As the Fed's Beige Book is just overloaded with a lot of tidbits, but exhausting to read, I always try to focus on one theme of it that I believe is most important.

As for today's release, I think there are two things most relevant, the direction of inflation and the breakdown between services and goods inflation and the other being the labor market with so many conflicting signals with hiring/firing and wages. On inflation, there are definite signs of easing but a stickiness still with many prices. On labor, the sense of slowdown is apparent but labor shortages and the need for more skilled labor is apparent in certain industries. The comments on wages were mixed with some easing in certain areas but rising for others.

Boston:

"Employment was up modestly, and wage growth was mixed. Labor markets remained tight but hiring and retention difficulties abated for some contacts and were stable, if still elevated, for most. Travel industry contacts engaged in a limited amount of hiring and their headcounts were roughly stable at desired levels. One retailer increased headcounts moderately in anticipation of a strong holiday season, and mostly reached their hiring targets. Manufacturers engaged in modest hiring on balance, but one instituted a hiring freeze in anticipation of a 2023 recession. Among software and IT services contacts headcounts increased moderately, and all but one contact experienced decreased turnover (another saw higher attrition)."

"The hiring outlook was mixed, and some contacts expressed concerns about adding too many workers in the lead-up to a possible downturn."

"Hospitality industry contacts reported average wage increases of 15 percent from a year earlier, with most of the growth occurring in recent months. Software and IT firms held wages steady or offered selected wage increases and bonuses, rather than permanent raises for all. A clothing retailer paused wage increases, having implemented substantial raises earlier in the year, but expects to offer signing bonuses to attract more seasonal hires. Manufacturing wage growth ranged from flat to above average."

"Most contacts expected to hold prices firm moving forward based on having made significant price hikes earlier in 2022, but a select few said that their prices still lagged relative to their costs and planned to make at least modest increases in the coming months."

New York:

"Employment continued to increase modestly, with some signs that labor shortages have eased a bit."

"Leisure & hospitality firms reported a marked pickup in hiring, and businesses in wholesale trade, information, and professional & business services reported that they continued to hire, on net. Firms in almost all industry sectors plan to add staff in the months ahead."

"Contacts in the construction, transportation, and information industries reported some slowing in wage growth, as did employment agencies in both upstate and downstate New York. In the education & health and leisure & hospitality sectors, however, wage growth remains strong. Businesses across all sectors continue to project widespread wage hikes in the months ahead."

"Selling price increases have slowed noticeably in the manufacturing sector but not in the service sector. A sizable and steady share of businesses in both sectors said they plan to raise prices in the months ahead."

Philly:

"Employment continued to grow slightly. Contacts described a heightened expectation of a recession, and businesses intensified preparations for a downturn: Multiple firms instituted a hiring freeze, others initiated planning for layoffs if business conditions did not improve, and one firm noted broad-based layoffs were already under way. While the share of firms reporting employment increases declined for the second consecutive period, the share remained near 25 percent for nonmanufacturing firms and near 15 percent for manufacturing firms."

"Most firms - 90 percent of manufacturing and 83 percent of nonmanufacturing - reported labor supply as constraining business operations to some extent in the third quarter of 2022. Several contacts noted firms were hesitant to lay off employees, given the difficulty they have experienced hiring workers in recent years."

"Firms continued to note that wage growth subsided in recent months... However, wage inflation remains widespread and appears to have maintained a moderate pace."

"On balance, prices rose moderately over the period - slower than in the prior period. Several contacts noted the rate of price increases had relented. However, price growth remained widespread."

Cleveland:

"Employment continued to increase, albeit at a slower pace. Slower employment growth in recent cycles is mostly a function of fewer firms adding to their staffing levels and more holding steady."

"One logistics contact said, "We would normally be hiring more people at this time but economic uncertainty has put our expansion plans on hold."

"Wage pressures remained elevated... Contacts indicated that wage increases remained necessary to retain talent amid a shallow pool of labor, which one described as "more of a puddle than a pool." Several contacts said that labor markets are still tight and likely to remain so, keeping upward pressure on wages for the near future."

"Cost pressures remained high, though they eased further in recent weeks. The share of contacts reporting higher costs was unchanged from the prior reporting period, but the share reporting a decline in input costs was at its highest in more than two years."

