Investors Create Alpha; Brainard Tows the Line – Try the Vegetarian Paella

Kenny Polcari Uncategorized Leave a Comment

**Join me today at 4 pm EST on my Blitzr Live Event where I will be interviewing CNBC’s Jim Iuorio about markets, trading and his difficulties in owning a small business (Restaurant) in Chicago during this crisis – It is sure to be fun. This is a free event – click on this link to register and attend.  You need a computer with audio/video and a chrome browser.

https://blitzr.com/event/3049/2236

Things you need to know.

  • Stocks retreat a bit – as asset managers attempt to create ‘alpha.’
  • Fed’s Brainard – tows the line and assures us that nothing has changed.
  • Jay Powell to speak on Thursday.
  • Eco data today will be keenly watched.
  • Dollar retreats, oil retreats and Bitcoin rallies
  • Try the Vegetarian Paella

Stocks fall, then rise and then fall again….as investors/traders and algo’s attempt to sort it all out….and while the rates on 10 yr. treasuries continued to retreat – stocks investors at taking advantage of the outsized moves trying to create ‘alpha’ in an uncertain environment.  For those of you unaware of what that means – here is how the street defines it:

“Generating alpha – is defined as generating a higher return while assuming a similar amount of risk as compared to the benchmark against which they measure their performance.” [Managedfuturesinvesting.com]

Essentially – it is asset managers (or retail investors on a much smaller scale) that hold a core position in a name and then ‘trade around it’ – taking advantage of the volatility and outsized swings from day to day (or week to week)….hopefully creating short term profits that – when added to the long term returns – boosts those returns even more….and the action of late – that is full of angst is ripe for  the outsized swings that individual names are experiencing   – and that provides the perfect environment for ‘generating alpha’.   And just to be clear – these trades do not have to be from day to day – per se, they just need to be completed for a profit vs. a loss – and if that is a 3 – 7-day trade – that is fine….

And so – the selloff that we have seen over the last couple of weeks has created short term dislocations in some particularly good names – so the strong rally on Monday took advantage of the ‘sale prices’ and stocks surged – so yesterday – those same trader types rang the cash register…once again ‘taking advantage’ of the up ticks and selling those shares purchased on Monday. For what they hoped was a profit – thus the ‘alpha’ – and if they sold it at a loss – it is not a ‘alpha’ trade – it is a losing trade….and if you do that too many times – you will not be trading very long….

In the end – there was nothing specific, no eco data, or otherwise that can explain yesterday’s weakness…in fact – you could argue that the market should have advanced on the back of Fed Governor Brainard commentary to the Council on Foreign Relations.  Recall that the volatility of late is being credited to the concerns of rising rates – specifically the 10 yr. treasury and what that says about the future of monetary policy and possible FED action…. with many claiming that the recent spike in yields and possible surge in inflation may cause the FED to tighten policy sooner than what the market (investors) expects thus causing this revaluation of asset values…. (think recent weakness.)

Now to be clear – Fed Chair Powell – has not been unclear at all…his message to the markets has been direct and unwavering….and he re-iterated this last week on Capitol Hill – telling both the House and Senate that the economy is not where it should be, and that the FED has an obligation to maintain policy until they are assured that the dual mandates required of the FED are met. And that school of thought was reiterated and emphasized yesterday during Brainard’s speech.  In it she said –

“The economy remains far from the central banks goals.  A burst of transitory inflation seems more probable than a durable shift above target in the inflation trend and an unmooring of inflation expectations to the upside.”

Right – and maybe that was the problem…. the smart logic algo’s cannot decipher what that means (think ‘transitory’, ‘durable shift’ and an ‘unmooring of inflation’) and so when that happens – the path of least resistance is lower not higher…. What she could have said that would have clearer was something simpler like –

“No worries, we may experience an uptick in inflation that will be short lived – but we got it under control…. Move on, nothing to see here.”  But – she is a FED Governor – so I suppose she must speak in sentences that causes some short-term confusion – and short term it did, right? Stocks sold off – giving back some of the outsized gains from Monday.  By the close of trading the Dow gave back 144 pts or 0.46%, the S&P lost 32 pts or 0.8%, the Nasdaq lost 230 pts or 1.7% while the Russell backed of 44 pts or 1.9%.

And this morning – after investors/traders had a chance to re-group – and the algos finally figured it out – after they brushed valuation concerns aside and refocused on the recovery – we see US futures solidly higher – At 5:30 am – Dow futures are up 240 pts, S&P’s adding 27 pts, Nasdaq ahead by 100 pts and the Russell up 29 pts.

10 yr. treasuries  are bouncing around the 1.4% range and all is good……The Senate is set to debate the $1.9 trillion relief package, Lizzy Warren is pushing her ‘tax the rich’ package, vaccinations in this country and around the world are changing the psyche, Biden says we will have enough vaccines by the end of May to vaccinate the whole country, Texas and Mississippi are ‘open for business’ and this is sure to send the left into a craze…..

