A World of Risk

On October 7, nearly one year ago, the Iranian-funded Hamas terrorist organization attacked concert goers and families in their homes in southern Israel. Not only were roughly 1,400 Israelis, who overwhelmingly were civilians, killed or taken prisoner, but Israel and its intelligence services had been humiliated. The nation appeared weak and unable to protect its own people. The result was a large-scale offensive into Gaza that we know has largely destroyed the military capabilities of Hamas, but also had a terrible impact upon the civilian population of that region. The also Iranian-backed Hezbollah terrorist organization had been hitting northern Israel with rockets sporadically in sympathy with Hamas, as the invasion of the Gaza Strip progressed.

Over the summer, the Israeli Defense Forces to a greater degree, turned their attention in a northerly direction. Mohammed Deif, who was the military leader of Hamas in Gaza was eliminated as was Hezbollah's military chief in Lebanon, Fuad Shukr. This past weekend, Hezbollah leader Hassan Nasrallah was killed by an Israeli airstrike in Beirut, Lebanon. Killed alongside Nasrallah was Iranian General Abbas Nilforushan.

This past weekend, Israeli Forces moved into Lebanon, striking against Hezbollah targets. Ahead of that smaller invasion, Israel had been quite creative, using pagers and walkie-talkies to not only target, with precision, members of the Hezbollah movement, but re-establish the reputation of Israel's intelligence services as an elite level player in the region.

Understand that there are two upcoming events that could and probably will impact the balance of power in the region. One, Iran is moving closer to becoming a true nuclear power, thanks to incredibly misguided U.S. policy over the past three years. Having groups like Hamas, Hezbollah, and the Houthi rebels in Yemen act as state-sponsored buffers between Israel and Iran is key to developing and preserving these capabilities for Iran. Two, Diplomatic normalization between Israel and Saudi Arabia is still on the table. Very likely, Iran used its terrorist proxies as fodder to provoke a war between Israel and Islamic groups in order to delay that process.

Escalation

The White House issued a warning first. Iran's attack on Israel was imminent. More than 200 ballistic missiles are believed to have been launched at Israeli targets by Iran's armed forces on Tuesday evening (local time). The attacks were said to be in response to the strikes against Hezbollah's leader in Beirut that also killed the Iranian general over the weekend, as well as in response to the head of the political wing of Hamas in July, which took place in Tehran. U.S. naval forces fired about a dozen interceptors in support of the Israeli Defense Forces that claim to have intercepted "many" of the incoming missiles.

Incoming missiles unlikely to hit anything of importance or hit near population centers did either get through Israel's "iron dome" or were permitted to explode harmlessly as a means of preserving ammunition. There is believed to have been one casualty in the West Bank, and there may have been limited damage elsewhere according to Israeli authorities. The Iranian military is claiming that 90% of the missiles hit strategic targets within Israel. There was no immediate independent assessment of damage inside of Israel, but it does not appear that Israel suffered any significant damage.

The IDF launched new strikes against Hezbollah in Lebanon after the Iranian airstrike had concluded. This is now twice that Iran and Iranian proxies have launched a large air attack on Israel since Hamas started the war on Oct. 7, with almost nothing to show for their efforts other than forcing Israel to make use of its inventory of defensive missiles. Israeli Prime Minister Benjamin Netanyahu stated, after the attack, that "Iran made a big mistake tonight, and it will pay for it. The regime in Iran does not understand our determination to defend ourselves and our determination to retaliate against our enemies"

Meanwhile ...

Soviet, I mean Russian, forces entered the small town of Vuhledar, Ukraine, which is a strategically located coal-mining pile of rubble that used to be home to a rough 15,000 people. Ukrainian forces had been able to hold this town since the Russian invasion began in early 2022. Why control of this town is crucial is that it lies on an elevated plain and lies close enough to a rail link between the city of Donetsk and the Crimean Peninsula. Holding the town would significantly improve the Russian army's posture in the region, at least from a logistical perspective.