"Freight costs, which have been a pain point for most firms, continued to fall."

"Selling price pressures remained elevated though they too lessened further recently. The share of contacts reporting an increase in selling prices dipped below 50 percent for the first time since April 2021."

Richmond:

"Since the last report, the Fifth District labor market remained tight while employment grew moderately. Firms were worried that the lack of labor was impacting their customer experience. A quick service restaurant reported service interruptions in food deliveries, trash collection, and landscaping. Additionally, some firms reported reaching a ceiling on wage increases to attract and retain workers."

"High school and college students returning to school has been especially impactful this year. One firm reported losing 40-50% of its workforce when the high school opened, further straining their ability to maintain consistent hours of operation."

"Prices continued to rise strongly in recent weeks albeit at a slightly slower pace of growth compared to recent months. According to our most recent surveys, manufacturers reported robust year-over-year increases in prices received from customers, but growth eased somewhat from the peak set a few months ago. Likewise, service providers continued to report strong year-over-year price growth and a slight easing from the peak in August. Firms in both sectors saw a moderation in input price growth with several contacts noting that freight and energy prices have come down somewhat in recent weeks."

Atlanta:

"Labor market pressures modestly eased since the previous report; turnover rates held steady or had improved by most accounts. However, conditions remained tight as many firms remained understaffed and continued to backfill open positions, particularly among healthcare, manufacturing, and commercial construction firms. Some contacts noted that there was greater availability of hourly workers; however, most firms indicated that workers were resistant to overtime scheduling."

"Employers continued to focus on efforts to attract and retain workers through increased wages and bonuses, and enhancements to benefits. To address labor shortages and save costs, several contacts reported offshoring positions in addition to continued investments in automation."

"Most employers reported upward wage pressures, although several indicated that pressure had eased in recent months. Bonuses for retention, performance, sign-on and referral continued to be reported. Several contacts said that wage increases would be more targeted going forward and many indicated a greater focus on enhancements to benefits including attractive scheduling, flexible work arrangements, expanded healthcare coverage, and more vacation."

"District contacts noted moderation in some commodity costs like aluminum and resin over the reporting period, but supply chain imbalances remained an issue for planning and contract negotiations. Even as some input costs eased, a few contacts mentioned increasing costs for freight (a reversal of sentiment from the previous two reports), labor, and fuel."

"Firms' year-ahead inflation expectations decreased to 3.3 percent, on average, from 3.5 percent in August."

Chicago:

"Employment increased moderately in late August and September, and contacts expected a similar pace of growth over the next 12 months. Contacts reported difficulty finding workers across sectors and skill levels, though there were also reports that difficulties had eased some."

"Overall, wage and benefit costs moved up strongly and were aimed both at attracting new workers and retaining existing talent. In addition to labor market tightness, contacts cited high inflation as an impetus for workers requesting wage increases."

"Most prices rose rapidly in July and early August, though some commodity prices fell, notably for fuel. Contacts expected the pace of price increases to slow over the next 12 months. Aside from declines in certain commodities, producer prices continued to rise, spurred by passthrough of higher overall costs for raw materials, labor, and shipping. That said, growth in producer prices slowed across many categories. Consumer prices generally moved up robustly due to solid demand and passthrough of higher costs. However, fuel costs were down, and contacts noted a greater number of promotions on a range of retail products."

St. Louis:

"Employment has remained unchanged since our previous report. Contacts across the region continued to report difficulty filling positions and retaining workers. Some employers reported that increased flexibility and benefit policies implemented to improve retention are starting to bring about improved retention. However, there were still widespread reports of skilled tradespersons and technicians being poached by competitors. Contacts noted particular difficulty staffing weekend and late-night shifts."

"Wages across the District have grown moderately since our previous report. Healthcare contacts reported raising wages by 7-10% this year, but the rate of wage growth has begun to slow recently. A recent survey of Arkansas firms noted 90% of trucking fleets raised their pay an average of 11% over the past year."

"Prices have continued to increase moderately since our previous report. Although input costs have increased across the board, contacts reported mixed results in their ability to pass through costs to consumers."

"A contact in the car industry reported no transfer of costs to consumers due to low demand for new cars. However, a contact in the hotel industry reported increased consumer prices of 15-20% due to increased labor costs and renegotiated contracts with suppliers."

