Dear Trader,
The latest inflation data came in hot. CPI and PPI both ran ahead of estimates, and the heat bled into core CPI (the version that strips out food and energy). The September jobs number came in soft.
Treasuries rallied hard anyway. Ironically, I played for that rally in Special Situations. Now we’re a few days out from the Fed meeting, and I’m going to play it the other way.
The market’s pricing no hike next week, with the next one coming in December. I think the most dovish thing the Fed can do here is a hawkish hold (leave rates where they are but talk tough about what’s next). The only reason they won’t hike now is to keep from spooking the markets.
Chair Warsh doesn’t seem to be trying to surprise anybody. He’s trying to build a relationship with the markets right now, but it’s still early days. The real risk is they hike now in October and get it out of the way.
I expect a short-term risk-off reaction (investors dumping anything risky and running for safety) to the Fed. There’s a good chance this trade pays before we even see what the Fed actually does.
Somebody Didn’t Get the Memo
Gold is the product that tells me this idea is one the market’s going to have to come to terms with. It’s back down to its support level from July, around $4,000 (support is a price where buyers have stepped in before).
Gold still has some stubborn longs. ETF holdings hit a record 4,256 tonnes at the end of September, while speculators in gold futures have cut their longs for seven straight weeks.
The product that hasn’t caught up as much is the VanEck Gold Miners ETF (GDX), my one to leave this week. GDX is still well off those lows. Miners don’t HAVE to trade exactly with gold, but there’s room lower, and if equities keep weakening, GDX will follow.
There’s room for GDX to head toward 70.
Who Owns the Track?
Gas prices keep shifting around, and there’s a little bit of worry in the market. Meanwhile, there’s strength coming out of the rails, and they’re taking it from trucking.
Over the last 20 days, CSX (CSX) is up 9 percent, Union Pacific (UNP) 7 percent and Norfolk Southern (NSC) 6 percent. Truckload carriers like Werner (WERN) are down 12 percent. Even the companies that sell intermodal space (shipping containers that ride a train for the long haul and a truck for the last few miles), like Hub Group (HUBG) and J.B. Hunt (JBHT), are lagging.
Freight’s moving to rail, and the track owner keeps the money. That’s why CSX is my one to love.
CSX gapped up on earnings (opened well above the prior day’s close) after a record quarter. Revenue jumped 12 percent, intermodal volume rose 7 percent and the operating margin hit 39 percent.
It held most of that gap on a day the transports gave back. This has room to run up and test its all-time highs around $53.
And here’s the kicker: this sector generally holds up to a hawkish Fed. In the 2022 and 2023 hiking cycle, the rails beat the S&P 500 in eight of 13 Fed weeks. In the two “hawkish holds” in 2023, they beat the S&P both times, while GDX fell 3 percent and 8 percent.
How This Blows Up on Me
The Fed itself. If they come out softer than I expect, or the market decides to shrug it off, or we get a relief rally from the megacap earnings next week, GDX will squeeze higher (short sellers rushing to buy back can launch a stock fast). It’ll likely break above the tight little range it was just in.
On the long side, CSX sits inside an industrial sector that looks like it’s about to break down.
Both of these are in the running for this week’s Ticker Highlight Show play. The team narrows the list down Monday morning, and the pick goes live at 10:30 AM ET.
Tap here to join the Ticker Highlight Show.
Enjoy the journey,
Tim