The Reddit traders strike again – but this time put their focus on RKT (Rocket Mortgage).  Yesterday the stock surged by 70% (on NO apparent news) to end the day at $41.60 as the Reddit Rebels identified this stock as ‘heavily shorted’ and so they are trying to prove a point that their voices matter, and professional Wall St traders have nothing on them.  Early this morning the stock had retreated by 10% but has since done a 180 and is quoted higher – up another $2….at $43.   All I will say – is that any professional trader that was short and did not have an ‘exit strategy’ in play to guard against this move – deserves what he/she gets…..Now while shorting stocks IS a valid strategy – we have all seen what can happen in a matter of hours if not minutes…if you take your eye off the ball….This will be interesting to see how it plays out again…and remember – these are isolated events – they are not broad market moving events at all.  RKT Mortgage CEO – Jay Farner is due to speak at a conference today and did warn investors back in January that if you were playing this stock from the short side – you are making a mistake – “We have lots going on and it’s all very exciting…”  Apparently, some ‘investors’ were not listening…. but hey – we are all big boys and girls….

Eco data today includes Mortgage Apps, Markit US services PMI of 58.9, ISM Services PMI of 58.7 and the ADP employment report -where we expect to see  200k new jobs created….and this will foreshadow what we expect to see on Friday when the gov’t report on Non-Farm Payrolls which is also expected to show an increase of 200k jobs….and a possible revised report from last month – that showed a huge disappoint of only 49k new jobs created.  Now look – the Services PMI reports are important – why?  Because we are a services economy….70+% of our economy is about services…so these reports will be widely watched…and at current expectations both of those reports are well into bullish territory….

Asian markets advanced up between 1% – 2%, European markets – while early are also up nearly 1% across the board.  UK Finance Minister Rishi Sunak vowed to ‘deploy the gov’ts full fiscal firepower’ to support the economy.  In addition – the British gov’t is revealing the annual budget statement – so all eyes are focused on the taxing and spending plan…Other than that – its more earnings and vaccination and end of lockdown discussion that is top of mind.  At 6 am the FTSE +1.0%, CAC 40 +0.82%, DAX +0.95%, EUROSTOXX +0.66%, SPAIN +0.29% and ITALY +0.80%.

The dollar index (DXY) kissed resistance at 91.328 yesterday and stalled – (as I predicted) This morning it is trading at 90.816 after testing a low 90.63   All eyes remain on the Senate and what happens to the relief bill….and that will help determine what the dollar does next.

Oil pulled back to $59.57 on those OPEC rumors of more supply coming to the market…. In addition, the API (American Petroleum Inst) reported an unexpected build in crude of 7.4 mil barrels – vs. the drawn down of 928k barrels.  I am not deterred we remain in the $55/$65 range.

Bitcoin – is up $4300 at $51,600.

The S&P closed at 3870 – once again falling below the century mark as the markets continue to digest the latest round of volatility…..But like I said yesterday – the concerns from last week have not really gone away…..an improving economy will cause rates to rise and at some point that will cause a re-pricing for stocks…..Now understanding that there is a floor underneath because of all the stimulus – so the downside at the moment is limited….The FED is not changing its stance and the Biden administration is not going to stop the stimulus efforts…

Again, we are back into the channel of 3770/4040.  Expect more churn today….
As always, I would advise you to stick to the plan, trim where necessary and put money to work in some of the underperformers….

Text INVEST to 21000 to get my digital business card – give me a call if you want to discuss what I can do for you.  You can now get a video version of this note on my IG (Instagram) feed – my handle is Kennyp1961 (https://www.instagram.com/kennyp1961/)

Take Good Care,

Chief Market Strategist, Consultant
kpolcari@slatestone.com

Vegetable Paella 

Like traditional paella – this dish is relatively easy to make and you can easily increase the amount of ingredients to feed many people.  It features no meat or fish is only veggies and rice – made with the traditional paella seasoning.  Try it – You will like it.
If you do not have a Paella Pan – no worries…you can use a large nonstick frying pan to accommodate this typical Spanish rice dish.

You will need: Olive oil, 1 red & 1 yellow bell pepper, chopped,  6 scallions thinly sliced,  5 cups vegetable broth,   3 cloves of garlic – minced,   1 tsp. crumbled saffron threads,   1 cup short-grain white rice – like Goya, or Vitarozz,  3 cups broccoli florets,   1 cup fresh (or frozen) baby peas,   1 cup halved grape or cherry tomatoes,   12 pitted green olives – cut in half,  12 pitted black olives – cut in half,   1 lemon, cut into wedges,   ¼ cup chopped fresh parsley.

Begin by heating olive oil in the large nonstick skillet over medium heat.  Add bell peppers, garlic, and scallions, cook 5 minutes. Next add the broth.   Stir in saffron, bring to a boil.  Add rice and stir – reduce heat to medium-low, cover and cook for about 10 mins.
Next – add the broccoli, peas, tomatoes, and olives over rice. Cover, and cook for about another 10 mins…or until rice is fluffy and tender. Remove from heat.  Let rest, covered, 5 minutes.  Taste and adjust for seasoning.   You can present this on a large family style platter garnishing with lemon wedges and chopped parsley.

Buon Appetito.