Right after the G-7 agreed to implement a price cap on Russian oil, Russia indicated it would halt gas supplies through Gazprom’s Nord Stream 1 pipeline, Europe’s major supply route, for an indefinite period of time. This was done under the ruse that Siemens Energy (ENR.TI – $14.14), needed to repair faulty equipment. Siemens Energy, which is headquartered in Munich, Germany, said it did not understand Gazprom’s presentation of the situation because it was not currently commissioned by Gazprom to do maintenance work on the turbine with the reported leak, nevertheless, the company would be on standby. This is just one example of how Russia is using energy as a weapon against Europe.

And the Nord Stream pipeline is important because all of Europe is facing a deepening energy crisis which could also become a financial and humanitarian disaster. The humanitarian element of this crisis will hopefully be avoided, but it will play out as cold weather hits Europe and fuel becomes both scarce and expensive.

Canary in the Coal Mine

On the financial side, we see a number of worrisome developments for Europe which are linked to energy. Finland’s Fortum Oyj (FORTUM.HE – 9.2 euro) recently signed a bridge financing arrangement with the Finnish government for 2.35 billion euros ($2.34 billion). Fortum Oyj is a Finnish state-owned energy company that operates power plants and generates and sells electricity and heat throughout Europe. The loan, which carries a steep 14.2% interest rate, was made to cover soaring collateral needs in the Nordic power derivatives market. Over the weekend, the Finnish government had already announced a 10-billion-euro package of credit for the Finnish power industry. CNBC recently discussed the fact that eurozone may require as much as $1.2 trillion in backing for the EU energy derivatives markets as the energy industry faces immense challenges. In short, it is possible that the energy derivatives market may be the canary in the coal mine for a financial crisis in the next twelve months. It is worth monitoring. Meanwhile, it is very clear that European countries are creating major programs that will increase sovereign debt.

Another example is the newly installed UK Prime Minister Liz Truss, who ran on a program to cap energy costs in Great Britain at a cost of $116 billion to the government. Closer to home and totally separate from Europe’s energy predicament, President Joe Biden signed a $1.2 trillion Infrastructure Investment and Jobs Act bill on November 15, 2021 and combined with his $1.85 trillion Build Back Better Act, which became the Inflation Reduction Act of 2022, requires Congress to invest over $3 trillion in national infrastructure and social programs. The impact of these bills on the US deficit is debatable and unknown. Nonetheless, it is no surprise that interest rates are on the rise.

The US Treasury yield curve is not yet fully inverted, but it has been inverted between the 1-year Treasury and the 10-year Treasury note for a few months and this is a warning of an impending recession. But in the last week interest rates have been rising as much as 30 basis points along the curve. This is apt to continue as the Fed increases rates and sovereigns continue to increase debt. See page 3.

Economic Roundup

The ISM manufacturing index was unchanged in August at 52.8 and the non-manufacturing index rose 0.2 to 56.9. Both indices are well below their 2021 peaks. The best component in both surveys was new orders, which rose from 48.0 to 51.3 in manufacturing and from 59.9 to 61.8 in the non-manufacturing survey. Employment was 54.2 in manufacturing and 50.2 in non-manufacturing, and both above 50 for the first time since March. In sum, these were slight improvements. See page 4.

Many feel that the August payroll report was the perfect combination for the Federal Reserve of “not too hot, not too cold” with a job gain of 315,000 and an unemployment rate that ratcheted up to 3.7%. But in our opinion, job growth has been subpar for a while. For the first time in this economic “expansion,” the seasonally adjusted level of employment in the establishment survey exceeded the peak employment level reached in February 2020, but only by a modest level of 240,000. Still, as seen on page 5, the not-seasonally-adjusted level of employment was 152.57 million in August and remained below the November 2019 peak level of 153.1 million.

In short, the monthly numbers do not tell the whole story. There has not been job “growth” in this expansion, in reality, there has barely been a job catch-up to pre-COVID levels. We see this as a critical weakness of the post-pandemic expansion. A normal economic expansion will see new peaks in employment and an accompanying increase in household income and consumption; but in fact, there are fewer people employed today than prior to the COVID shutdown. See page 5. We also noticed that there is a declining trend in the number of people who are “not in the labor force and do not want a job” and a corresponding rising trend in those “not in the labor force but want a job.” See page 6. This desire to return to work may be a sign of financial pressure in many households as the combination of inflation and rising taxes erodes purchasing power.


September is a great month in many ways, but it has a long history of poor stock market performance. Since 1950, the month is the weakest of all 12 months averaging a loss of 0.4%. Data going back to 1931, shows September to be the weakest month with an average loss of 0.9%. Either way, seasonality suggests September is a time to be cautious, particularly since it will include another Fed funds rate hike, earnings warning season, and dollar strength increases the cost of energy for all non-US entities and intensifies the pressure on the European economy.    


Once the rally encountered resistance at the 200-day moving averages, the indices all plunged below all other shorter moving averages. It is a sign that the lows are apt to be tested in the near term. And keep in mind that it is not unusual for a test of bear market lows to generate a new low in price. In our opinion, it is the FANG-type stocks and the stay-at-home stocks that look the weakest currently. This is in line with the fact that the key to a successful retest of a bear market low is whether or not a new low in price also generates a new low in breadth. A successful retest will show there is less selling pressure – a less severe oversold reading — despite a lower low in price. We think this is a possibility in the final months of the year. See page 13. Since we believe there could be disappointments in September in terms of monetary policy, earnings, and a festering energy crisis/recession in Europe, and these risks have not been fully priced into equities, portfolios should be concentrated in sectors where earnings are most predictable and are both inflation and recession resistant. These include areas such as energy, utilities, defense-related stocks, staples, and select healthcare. 

Gail Dudack

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