Minneapolis:

"Employment grew slightly since the last report. Total job openings have moderated; firms have reportedly reconsidered some job openings due to recession concerns or extreme difficulties in filling them. But recent surveys continued to find healthy overall demand; recruiting and staffing contacts concurred. Labor supply remained tight, however."

"Turnover was also problematic, often for nonwage reasons, such as schedule flexibility, said a staffing contact. "Many are losing more out the back door than they can bring in."

"Wage pressures remained high. A large share of employers reported that compensation costs increased compared with the previous month, and that trend was expected to continue."

"Price pressures eased slightly since the last report, but remained elevated. Two-thirds of respondents to a September survey of District firms reported that their nonlabor input prices increased from a month earlier. About 40 percent had slightly increased their prices charged to customers, a decreasing share from recent months, while about 10 percent of firms said their selling prices went down. Firms' outlooks for prices over the coming month moderated slightly."

KC:
"Employers in the Tenth District continued to add jobs at a moderate pace during September, as momentum from past job openings kept hiring activity elevated. However, commentary from a broad set of contacts pointed to signs of cooling labor demand... Many other businesses reported that they do not plan to post new job openings in coming months, indicating uncertainty about the outlook in slowing planned hiring."

"Contacts reported expectations that wage growth is likely to slow to a moderate pace in coming months. Although wage growth is expected to slow from recent highs, most businesses indicated the increase in labor costs being budgeted for in the coming year remains well-above historical norms. Moreover, manufacturers indicated they continue to expect wage growth to exceed historical levels, even though overall demand growth has become more sluggish."

"Prices continued to increase at a robust pace. Most businesses indicated an improved ability to pass on higher prices to customers over the past few months, particularly for hospitality and retail businesses. Most contacts expect cost pressures to remain persistent over the next six months, broadly citing financing, energy, labor and shipping and transportation costs."

Dallas:

"Solid employment growth continued, with a slight pickup seen in the energy sector. There were, however, scattered reports of a slowdown in hiring amid weaker demand and recession fears. Labor markets nevertheless remained quite tight."

"Some employers have rebranded undesirable positions to attract workers. A few contacts noted a higher degree of apathy among workers towards attendance and work quality. Some contacts said their growth plans were being constrained by an inability to bring on and retain sufficient staff."

"Wage growth eased slightly but remained high. Employees continued to demand higher pay, and companies responded in an effort to recruit and retain employees. Some contacts noted losing employees to competitors or other industries offering higher pay. A staffing firm said they were seeing a lot of workers switching jobs to attain higher wages."

"Input costs continued to climb at about the same elevated pace as during the prior period, while growth in selling prices continued to ease... Services firms commented that the ripple effect of inflation was a challenge, and numerous contacts noted greater difficulty passing on cost increases to customers. A restaurant said their biggest concern was customer pushback on menu price increases. Retailers also said customers were starting to push back on pricing."

SF:

"Hiring activity grew at a modest pace during the reporting period as labor markets remained tight across most sectors. Reports indicated increased employment levels despite difficulty attracting workers in manufacturing, health care, retail, professional services, and skilled trades. Real estate and construction firms as well as financial services providers reported further easing of labor supply constraints, partly due to slower activity in the housing market. Employment in leisure and hospitality remained far below target levels despite some reported increase in job applications. Airlines have adjusted their schedules in recent months to better reflect crew availability and continued to develop in-house training programs to help meet future demand."

"Reports indicated some improvement in employee retention, but many employers continued to highlight persistently high turnover rates. Several contacts noted that worsening housing affordability has made it more difficult for firms to fill entry-level positions in urban areas. One contact reported a notable uptick in applications for evening shifts as people sought a second job to supplement their income. Due to an increasingly uncertain outlook, many contacts narrowed down their future hiring plans to critical positions."

"Wages continued to grow, albeit at a slower pace. Reports indicated that elevated costs of living, particularly for essential expenses such as food and rent, continued to drive wage pressures upward. Employees across a range of sectors continued to demand more comprehensive benefits, flexible work arrangements, and up-front hiring incentives. However, there were several reports of hourly workers favoring higher pay over expanded benefits amid elevated price inflation."

