Updating Granny Shots. Is June the last "really bad" CPI, enabling Fed reaction function shift from "expeditious" to "measured"

We publish on a 3-day a week schedule:

Monday
SKIP TUESDAY
Wednesday
SKIP THURSDAY
Friday

___________________________________

• Granny Shots July Quarterly rebalance today
• see below for adds and deletes

___________________________________

Could June CPI be last “really bad” report?

The story for much of 2022 has been that of markets and Fed trying to keep up with surging inflation. And as the chart below simply illustrates, for much of 2022:

• “hard data” (reported CPI) has been steadily rising
• “leading indicators” such as commodities, surveys, alternative data showed inflationary pressures
• hence, the Fed’s reaction function had to be “expeditious”
• meaning, moving Fed funds rates quickly higher to at least Neutral (2.5% per Fed)

This in turn has pressured markets. It did not matter to investors or risk assets whether inflationary pressures were structural or cyclically fueled by several factors. Inflation is mysterious and alternately explained by monetary policy, expectations or demand or supply.

• as our clients are aware, we view inflationary pressures are less sticky
• because supply chains
• along with the “bull whip” effect
• plus Russia-Ukraine war (“supply shock” plus “war risk”)
• created complicated and lasting inflationary effects
• but tested the market’s patience, which in turn, pressured the Fed to act

June CPI is probably ugly… but market’s likely convinced June CPI does not reflect underlying trend

June CPI is reported today at 8:30am ET and this will carry enormous weight. Forecasting volatile economic data is challenging, which is the reason the Street and investors are bracing for a bad report — 2022’s lesson is to expect figures to be “hot”

• even the White House is trying to get ahead of this report
• Street is looking for CPI +1.1 m/m and core +0.5% m/m
• YoY, this is CPI +8.8% and core CPI +5.7%

…But June might the “last” bad CPI report

However, unlike anytime since early 2021, the underlying inflationary dynamics are now meaningfully reversing. These breaks took place in the past 4-6 weeks and are not yet in the “hard data”:

• used car prices falling at fastest pace since early 2000s
• retailers record inventory glut and hiring liquidators
• energy commodities down >25% and oil <$95 and gasoline down 25 days straight
• homebuying demand hit a wall, new rental rates slowing
• even airfares and hotel rates are rolling over hard (Hopper data, see below)
• indeed.com labs shows material decline in job openings
• literally, leading indicators for >75% of CPI components are showing big rollovers

Fed reaction function shifting arguably to “measured” from “expeditious”

The takeaway, in my view, is the Fed’s reaction function is changing. The Fed has used the word “expeditiously” for many months now. This is to show their commitment to battling inflation:

• but if inflationary pressures rollover faster than consensus expects
• Fed can shift from “expeditious” to “measured”
• and while the “terminal rate” for Fed funds is not clear
• if Fed shifts to “measured” we see a dramatic change in market risk-appetite
• this is the primary reason to support stronger equity prices in 2H2022
• and investors would also look through “e” if “i” is falling

Travel inflation is coming in for a “hard landing” in July CPI, maybe June?

The levitation of airfares and hotel rates is popping. That is, if the Hopper.com data is correct. Let’s start with some context.

• Travel CPI surged to >26% YoY in May
• accounting for +0.5% of the inflation surprise
• Travel is a mere 1.7% weight, but the “revenge travel” surge
• meant Travel was 9.7% of m/m and 5.5% of the y/y rise
• or 6X and 3X its own contribution
• and many argued this is proof “services CPI” is raging higher
• and this “travel inflation surge” contributed to Fed having to react even more aggressively with June +75bp hike

…Hopper data shows Airfares and hotels rolling hard

Our data science team, led by tireless Ken, compiled hopper.com data (travel site) and compared this to CPI travel data. There is surprisingly tight fit as shown below:

• domestic airfares rolled in June, pretty substantially
• there is a slight lag but as shown below, this should lead to a downturn in airline CPI

Similarly, hotel rates are rolling over as well and this should lead to lower “hotel CPI” (aka shelter away from home).

• the collective picture is the “revenge travel” CPI is running its course
• this is another example showing inflation is not even that “sticky” in services

STRATEGY: We think June might be the last of the “extra ugly” CPI prints

Bottom line, we believe this coming June CPI will mark the end of the last ugly CPI reports. Why? We think investors will increasingly view inflation as less sticky — aka more “transitory”

• if travel rolls over, argues against services CPI surging
• durables already rolling
• energy commodities already rolling over
• food prices stabilizing and possibly declining
• only “rents” are still rising
• rents were a surprise in the May report

But housing is weakening and rents could lag for some time. Would the Fed really keep its “neck on tight money” if rents are still rising? It seems like the market could change its view on what the Fed needs to do.

