwords in recent memory. The term was rarely used before -- in fact, just once in 2001 -- but it’s now used to describe practically any kind of business goal, even if it’s totally mundane.

“You’re always looking for new ways to say the same things,” says Grant Barrett, a linguist and co-host of the public radio show “A Way with Words.” “I like ‘journey’ for this purpose. It’s less clinical and corporate than saying something like, ‘during the last eight quarters,’ and it’s more affirming than talking about a period of transition or uncertainty.”

Whatever the journey entails, the end date is rarely, if ever, defined. “The word has the advantage of being opaque,” says Mark Stoeckle, chief executive officer of Adams Funds, which manages $3 billion. “This allows companies to gain flexibility.”

To see more content, including summaries of most major U.S. economic reports and my morning and nightly updates go to Cbus Neil's Blog Posts for more recent or Sethi Associates for the full history.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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