"Price levels remained highly elevated despite reported moderation in the rate of increase. Reports noted persistent inflation across industries and products, including prices for food, insurance, health care, legal services, packaging, and some manufacturing products, such as plastic and cardboard, due to continued cost pressures from materials and labor... Nevertheless, cooling overall demand helped alleviate some price pressures, and contacts noted more stable prices for used vehicles, construction materials, and airfares. Contacts generally expected cost pressures to persist over the coming months."

I don't think anyone should be surprised about today's modest weakness after back to back (belly to belly) big up days.

Breadth was bad:

Thanks for reading my Diary today - I hope it was helpful.

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Enjoy your evening.

Be safe.

And... GO YANKEES!

After hours percent movers:

I will be out of the office between 3-4 pm today for a Vet appointment.

From Stifel on Green Thumb Industries (GTBIF)  .

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I have added to (C) , (PNC) , (WFC) and (BAC) on today's weakness.

Weak auction but good follow up buying over the last 15 minutes.

Fed's Kashkari (non-voter): Possible headline inflation has peaked, have not seen evidence core inflation has peaked.

- Seen very little evidence of local labor softening

- Surging mortgage costs are having a profound impact on the housing sector

- Gas prices have certainly affected purchasing power

- We are still working hard to achieve a soft landing

- Notes danger of talking ourselves into recession, mixed signals make it hard to get firm read on economy

- Underlying health of consumer showing mixed signals, possible headline inflation has peaked, have not seen evidence core inflation has peaked

My newest short, FIGS  (FIGS) , is -10% today.

And Carvana (CVNA)  is at a new low... the gift that keeps on giving.

I added across the board to my cannabis holdings this morning: (MSOS) , (CRLBF) , (CURLF) , (AYRWF) , (TCNNF) , (TRSSF) , (GTBIF) and (VRNOF) .

I mentioned that (PINS) call activity has been elevated recently. 

Today over 4,000 PINS $23.5 calls, expiring Friday, have traded as well as 2400 $22.5 calls.

The UK Gilt 10 Year Note Yield has taken an abrupt drop in yield (-16 bps) from a day's high of 4.034% to the current 3.875%. 

It has not yet translated into lower US yields - but if it does it could be short term bullish.

* (Green Thumb Industries') Ben Kovler's Excellent Adventure...

Very, very strange!

Interesting interview with Russell Napier.

I am expanding the size of yesterday's straddle.

I added big to my already sizeable two year Treasuries.

dougie kass

I have been watching MSOS like a hawk recently.
There is finally a real bid.
Adding - as it might be "the time.".
Dougie

Yesterday I sold (TLRY) and used the proceeds to add to (GTBIF)  - these shares are my largest dollar commitment to cannabis:

Randy

Drive "Straight" In

Multi-state cannabis operator Green Thumb Industries Inc. OTC teamed up with Alimentation Couche-Tard OTC Circle K Stores, an American chain of convenience stores. Under the deal, Green Thumb will sell licensed cannabis at Circle K gasoline retailers in Florida, first reported Bloomberg.

Financial terms between the two parties weren't disclosed, but it was noted that Green Thumb will lease space from Circle K locations.

The sales will start in 2023 at 10 of the company's 600 locations in the Sunshine State. Bloomberg pointed out that is a global first, as marijuana has been legally sold only in dispensaries in the U.S. and in pharmacies in countries that have legal cannabis programs like Germany or Uruguay.

The sales should "continue to normalize" cannabis fusing it with standard consumer products, Green Thumb CEO Ben Kovler said. "This is a futuristic deal."

Seeing marijuana at stations where people usually buy snacks and cigarettes could open the way for the plant to become fully mainstream.

The cannabis company's outlets will be branded as "RISE Express" stores and will have a separate entrance from the gas station.

With Florida having legal only medical cannabis, sales will be limited to residents with medical marijuana cards, which is about 700,000 people.

Kovler added that "there's appetite" from Circle K to expand partnership across other states.

* "All investment roads lead to interest rates" as demonstrated last night in the stock futures turnaround from +45 handles to -25 handles.

* In the market with no memory from hour to hour, stock futures climbed meaningfully last night until UK and US (in particular) yields began to rise a few hours ago. The US Dollar followed with strength as non US currencies succumbed.

