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Our latest “Inflation Dashboard” has been updated and is attached

Why is the US essentially the worst stock market in the world? With the weakest bounce?

Arguably, the US has best weathered the trifecta of global turmoil–global inflation, surging oil and China zero COVID–among any major nations. This is evidenced many ways but consider:

Fed has raised interest rates +400bp in 2022
yet, the US economy continues to produce solid real GDP growth and employment has held up
and inflation has been falling visibly

Yet, despite the obvious robustness of the US economy, the US equity market is among the worst performers YTD:

peak to trough, the US fell -28% and as shown, is the worst of any major nations except for those 3 Asian nations Hong Kong (-53%), China (-40%) and Korea (-36%).
and the US rise from the low is only +10% which is dwarfed by other nations including Germany which has surged +20%. Germany only fell -27% peak to trough, which is less than the US

RETRACEMENT: US only recovered 29% of decline, while Europe 45% to 77% retracement

This also puzzles me. This is looking at retracements, or what share of the decline has been recovered:

the US has only recovered 29% of the decline (10% recovery after a 28% decline)
yet, other major nations have seen 45% to 77% retracements including Germany (54%), Japan (47%), UK (77%) and even Brazil (38%)
to me, this is not consistent with the US having the best economic outcome arguably

SOME WHYS: Some possible explanation for why US has not fared better

Here are some possible explanations for why the US has fallen more than other nations, and recovered less:

Fed has raised interest rates the most, thus, hurting US valuations most –> but this means RoW is behind, arguing rest of World should not have sustainable outperformance
US outperformed for longer thus this is payback –> but if US is strongest economy (vs RoW), shouldn’t US recover fastest?
US stocks were more expensive than RoW –> so valuations are converging
USD has risen +18%, hurting US earnings –> but flat/falling earnings is now a tailwind
Investors have panicked and sold the US –> thus, if US inflation recovers, US equities should bounce

Ultimately, this is why we see the incoming November PPI and CPI reports as crucial (see below).

Expecting positive surprise from 3 key reports: PPI (12/9), CPI (12/13) and FOMC (12/14)

In the next 4 trading sessions are crucial incoming economic reports and Fed decisions that arguably will determine the path of markets for the next 6 months:

12/9: Nov core PPI consensus +0.2% (0.0% last month) –> crucial but expecting positive
12/13: Nov core CPI consensus +0.3% (+0.27% last month) –> crucial but expecting positive
12/14: Dec FOMC consensus +50bp

PUT/CALL BACK TO 30-YR HIGHS: Positive surprise in PPI and CPI is not discounted…

A positive surprise (lower PPI and CPI) is not discounted by investors. Look at the equity Put-call ratio below:

at 1.46, we are back to 2022 highs
and as shown below, is among the highest levels in the past 30 years
takeaway?
if PPI and CPI come in soft, we expect a fierce positive market reaction

And as Helene Meisler @hmeisler notes, even trading on Thursday 12/8 also had a bearish tone:

equity put:call at the highs
we expect a soft CPI and hopefully PPI
as such, we expect a very strong positive market reaction

GLOBAL INFLATION: Lots of downside reads in the past few weeks

Inflation is falling rapidly globally and there have been many downside reads as shown below:

Germany CPI saw outright deflation in Nov -0.5% and this was true for Eurozone broadly
Even Mexico CPI saw a downside read and YoY is falling

FALLING LIKE A ROCK: Oil and gasoline plunging like a rock, not a feather

Remember how economists said gasoline prices “soar like a rocket and fall like a feather?” That is not the case today. Oil and gasoline prices are plunging like a rock,

Oil prices are at the lowest of 2022
This despite Russia-Ukraine war still raging and the end of the SPR release
and contrary to those who said oil and gasoline would only drift downwards gradually, prices have fallen like a rock

FALLING LIKE A ROCK: Used cars went up like a rocket and plunging like a rock

Remember how economists also said goods prices probably remain stubbornly high due to supply chains and other constraints?

Manheim reported November used car prices and the YoY decline has accelerated to downside to -14%
Used car prices are falling like a rock, similar to oil and gasoline
And this leads CPI used cars by several months, so we expect a downside acceleration to CPI used cars as well

37 GRANNY SHOTS: Updated list is below

The revised 37 Granny shots are shown below. The list is sorted by the most attractive (most frequently cited) to least. To be a “Granny shot” the stock needs to appear in at least two portfolios:

$AAPL in 4 of 6 portfolios
$GOOGL $MSFT in 3 of 6 portfolios
$AMZN $META in at least 2
This reinforces our favorable view of FANG in 2H2022

37 Granny Shot Ideas:

Communication Services: $GOOGL, $META

Consumer Discretionary: $AMZN, $AZO, $GPC, $GRMN, $ORLY, $TSLA

Consumer Staples: $BF/B, $MNST, $PG, $PM

Energy: $CVX, $DVN, $EOG, $PSX, $XOM

Financials: $ALL, $AXP

Health Care: $AMGN, $HUM, $UNH

Information Technology: $AAPL, $AMD, $AVGO, $CSCO, $KLAC, $MSFT, $NVDA, $PYPL, $QCOM

Materials: $CF, $FCX, $LIN

Real Estate: $AMT, $CCI, $EXR

CBOE Equity Put/Call: Same place it was Nov 16, just before equities surged