• and as shown below, market-based measures of inflation see annualized inflation falling to less than 2% annualized August 2022 to Feb 2023
• so Fed could be seen as being too tight

CPI MARKET-BASED: Inflation swap markets see <2% annualized inflation in Aug 2022 to Feb 2023

Monthly CPI based upon expiring inflation swaps

GRANNY SHOTS: Adding 8 stocks. YTD outperformance +349bp

Today is the the July quarterly rebalance of our Granny Shots portfolio. The Granny Shots is our core stock holdings, using 6 thematic/quantitative portfolios and is designed to identify long-term EPS growers. Since inception in 2019, Granny Shots has outperformed every year:

• 2019 +879bp
• 2020 +3,015bp
• 2021 +392bp
• 2022 +349bp YTD

July rebalance additions are:

• META1.40% ,
• AZO1.19% ,
• GPC11.22% ,
• ABT-0.59% ,
• BIIB-0.85% ,
• ISRG1.56% ,
• MRNA-1.09% ,
• REGN-0.80%

July rebalance deletions are:

• PSX-2.51% ,
• CB0.76% ,
• CINF1.93% ,
• WRB,
• QRVO-1.92% ,
• CF2.30%

Below is the 2-year stock charts for the 8 additions.

GRANNY TECHNICALS: Per Mark Newton, Head of Technical Strategy

ABT-0.59% - Abbott Laboratories

Attractive to buy following a 21% decline over the last seven months as it’s thought that ABT has started its stabilization process and should begin a rally back higher in the near future. At present, a short-term downtrend from late December remains intact which has held two of ABT’s recent rally attempts. Overall it’s important to relay that while ABT has declined over 20% in recent months, the stock has only given back 38.2% of its rally from late 2016, a key Fibonacci level that’s thought to be very good support. Key level to exceed lies at $112 and getting over this would suggest this decline has run its course. On the downside $101 is important to hold on pullbacks, as below would have little real support until near $90, which is the 50% retracement of the stock’s five year uptrend. Bottom line, ABT remains in a very attractive sector, and it’s difficult to view recent weakness as anything more than a temporary pullback as part of its longer-term uptrend.

AZO1.19% -Autozone

Near-term bullish as part of a neutral period of consolidation that began in late December 2021. AZO has been extraordinarily strong in recent months, having avoided much of the carnage that’s affected many other retailing names. At present, AZO lies within striking distance of all-time highs on a weekly close, and is expected to push back to new high territory in the months to come. While some evidence of weekly negative momentum divergence happened into April 2022 peaks, the decline into May barely breached February 2022 lows, showing hardly any real damage. Until greater evidence of trend deterioration starts to occur , AZO remains quite attractive technically, and is considered one of the best stocks within the entire Consumer Discretionary sector. Until/unless this breaks May lows near 1700, this is considered a strong overweight within Discretionary, and upside technical targets lie near 2400.

BIIB-0.85% - Biogen Inc

Attractive to own on an intermediate-term basis following its successful bottoming out near two major intermediate-term lows that have held over the last six years. BIIB bottomed back in June 2016 along with March 2019 between 205-215 and weakness into 2022 barely undercut this support zone before pushing back above in recent weeks. The act of having reclaimed such a prominent level of lows is thought to be important and positive technically, and BIIB definitely looks to have begun its bottoming process, not unlike what happened near those prior lows. Its rally over the last 3 of 4 weeks has carried the stock up to the highest weekly closing levels since February and it’s expected that Biogen should push up to $254 into September, with intermediate-term rallies expected to eventually reach $295. IN the weeks to come, minor pullbacks are possible in the short run, but are expected to hold recent lows near $187 and provide excellent buying opportunities for Dip buyers.

GPC11.22% - Genuine Parts Co

Attractive technically given very little evidence of any real trend deterioration. GPC’s early year pullback proved brief, lasting around a month before turning back higher and has successfully logged three out of four positive months during a very challenging time for retail stocks. GPC is technically similar to AZO in having weathered this difficult time for Equities and now looks to be setting up for an upcoming challenge of all-time highs in the weeks/months to come. Key resistance lies at $143, then $150, while support is found at $129, then $115. Only a decline under $115 would postpone GPC’s push back to new highs, and it’s right to own GPC and consider this to be a top technical holding within Discretionary. While weekly momentum has lost some ground in the last few months on GPC’s stalling out, this has not served as a sufficient warning sign to avoid owning this at current levels. Overall, GPC looks quite appealing to own for a push up to $150 in the months to come.