* The U.K. and the EU's economic and financial uncertainties - of taming inflation, on one hand, and resuscitating economic growth, on the other hand - remain the concern du jour. As I wrote Monday, who would have thought several months ago, that U.K. policy would be the tail that wags the U.S. market's dog? Anyway, this results in me looking at U.K. gilt yields and the pound's value when I arise at 4 am, even before reading about the NY Yankees win! (Nasty Nestor!!) ...

* Obviously the losing skein in the U.S. markets reversed mightily yesterday and Monday. Today will be challenging with the rising yields here and over there.

* As mentioned, I remain in the camp of a successful test in here as noted in my opening missive last Tuesday and on Bloomberg early last week - though it doesn't have to be a straight line higher! I also had mentioned that I spoke to Lee Cooperman last Tuesday night and he mentioned that two technicians he speaks to and respects are looking for a rally over the near term. They were solely wrong on Friday! But very right on Monday.

* The unprecedented instability of currencies and interest rates continues to underscore the likely end of the salad days of easy financial conditions and holds the key to the prospective course of global equity markets during the near term. Higher short-term interest rates remain a market hurdle and a restriction for meaningful gains from here.

* Overnight, non-U.S. currencies, especially the pound and the Eurodollar, are weaker with, unlike previous days, higher rates. The recent climb in overseas interest rates is the byproduct of ill-timed (2021-2022) and now hawkish monetary policy, and what appear to be related reverse currency wars are moving multiple standard deviations from the mean.

* Though some strategists have turned more constructive, investor sentiment has been sour and the bears I speak to are very emboldened now - this morning some, like Goldman Sachs, are digging in their feet. As mentioned, previous bullish strategists - Goldman, JPMorgan and others - are now confidently bearish, bulls are now talking about limited downside and not so much about the upside, and put buying set a record three weeks ago Friday. AAII Bears are at March 2009 levels and the S&P oscillator remains in an oversold state, but down from 10 days ago... but sentiment is not a good timing tool. As mentioned early last week, traders' short hedges are at records.

* As mentioned, and for emphasis, all roads like to interest rates. Goodbye TINA (There Is No Alternative), hello TATA (Treasuries Are the Alternative): I believe the bond rout continues to create an opportunity in both fixed income and, in the fullness of times, in equities. Depending on one's risk profile, short-dated Treasuries are compelling even though I expect a market rally.

* Subject to interest rates, I am a continued buyer of stocks on weakness.

* The yield on the U.S. 2-Year Note is +9 basis point this morning after also advancing for most of the last few months. The yield on the 10-Year is +11 bps - now at 4.11% , and up by over 50 basis points in the last month. The 10-year U.K. gilt yield is +8 basis points.

* Market inflation data have noticeably moderated, softening labor and commodities, in recent months. In the last few days I have highlighted the imminent weakness in rental and home prices, which work with a lag in the data. 7% mortgage rates will hand homeowners a bum deal and I now believe that home price drops will accelerate relative to consensus expectations. This morning soft commodities are broadly lower. By contrast, Brent oil is +$0.91/barrel to almost $91.

"Workin' on our night moves
Trying to lose the awkward teenage blues
Workin' on our night moves
In the summertime
And oh the wonder
Felt the lightning
And we waited on the thunder
Waited on the thunder."

- Bob Seger, "Night Moves"

The market (and money) never sleeps -- and neither do I, it appears!

I described the importance that overnight futures trading holds for me here. It is a guidepost to my strategy in the regular trading session.

Moreover, the overnight/early morning futures hold opportunities as they are (1) inefficient, though liquid, and (2) it seems fear and greed is often exaggerated outside the regular trading session.

S&P futures were higher most of the evening - but succumbed to higher interest rates.

In recent weeks, during these volatile markets, I have kept a bead on volatility as well as currency rates. This morning VIX is +0.69 to 31.19. The VIX has been stubbornly high over the last 10 days - and remains so. Importantly, if you watch my trades I am using the elevated VIX to take in larger premiums in my short calls and puts and my straddle put on yesterday.

Gold, which has collapsed in recent weeks, was -$16 this morning. I still can't work it up to buy precious metals.

