Good morning investors,
We got a surprise with the November CPI print coming in at 2.7% versus 3.1% expected, which sparked Thursday's rally with the S&P gaining 0.8% and Nasdaq surging 1.4%. Oracle rockets 5% premarket on finalizing TikTok's US spinout into an Oracle led joint venture valued at $14 billion, ending years of regulatory limbo. Nike plunges 10% despite beating earnings as China sales collapsed 17% and tariffs hammered margins by over 3 points. With $7.1 trillion in options expiring today, the largest "quadruple witching" on record, expect volatile closes as Santa Claus attempts his traditional year-end rally.
Opening Bell: TikTok Resolution
S&P ($SPY ( ▲ 0.5% )) futures up 0.1% with Nasdaq ($QQQ ( ▲ 0.75% )) futures gaining 0.2% while Dow ($DIA ( ▲ 0.23% )) futures dip 22 points. Oracle ($ORCL ( ▲ 1.43% )) surges over 5% premarket on the TikTok deal creating majority U.S.-owned entity with Oracle handling data security, content moderation, and algorithm safeguards. ByteDance retains 19.9% ownership while licensing its recommendation algorithm.
Nike ($NKE ( ▲ 1.13% )) craters 10% premarket after China's 17% sales decline and Converse's 30% collapse overshadowed North America's 9% growth. The 3.15 point tariff margin hit proves structural, not temporary, crushing investor hopes for quick turnaround.
CPI's Gift to Bulls
November's 2.7% CPI versus 3.1% expected handed markets exactly what they wanted, a reason to rally. Core at 2.6% looks even better, though economists rightfully question data collected during shutdown disruptions with October comparisons missing entirely.
As I noted yesterday: "Markets don't trade perfection, they trade marginal change." This print reinforces a Fed biased toward protecting growth over fighting inflation. The Fed put isn't theoretical anymore, it's behavioral. One report doesn't solve inflation, but directionally supports policy asymmetric in markets' favor.
Fed's Measured Response
January rate cut odds remain unmoved at 75% chance of holding despite the soft CPI. Powell pre-warned the Fed would view these numbers with a "skeptical eye" given collection issues. But Chicago Fed's Goolsbee admitted rates could "come down a fair amount" if this trend continues.
The debate intensifies with Governors Waller and Miran already advocating cuts while others demand patience. Good data like Thursday's eventually converts hawks to doves, but one disrupted print won't shift consensus immediately.
Nike's China Catastrophe
Nike's Q2 beat on North America strength can't mask disaster elsewhere. China down 17% accelerates deterioration in their second-largest market. CEO Elliott Hill admitting improvements "not happening at the level or pace we need" understates the crisis.
Converse collapsing 30% versus 27% last quarter shows problems worsening, not stabilizing. The 3.15 point tariff margin hit becomes permanent headwind pricing can't offset. Hill claims "middle innings of comeback" but investors see late-stage decline.
Oracle's Redemption Arc
TikTok's formalization validates Oracle as the infrastructure partner for geopolitically sensitive tech. The deal structure, majority US ownership, Oracle controlled operations, ByteDance licensing algorithms - creates template for future China US tech compromises.
My view yesterday that Oracle's selloff looked overdone proves prescient. Yes, funding concerns remain real, but this TikTok win plus long term AI positioning suggest the 30% decline from September created opportunity.
Quadruple Witching Drama
Today's $7.1 trillion options expiration, largest on record, creates volatile potential. Four securities types expiring simultaneously typically drives aggressive positioning adjustments, especially into close. Combined with year-end window dressing, expect exaggerated moves.
Historical patterns favor bulls: S&P rises 75% of time in December's last two weeks, averaging 1.3% gains since 1928. Barring major shocks, positive seasonality and cleaner positioning support continuation higher.
Micron's AI Validation
Micron's Wednesday guidance declaring "demand substantially higher than supply for foreseeable future" provided crucial AI validation after Oracle's debt concerns. Memory chip shortages confirm infrastructure buildout continues despite individual company struggles.
The results reassured investors that AI demand remains real, not speculative. Magnificent Seven all closing green Thursday shows appetite returning for quality tech despite recent rotation.
Final Thought
Markets demonstrated Thursday what I've maintained throughout December's choppiness: this bull market needs minimal excuse to rally. A highly questioned CPI print sparked buying simply because the number looked good.
The divergence between economists dismissing November's CPI data and markets surging anyway reveals an important truth. We're in a market that wants to go higher and will interpret ambiguous signals optimistically. This behavior typically marks mid-cycle dynamics, not late-stage tops.
Today's record options expiration adds complexity but doesn't change direction. The Santa Claus rally thesis remains intact with historical patterns, positive seasonality, and improving breadth supporting further gains. My 7,000 year end upside target looks increasingly achievable if momentum continues.
As always, feel free to reach out with questions about navigating year-end positioning.
Best regards,
Dan Sheehan
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.