A Chance To Re-Examine

Kenny PolcariUncategorized

Things you need to know:

  • The push to test lower continues
  • Buffet holds his annual meeting via ZOOM and says “Don’t bet against America” after he sold all of his airline holdings. (but to be fair – the investment thesis changed for him)
  • Oil under pressure as supply glut concerns rise
  • Mohammed El Erian suggests that the FED went too far this time – but only time will tell
  • Try the Orrechiette with Zucchini & Mushrooms

 

May Day is the 1st of the month – many markets around the world were closed – causing global volumes to be light as most of Europe and parts of Asia celebrated. It was also a Friday this year and that gave investors – in the current situation – a chance to re-examine the outlook as we enter month two of the second quarter. On Friday – investors were not sure they liked what they saw. Stock futures were weak as the sun rose over the America’s and the tone a bit sour as concern over the partial re-opening of the US caused reactions from all sides, earnings continued to lack clarity. Macro data continued to weaken and reports that Trump (and other world leaders) are holding XI Xi and the Chinese government responsible for not sharing the extent of what was happening in Wuhan, China causing a global economic catastrophe and a global plague resulted in a laundry list of questions for investors to ponder.

What should the world do about China? Is it too early to begin to re-open? Would there be a second wave of infections? Was remdesivir – the Gilead (GILD) drug really the drug it appeared to be? Were infections and deaths decreasing or not? What about the horrendous macro data? It was even worse than the Wall Street analysts/economists had prepared us for. Was that about to get even worse in the months ahead? So many questions – with not too many answers yet. To add salt to the wound – Warren Buffet presented his annual investor conference via ZOOM on Saturday – expect it to be the focus of every show on CNBC today. Becky (Quick) will launch the conversation about what he said that may or may not change the psyche? By the end of the day – the reality check that began on Thursday continued into Friday – sending stocks lower and anxiety higher. As the closing bell rang – the Dow gave up 622 pts or 2.5%, the S&P lost 81 pts or 2.8%, the Nasdaq fell by 284 pts or 3.2% and the Russell – again the biggest loser after having been the biggest gainer, +30% in April – fell by 50 pts or 3.8%.

Technology names – which have been behind so much of the gains for years and then again during this latest market rebound – tripped on Friday. They fell over and dragged not only the Nasdaq lower – but giving more reasons for investors to focus on the negatives sending the broader market lower as well. It was also a big week for earnings – which have essentially been in line with the expectations so that was not the issue. The issue is that most companies refused or were unable to provide forward guidance. While that was also expected – it just makes it that much more difficult to properly assign a value to stocks and indexes and with the outlook for the virus still so uncertain. That lack of valuation now suggests that the second quarter is not going to be a bed of roses either. Remember – the market and investors can deal with concrete bad news and weak forward guidance– what it can’t deal with is “uncertain bad news” and NO forward guidance – Capisce?

The fact that big names companies – stalwarts of the market – have been unable to provide this guidance is a shot across the bow suggesting that no one is immune from the effect of the virus. This will be the issue in the weeks ahead as we are now solidly in the second quarter with no signs of relief. The macro data last week on top of the macro data in the weeks prior only proving this point. Consumer spending – the key driver for the US economy – posted its biggest monthly decline ever in March and GDP for the first quarter – fell at its fastest pace since the GFC (Great Financial Crisis). On top of that, we are seeing weakness in manufacturing, housing, construction, capacity utilization, durable goods etc. All of this weakness is posing an enormous challenge for Washington as Congress, the White House and the FED attempt to restart the US economy that was brought to its knees 10 weeks ago. Recall that earlier in the week – “Papa” Jay Powell warned us of even greater economic deterioration in the months ahead, but also assured us that he has plenty of “food in the fridge” to weather this storm.

Over the weekend – we continued the conversation about the economy and the virus. While nothing was really new the concern remains high as individual states begin to formulate their own plans on how to re-open. If they will re-open and when they will re-open as the reported cases continue to increase. But let’s just put that in perspective. As we test more and more people – the fact is that more and more people will show signs of having had the infection – which then raises the number of reported cases. That does not mean that the number of deaths has gone up. Case in point and consider how many more of these there are.

I had the virus back in March, but was not tested at the time so I was not part of the statistics, I was not a reported case. When I got tested for the antibody last week and I was positive – so I suddenly became an “infected person,” raising the stats – even though I never went to the hospital, never was on a ventilator and was never reported. My status today is fine, I’ve recovered with zero side effects. I stayed in bed, quarantined, took Tylenol and drank plenty of juice. Now I realize that is not the case for everyone – there are some horrible stories as evidenced in the media. What I am saying is that as the number of tested people rises – then expect for the number of “infected” people to rise as well, not the number of deaths, causing the statistics to change. Again, I am not negating the seriousness of this pandemic and yes, we need a vaccine, but what I am saying is that in the end we can expect the numbers to be vastly different than they currently are.