Brent oil was +$0.91 to almost $91/barrel.

Bond yields continue to represent the greatest risk to equities, accounting for the reversal in futures from last evening to this morning, and with rates spiraling ahead equities grow harder to value. Bond yields, the equity market's nemesis, are likely responsible for a large portion of the market's drubbing this year and overnight. As noted, this morning yields were much higher both in the US and over there.

The S&P Oscillator stands at -3.39% - its been range bound since last Wednesday. The oscillator has been a good short-term trading tool over the last few months! When the oversold is extreme I tend to be more of an aggressive buyer and vice versa.

Cryptocurrencies are flat again - uninspiring action with little volume, Bitcoin is unchanged at $19,150 and the conversation has left the asset in recent weeks. This asset class is "off the tape" and I continue to have zero interest in it.

S&P futures peaked at +44 and bottomed at -32 At 8:00 a.m. ET futures were -21 handles.

Nasdaq futures peaked at +185 and bottomed at -91 . At 8:05 a.m. ET futures were -70 handles.

Here is a synopsis of some of my columns I believe were important, or in the event you were out yesterday. The principal intent is to review the logic of my market moves and other factors:

Why I Remain Optimistic on Bonds and Stocks (I think this is a good read!) 

A Short Straddle (good idea with rising VIX?) 

High Above The Alps

All Investment Roads Lead to Interest Rates

More on Housing

Here were Tuesday's trades. This section provides transparency and a further record in memorializing my good and bad investments - frankly, there are a lot of disingenuous actors that smile and get away in the business media with disastrous recommendations of individual stocks and in piss poor market projections:

I just added to (SPY) $368.41 and (QQQ) $269.71.

I just sold a short straddle - January (SPY) $370 puts and calls shorted/sold.

To remind you, a short straddle is selling a put and call option with the identical strike price and expiration date.

I am doing this with an elevated VIX - which, to me, gives me an opportunity.

Added to (UAL) $38.52,  (DAL) $32.35,  (PINS) $23.01, and (AMZN) $114.60.

From my pal Peter: 

Housing starts in September totaled 1.439mm, just under the estimate of 1.461mm and down from 1.566mm in August. Of note, and on the heels of the 38 print in yesterday's NAHB builder survey, single family starts fell to 892k from 936k and that is the least since May 2020. Multi family starts, which are very volatile month to month, fell to 547k from 630k in August and vs 477k in July and 562k in June. We know all about the tightness in the rental market but we are slowing getting more needed supply.

With respect to permits, they fell again for single family, also to the lowest since 2020 but multi family permits increased after the August drop.

Bottom line, it's obvious why single family starts are falling and obvious why multi family construction remains healthy. The rental market supply/demand was offsides even before the mortgage rate spike which means even more demand for rentals.

Single Family Starts

Multi Family Starts

Hat tip to sub, Randy: 

Research Alert: CFRA Keeps Buy Opinion On Shares Of Amazon.com, Inc.

Analysts at CFRA have summarized their opinion as follows:

We trim our 12-month target by $5 to $170, calculated using an EV/EBITDA multiple of 21x against our '23 adj-EBITDA estimate of $84,886M (lowered from $85,124M). We raise our '22 EPS to $0.13 from $0.10 but lower our '23 EPS by a penny to $2.90. AMZN reports Q3 results on 10/27. We forecast revenue growth of 16.5% Y/Y vs. 15.3% consensus, GAAP operating income of $3.4 billion vs. $3.0 billion consensus, and adj-EBITDA of $18.3 billion vs. $17.2 billion consensus.

Headwinds include a slowing macro environment and the strong U.S. dollar. The positives are: 1) comparable figures will ease as AMZN laps elevated supply chain costs; 2) worker productivity should improve as headcount stabilizes; 3) fixed cost leverage should strengthen from Prime Day/holiday benefits and as AMZN right sizes capacity to match current demand trends; 4) growth in advertising and subscription revenues following recent Prime Video enhancements; and 5) AWS momentum, noting $100B of commitment backlog and 3.9 years of deal life as of 6/30.

