Another Surge in One Sector
Mortgage rates kill housing … PCE numbers mean the Fed will keep hiking … oil investors are rolling in record profits … Q3 GDP manipulation? … Dogecoin surges on Musk Twitter takeover
The news keeps coming fast and furious. Let’s bounce around to the stories impacting your portfolio.
Sky-high mortgage rates continue to throttle the housing market
The average 30-year fixed rate mortgage is now above 7%. One year ago, it sat at 3.14%.
This explosion in borrowing costs has locked many prospective buyers out of the housing market…and last Friday, we received the numbers to prove it.
Pending home sales dropped a much-worse-than-expected 10.2% between August and September. Economists had only expected a 4% decline.
Here’s CNBC with more:
This marks the lowest level on the pending sales index since June 2010, excluding April 2020, when the Covid pandemic was in its early days.
Realtors point squarely to sharply higher mortgage rates, which had sat at record lows for the first two years of the pandemic…
While red-hot home prices are starting to cool and even drop in some local markets, the decline is not enough to make up for the increase in interest rates. Home prices are up more than 40% since the start of the pandemic, fueled largely by those rock-bottom interest rates early on.
So, if you’re a would-be homebuyer waiting on the sidelines…keep waiting.
However, you can be sure this massive drop in pending home sales is music to the Fed’s ears. For everyone hoping for the Fed Pivot, this is a good sign.
Meanwhile, last Friday’s data show inflation remains strong but not unexpectedly strong
The Federal Reserve closely watches the core personal consumption expenditures price index (PCE).
Last Friday, we learned the index increased 0.5% between August and September. The year-over-year increase was 5.1%. The monthly gain was in line with Dow Jones estimates, while the annual increase was slightly below the 5.2% forecast.
So, how might the Fed interpret that?
For that, let’s go to legendary investor Louis Navellier. From last Friday’s Accelerated Profits Market Update Podcast:
This is the third straight monthly increase in the core PCE.
Economist were expected a rise to 5.2%, so technically, we rose less than expected. But (the persistent monthly increases) just mean the Fed is going to keep raising rates.
They want the core PCE to cool off.
The question on everyone’s mind is “so, how much will the Fed keep raising rates?”
As it stands today, many traders believe we’ll get that softer 50-basis-point hike in December. We can see this by looking at the CME Group’s FedWatch Tool, which assigns probabilities to various Fed Funds rates at upcoming points in the future.
Even after last Friday’s PCE numbers, 44.6% of traders expect we’ll see a 75-basis-point hike next Wednesday at the Fed’s November meeting, followed by a 50-basis-point hike in December.
But what’s interesting is that this percentage has been dropping. Last Friday it was at 48%. And if we go back one month, it came in at 54%.
All eyes and ears will be on the Fed for clues this Wednesday.
Meanwhile, was Q3 GDP growth manipulated?
Last Thursday, we learned that Q3 Gross Domestic Product rose 2.6%. That was better than the estimate of 2.3%.
But Louis believes there’s a bit of smoke-and-mirrors going on. Back to his market update:
Amazingly, of the 2.6% GDP growth, 2.77% is attributable to the falling trade deficit.
Why is the trade deficit falling?
Well, we’re exporting a lot of oil and refined products. Especially with the big Strategic Petroleum Reserve (SPR) release. You can argue that the 3rd quarter GDP was artificially manipulated by the SPR release.
Obviously, the Biden Administration won’t be able to keep that up much longer because the reserve is being depleted.
For context, the Strategic Petroleum Reserve Stocks is at a level of 401.72M, down from 615.28M one year ago. That’s a 35% drawdown.
Speaking of oil, we’re seeing record earnings from top-tier oil companies
This is no surprise for regular Digest readers. For months, we’ve been highlighting Louis’ analysis that’s predicted this monster bull run in energy.
Well, last week, Chevron reported its second-highest quarterly profit ever. It posted a net profit of $11.2 billion, or $5.78 per share, crushing Wall Street’s $4.86 estimate.
Exxon one-upped Chevron by posting its highest profit in history. Analysts were expecting adjusted earnings per share of $3.86. The number came in at $4.45 per share.
This “rise of oil” is leading to a fascinating dynamic playing out in the S&P.
Back to Louis to explain:
…There is a shift away from tech companies as energy stocks are clearly set to post the best earnings in the third quarter.
Now, what’s interesting here is the big institutional investors are waking up to the energy companies’ growth; they went from accounting for just 2% of the S&P 500 to about 6% now.
Personally, I think energy stocks will account for 30% of the S&P 500 in the next two years, which bodes extremely well for our big energy bet as the institutional buying pressure should remain persistent and relentless.
If you’re unclear about the math behind Louis’ projection, in short, it boils down to money managers who run funds that mirror benchmarks.
As money flows out of big tech stocks – which have made up an enormous percentage of indexes like the S&P – and money flows into energy, the percentage weightings within an index change. Money managers with funds that are intended to mirror these weighted indexes have to recalibrate, which means more money flows into energy.
Back to Louis:
The institutional buying pressure in energy stocks is going to be persistent and relentless…
That’s why I’m so bullish on energy.
Translation: Load up on top-tier energy stocks.
Finally, the cryptocurrency Dogecoin has exploded roughly 65% since Friday as Elon Musk takes the helm at Twitter
Musk has been a vocal proponent of Dogecoin. His supportive tweets in past months have led to various Dogecoin surges. And it looks like Doge fans are hoping for more.
Dogecoin jumped 10% over the 24 hours to Friday midsession in New York, as billionaire Elon Musk, a vocal backer of the cryptocurrency, on Thursday completed his deal to take over social media platform Twitter…
Some Dogecoin holders are hoping that Musk could push for wider adoption of Dogecoin, by ways such as accepting the crypto for payment on Twitter after he takes reins of the social media platform.
While we wouldn’t recommend anyone invest in Dogecoin based on Musk’s purchase of Twitter, we’re beginning to see signs of life in the broader crypto sector.
Last week, our crypto experts Luke Lango and Charlie Shrem held a special live event to discuss what’s going on.
In short, they believe the market has finally reached an inflection point, and it’s time to buy certain top-tier altcoins.
Here’s Charlie with more:
[Our current crypto winter] has set the stage for the biggest buying opportunity in history. You can buy incredible altcoins right now at steeply discounted prices.
Altcoins with 10x or 20x potential… For Just pennies.
You can watch a free replay of last week’s event here.
One quick note before we end…
Though stocks are down as I write Monday morning, it’s been an amazing October. In fact, the Dow is on pace for its best October ever.
Will it continue?
All eyes are on the Fed on Wednesday. The central issue will be hints about what happens in December.
We’ll keep you up to date here in the Digest.
Have a good evening,