Markets of the world are beginning the week in the RED. Japan and China are closed until later in the week due to a holiday. Hong Kong fell by 4% — reasons cited are the increasing tensions between the US and China over what the Associated Press says is a US Intelligence report accusing China of “concealing the severity” of this pandemic while also hoarding medical supplies.

European markets – now all open are under fire for all the same reasons… the virus, macro data, earnings data, and now this intelligence report questioning the source of this virus only adding fuel to the fire. And while this report does not accuse China of manufacturing the virus, it does suggest that there was an accident resulting in the release of the virus that was held in a P4 laboratory in Wuhan and not telling the world about it. At 6 am – we see the FTSE -0.41%, CAC 40 -4.15%, DAX -3.59%, EUROSTOSS -4%, SPAIN -3.1%, and ITALY -2.8%.

In the US, futures are under pressure… Dow down 270 pts, the S&P -28 pts, the Nasdaq -75 pts and the Russell is down by 21 pts. CNBC is running with the ‘Buffet’ story – as he held his virtual meeting on Saturday revealing that he SOLD all of his holdings in the 4 US airlines – saying that the ‘equation has changed’ so he sold his stocks and that is a smart thing to do. If you read any of my notes, I say the same thing… “Stick to the plan unless something has changed”. If nothing has changed that’s great, but in this case, the plan HE had for his airline investment has changed – so he sold it.

But does that mean the world is coming apart? Does that mean that he is setting the tone going forward? I mean, he sold his holdings but someone or some others bought them and in the days ahead when the 13F reports get filed – you will see exactly who did what.  Who sold, who bought, who is positive and who is negative. CNBC will make today’s conversation all about Warren – because why not? He is successful, he is well respected, and he is Warren. But let’s be honest – Berkshire Hathaway has underperformed the S&P for 15-plus years, just sayin… I mean, it’s fine but let’s not be blinded and he will be the first one to tell you that!

And just because he sold his investments in the airlines that does not ring the death knell for that industry as some would have you believe. Look – that investment for him was not a good one – and he recognized that and eliminated it, helping to send those stocks lower which then provides an opportunity for others.  YTD –  AAL -65%, UAL – 70%, DAL -61% and LUV -51%.

Oil is under pressure as concerns over a global supply glut re-ignite the demand story and tensions between the US and China rise as trade tariffs and the threat of more tariffs restrict any economic recovery. As any of the recent optimism fades – oil will back off and if the optimism returns, then expect oil to begin to rally again. That being said, oil appears to be in the $15-$20 range for now… We will see the results of the supply cuts initiated by OPEC and Russia in the months ahead as well as decreased production in the US – and then we should see that $15 floor solidify. The trendline continues to be down and resistance – if we’re really concerned – is at $29/barrel on its way towards $25/barrel. Oil futures suggest a $25-$30 barrel range towards year end – but that is still highly suspect.

Eco data today includes Factory Orders – expected to be -9.4%, and Durable Goods expected to be down 14.4%. This is the last week of earnings so expect the focus to return to the broader macro data and the stimulus programs enacted. Will there be more? What happens next?

The S&P closed at 2830 and appears to want to test trendline support at 2760-ish… but remember — the 50-day moving average is in a downtrending mode. Its direction is heading lower so it’s not going to be very supportive. So if the market begins to come under pressure, do not expect it to be very helpful and if that’s the case then look for 2650 to a level that should provide some short term support.

Stay tuned – more to come.

Take good care.

Kenneth Polcari
Chief Market Strategist, Consultant
kpolcari@slatestone.com

 

Orrechiette with sautéed Zucchini and Mushrooms

This is an easy dish to make and even better to eat.

For this you need – 1 lb of Orrechiette, 3 large zucchinis Yellow and green, 1 large onion, garlic, sliced mushrooms, chicken broth, olive oil, s&p and grated cheese.

Begin by bringing a pot of salted water to a boil.

Slice the zucchini and the onions, set aside.

Using a large saute pan – heat up some olive oil and add the smashed garlic, once browned, add the onions, zucchini and mushrooms and saute on med heat until soft – maybe 10 mins.  Now add a cup of chicken stock. Season and taste.

Add the pasta to the water and cook for 8 mins or until aldente. When done – strain- and add the pasta directly to the saute pan and mix.  Add in 2 handfuls of fresh grated cheese and serve immediately. Simple, good for you and just as good the next day.

Buon Appetito.