As mentioned ad nauseum, an improvement in the supply chain issues has been a part of my more bullish market view:

An important chart which could be an aide to short term traders:

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Goldman Sachs:

US Sector Views: Updating our US sector recommendations

The combined outlook of slowing economic growth and rising interest rates informs our sector allocation recommendations over the medium term. The stock market has priced the recent economic slowdown but share prices do not currently reflect the risk of a US recession that many portfolio managers expect during the coming year. We revise our sector recommendations accordingly.

The relative performance of Cyclicals vs. Defensives has closely tracked the decelerating growth environment. However, the current earnings yield gap, a representation of the equity risk premium, is actually below average, indicating investors are not overly concerned about market risks. Our overweight sector recommendations are generally defensive and reflect the significant risks to earnings and valuation in an environment of elevated inflation and interest rates. Our underweights are more cyclical, as we seek to minimize sensitivity to a continued economic slowdown.

Overweights

• Health Care, Consumer Staples, and Telecom Services provide defensive exposure and exhibit relatively low vulnerability to the risk of higher real interest rates.
• Energy captures upside to GS commodity price forecasts and represents a hedge against stagflation.
• The Consumer Durables and Apparel industry group within the Consumer Discretionary sector offers a counter-balance of exposure to a group within a cyclical sector. This group trades at historically low valuations relative to both the S&P 500 multiple and 10-year yields.

Underweights

• Industrials, Materials, Autos, Media, and Semiconductors tend to underperform when economic growth slows.
• Technology Hardware should struggle if rates rise further and currently trades at elevated valuations.

The continued draining of the SPR (and could continue into the winter) which should now be renamed the Strategic Political Reserve, gives continued reason to be bullish on energy as this action further disincentivizes new supply and eventually this reserve needs to be replenished as it was initially meant to be used for actual physical supply disruptions (as we should all know already), not to manipulate the price.

As we discuss who are going to be the buyers of US Treasuries as the market loses the Fed, the banks and some foreigners like the Chinese and Japanese, buyers are coming from elsewhere, albeit at weaker prices and higher yields. According to the Treasury International Capital flow data out last night for August, foreigners bought up a huge $174b of US notes and bonds. That is the biggest one month pace ever and based on where it is coming from, it's most likely coming largely from hedge funds and other private pools of capital as the UK (foreign buyers likely using its banks as the source) and the Cayman Islands was where most of the money came from.

From the UK came $100b and $68b from the Caymans. Japan and China both were buyers of notes and bonds for the first time in many months but the Japanese let about $30b of T-bills mature that were not reinvested. As they intervened in September, I'm sure a further reduction in US holdings continued for Japan.

There will be always buyers of US Treasuries but at what price is the question and as seen in markets, it is at weaker prices and higher yields. As of this writing, the 10 yr yield is rising to a fresh 14 yr high at 4.08% following weakness in Asian and European bonds.

Monthly Foreign Buying of US Notes and Bonds

With respect to gilts, Deputy Governor of the Bank of England Jon Cunliffe penned a letter to the Treasury Committee in Parliament and said "Taken as a whole, LDI funds are now significantly better prepared to manage shocks of this nature in the future. As such, the risk of LDI fund behavior triggering 'fire sale' dynamics in the gilt market and self-reinforcing falls in gilt prices has been significantly reduced." Let's hope so but I'm hearing stories that pension funds are selling a variety of assets, including real estate, to firm up their financial positions.

The UK released its inflation stats today for September and headline CPI rose by 10.1% y/o/y with a core rate of up 6.5%, both one tenth more than anticipated. Input prices also grew more than expected while output charges were in line when including the August revision. In response, the 10 yr inflation breakeven is jumping by 13 bps to 3.78% after the sharp drop seen in the past few weeks. The next BoE meeting is on November 3rd, and the market is expecting them to step up to a 75 bps pace. Much of the gilt chaos is being blamed on Truss but the BoE's snail walking on its monetary tightening is mostly to blame I believe.

On the inflation front, Manheim said yesterday that wholesale used car prices fell 2% from September in the first 15 days of October and down by 10.3% y/o/y. So the price spike over the past few years continues to reverse and in coming months will further be reflected in the retail used car price gauges. We're still waiting though for new car prices to cool but they at least seem like they are plateauing.