Tuesday

In response to the heightened geopolitical situation as well as a Jerome Powell that has suddenly started to sound less dovish, there was a risk-off sentiment that permeated financial markets on Tuesday. WTI Crude rallied on Tuesday and continued to rally overnight. Gold rallied on Tuesday but has sold off small overnight. U.S. Treasuries from the belly of the curve out to the deep end rallied sharply on Tuesday, but have given much of that ground back overnight.

As far as equities are concerned, across the 11 S&P sector SPDR exchange-traded funds, it was clear that investors moved out of Tech XLK and into Energy XLE. Tech gave up 2.44%, as Energy added 2.28%. No other group gained or lost more than 0.8% as seven of these funds gave up ground. Within tech, the Philadelphia Semiconductor Index surrendered 2.86%. Yes, I remain long Nvidia NVDA, Advanced Micro Devices AMD, and Intel INTC. That said, I also remain short Micron Technologies MU, which started out as a (very good) trade, but now serves a hedge.

The Industrials XLI may have closed up just 0.05%, but within that group, the Dow Jones U.S. Defense Index gained 2.48%. Yes, I did take a little something off of my long in Lockheed Martin LMT, which was up 3.64%, but those funds were used to initiate a new long position in RTX Corp RTX, which was up 2.67%, so not a total blunder, just increased diversity across my defense portfolio that also includes Northrop Grumman NOC and General Dynamics GD.

Though they might be down this morning, I will remain long my gold funds and medium to long-term bond funds. For those with an interest, I am long the SPDR Gold Shares ETF GLD, the Goldman Sachs Physical Gold ETF AAAU, the iShares Long-term Corporate Bond ETF (IGLB), and the iShares 7-10 Year Treasury Bond ETF IEF. Just an unpaid endorsement of a service I do pay for ... Keith McCullough at Hedgeye has an incredible knack through his process for putting ETFs that I may or may not have heard of, but definitely was not thinking of in the heat of the moment, in front of me, precisely when I need to see them. 

As For the Macro

Tuesday was kind of a rough day. The ISM Manufacturing PMI showed headline contraction for a sixth consecutive month, with New Orders and Employment still mired in a state of deep contraction. Backlog of Orders and New Export Orders are also in awful shape. Yeah, Sarge, we all know that the U.S. is in a deep state of industrial recession for more than two years. Was there any good news? Actually, yes. Prices finally fell (by a smidgen) in contractionary territory.

As for the August JOLTs job openings report, it looked as if there was good news -- for a moment, until one looked into the data. Job openings did decrease in August from 7.71 million in July to 8.04 million. Unfortunately, practically the entire gain in openings was an increased need for construction workers. If you do almost anything else for a living, no, there was no increase in demand for your services. Very interesting and perhaps frightening, the hiring rate dropped to its lowest level since October of 2013 (ex-Covid), while the quit rate dropped to its lowest level since 2015 (ex-Covid). Not pretty.

Economics (All Times Eastern)

07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 6.13%.

07:00 - MBA Mortgage Applications (Weekly): Last 11.0% w/w.

08:15 - ADP Employment Report (Sep): Expecting 112K, Last 99K.

10:30 - Oil Inventories (Weekly): Last -4.471M.

10:30 - Gasoline Stocks (Weekly): Last -1.538M.

The Fed (All Times Eastern)

09:00 - Speaker: Cleveland Fed Pres. Beth Hammack.

10:05 - Speaker: St. Louis Fed Pres. Alberto Musalem.

11:00 - Speaker: Federal Reserve Board Gov. Michelle Bowman.

12:15 p.m. - Speaker: Richmond Fed Pres. Tom Barkin.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: CAG (0.60), RPM (1.74)

After the Close: LEVI (0.31)

At the time of publication, Guilfoyle was long NVDA, AMD, INTC,LMT, RTX, NOC, GD, GLD, AAAU, IEF, IGLB. Short MU.