ISRG1.56% - Intuitive Surgical

ISRG’s recent bottoming out near its 50% absolute and relative retracement of its long-term advance looks significant and could mark an area of major support which should result in a rally into the Fall. Weekly momentum officially reached oversold levels per RSI last month and ISRG looks to have made two equal waves of price from late December that bottomed out nearly four weeks ago. Rallies are expected in 2H 2022 which should face initial resistance near $254, but above that would argue for a push up to $279 which looks important on rallies. Any pullback in the weeks ahead should find strong support near $186, but any weakness back under $195 into late July should translate into a great risk/reward area to buy dips for the start of an intermediate-term rally.

META1.40% - Meta Platforms

Despite being down over 55% from last August’s peaks, META has not shown sufficient stabilization to think this has officially bottomed. While many routinely think of META as being “cheap”, this continues to trade within an ongoing downtrend from April, and the breakdown back down to new lows into June keeps this trend bearish and devoid of much stabilization. In the short-run, further weakness into late July looks likely which could take META down to $150 or even lower to $137-140 to challenge prior lows from March 2020 before this can bottom out. On the upside, recovering the area of the breakdown at $176 would represent the first step towards thinking META can begin a larger rally. It’s wave structure looks to be in the final stages of the decline, which suggests that a meaningful low could come about in the next 2-4 weeks. However, exhaustion signals based on DeMark indicators look early by at least four weeks before signaling any sort of weekly TD Combo “13 countdowns”. Until META can either reach more material areas of technical support near prior lows, or trigger DeMark weekly exhaustion, than owning this at $164 might be a bit premature in expecting immediate rallies until/unless this regains the preferred $176 area. Such a rally would break intermediate-term downtrends as well, offering more conviction about a more meaningful low in place.

MRNA-1.09% - Moderna

Near-term trends look bullish and further rallies appear likely to levels near March 2022 peaks at $188 which might provide initial resistance to this rally. Following four straight weeks of gains, MRNA looks to have finally begun its bottoming process after having lost a stunning 76% off August 2021 peaks. Momentum has begun to stabilize in recent months, and indicators like MACD have made bullish crossovers based on the extent of its recent push back up to multi-month highs. While MRNA has gotten a bit overbought on daily charts after its rally in the last month, pullbacks likely won’t get below $151 before turning back higher for a more meaningful advance. One should look to position long, looking to buy dips when given the chance in the weeks to come with key areas at $159 and then $150. Above $188 would target $1206, but eventually should allow for a move back to $261, and then $305 which is a 50% retracement of the decline from last year.

REGN-0.80% - Regeneron

REGN looks quite attractive following its rally back over prior May lows near $597.76 in recent weeks. While Regeneron did drop more than 10% off April peaks this year, this has defied the patterns being seen over much of the Biotech space, and just pushed back to new all-time highs three months ago. The act of having exceeded 2015 peaks is seen as a very positive intermediate-term development, and should drive the stock higher to levels near $747 and then $833 which would represent a 100% alternative extension to the rally which began back in 2019. In recent weeks, the specific act of having recovered May lows makes these two waves from April peaks almost exactly equal at a price of $551, and should result in a rally back to new all-time highs in the back half of 2022. Technically REGN is quite positive, and it’s right to own this, looking to buy all pullbacks with recent lows near $583 likely not being undercut on any late month weakness.

33 GRANNY SHOTS: Updated list is below

The revised 33 Granny shots is shown below. The list on the table below is sorted by the most attractive (most frequently cited) to least. To be a “Granny shot” the stock needs to appear on at least two portfolios:

• AAPL-0.57%  in 5 of 6 portfolios
• GOOGL0.35%  MSFT-1.90%  in 4 of 6 portfolios
• AMZN-0.99%  META1.40%  in at least 2
• This reinforces our favorable view of FANG in 2H2022

33 Granny Shot Ideas:

Consumer Discretionary: AMZN-0.99% , AZO1.19% , GPC11.22% , GRMN-0.25% , TSLA-3.56%

Information Technology: AAPL-0.57% , AMD0.89% , AVGO-1.84% , CSCO0.67% , KLAC-2.24% , MSFT-1.90% , NVDA0.62% , PYPL-1.71% , QCOM-2.01%

Communication Services: GOOGL0.35% , META1.40%

Energy: CVX0.75% , DVN-0.46% , XOM

Financials: ALL3.80% , AXP-0.08%

Real Estate: AMT-0.59% , CCI1.42% , EXR-1.40%

Health Care: ABT-0.59% , BIIB-0.85% , ISRG1.56% , MRNA-1.09% , REGN-0.80%

Consumer Staples: BF/B, MNST-1.46% , PG0.18% , PM0.68%

_____________________________

33 Granny Shot Ideas: We performed our quarterly rebalance on 7/12. Full stock list here –> Click here

_____________________________