Manheim Used Car Prices

In terms of the transportation of goods, trucking company JB Hunt said a few notable things in their earnings call last night. "While some improvement has been seen in rail service and company hiring challenges in particular with our driver force, we continue to face difficulties in equipment availability for growth and replacement along with the uncertainty of the direction of macro conditions" said the CEO. The CFO said, "From a cost perspective, we continue to experience inflationary pressures across most areas of our business, but primarily around labor, equipment, including both parts and labor and in the area of claims. We are keeping a close eye on receivables, credit and bad debt as economic conditions change."

With respect to preparation for the holidays, "peak season volumes aren't where we would have anticipated them to be just, I don't know, four or five months ago. Certainly would have anticipated stronger volumes. But peak season this year just doesn't appear to be much of an event, I'll just say it like that, while we're still experiencing growth." I'll add my belief that part of this was inventory loading earlier than seasonal trends as companies didn't want empty shelves again this holiday season.

Here is what UAL said in its earnings release, "Looking forward through the end of the year, the airline expects the strong Covid recovery trends to continue to overcome the recessionary pressures in the macroeconomic environment. The airline now expects fourth quarter adjusted operating margin to be above 2019 for the first time."

As for the main factors in their optimistic outlook, "The company believes there are three durable trends for air travel demand that are more than fully offsetting any economic headwinds: air travel is still in the Covid recovery phase, hybrid work gives customers the freedom and flexibility to travel for leisure more often, and external supply challenges will limit industry supply for years to come." And the latter will give them extra pricing power I'll add.

With respect to P&G, sales rose just 1% y/o/y as FX "had a six percent impact on net sales." Pricing drove a 9% increase in sales but volumes fell by 3%, a similar trend seen with other consumer product companies.

With the average 30 yr mortgage rate at around 7%, the MBA said purchases fell 3.7% w/o/w and are down 38% y/o/y. Refi's were down another 6.8% w/o/w and by 86% y/o/y. We're all clear on the situation in housing, it's in a recession.

From Bramo:

Upside

- (MNTV) +15% (reportedly has received takeover interest, considering sale)
- (NFLX) +13% (earnings, guidance)
- (ISRG) +10% (earnings, guidance)
- (ZYME) +8.6% (JAZZ enters license agreement with Zymeworks to develop and commercialize zanidatamab, a HER2-targeted bispecific antibody)
- (ABEO) +5.4% (announces database lock for pivotal Phase III VIITAL study of EB-101 in patients with recessive dystrophic epidermolysis bullosa (RDEB))
- (ASML) +5.1% (earnings, guidance)
- (UAL) +5.0% (earnings, guidance)
- (JBHT) +2.5% (earnings)
- (BKR) +2.2% (earnings)
- (ADBE) +1.7% (initial FY23 guidance from investor day event)
- (PG) +1.7% (earnings, guidance)
- (ABT) +1.5% (earnings, guidance)
- (CFG) +1.5% (earnings, guidance)
- (NDAQ) +1.5% (earnings, guidance)
- (CMA) +1.3% (earnings, guidance)

Downside

- (GNRC) -18% (reports prelim Q3, cuts guidance)
- (PTCT) -16% (confirmed enrollment is active and ongoing for Phase 2 PIVOT-HD trial of PTC518 for treatment of Huntington's disease at study sites globally and plans to share data from 12-week portion of PIVOT-HD within 1H23; US FDA requests additional data to allow study to proceed in US)
- (ALLY) -7.5% (earnings)
- (BHVN) -6.9% (files to offer up to 20M shares)
- (GRTS) -4.2% (to host data update on CORAL and discuss the application of self-amplifying mRNA (samRNA) in Infectious Diseases)
- (LPI) -4.2% (cuts Q4 production guidance)
- (MTB) -2.8% (earnings)
- (WGO) -1.3% (earnings)

At its highest, S&P futures were +42 handles in the evening futures session but then domestic and non US interest rates started to pick up - led by the rise in the US two year note yield to over 4.50% (+6 bps). 

As I write this S&P futures are -14 handles and the VIX is on the rise, +0.80 to 31.30. 

No biggie but it is important to watch the correlation. 

More in "Futures" column coming up in 45 minutes or so.

This captures my view:

Biden touts cannabis reform at a political rally.

Doomberg on Chicken's Razor.

Another tough night with one of my dogs having health issues.

There will be a slow start to columns today.