Powell Confuses Markets, No Inflation, No YCC – Try the Grilled Shrimp on a Bed of Orzo

Kenny Polcari Uncategorized Leave a Comment

Things you need to know.

  • Powell talks out of both sides of his mouth – frustrating trader types
  • OPEC holds the line on production- oil surges
  • NFP report today…will it disappoint?
  • Nasdaq in correction territory – The others remain in the normal band
  • Dollar rises, sending gold lower
  • Try the Grilled Shrimp over Orzo

Powell goes POW! Treasury rates rise and then…. the market goes – Bang, Boom, Ka-Boom….

Stocks across the board get shellacked!  Not just the Nasdaq names yesterday…Dow stocks, S&P’s, the Russell, and the Transports all taking it hard….as the algo’s went into overdrive (as I suggested yesterday, they would).

In fact, yesterday morning I said.

“…. if we remain weak going into the WSJ Webinar today – he will have a tougher job – and if investors/traders think he is losing control of interest rates – they will hit the market even harder…”

In fact – Investor’s reaction is suggesting that they are beginning to think that not only is he losing control of interest rates but more importantly – he is blind to building inflation….and that is what will prove to be his undoing…for him to say that he does not see inflation creeping up or that the

“recent run up in bond yields was notable and caught his attention and that he would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threatens the achievement of our goals….

Suggests he is either playing ‘Mickey the dunce’ or just refuses to acknowledge what we all see.

And then he did not give any indication of how the FED intends to reign it in – leaving many to wonder – Can he reign it in?  And THAT is the issue now…. What investors wanted to hear was that he promised to ‘adjust’ the FED’s asset purchase program – buying the long end to try and control rising yields in what is known as Operation Twist.

[Operation Twist has the FED selling short term bills to buy long term notes – hoping to force yields lower at the long end…. remember – yields move inversely to price…so as prices rise at the long end – you would expect yields to go lower…in what could also be referred to as Yield curve control – YCC].

But what they heard?   – Exactly – nothing and so here we go….so the 10 yr. rose -piercing 1.5% – which is not the end of the world, except what it says about where it is going…. (and that isn’t down) – in fact, that is the debate – Where is it going and how fast will it get there and what does that mean for valuations?  And so, as usual – it was a ‘shoot first ask questions later’ reaction….

The algo’s went into overdrive sending stocks plunging…. the Nasdaq gets slammed – as the move lower puts it in ‘correction territory’ – currently off 11.4% from the highs….The Dow, S&P, Russell and Transports remain well within ‘the normal trading band’ so no need to become hysterical….[the normal band is anywhere between 0 and 9.9% move off the high] – once it hits -10% it is considered a correction and then when it hits -20% it is considered a Bear Market….Until then – it is still a Bull Market….

So – in the end – investors believe that he has lost control…..causing markets to become a bit unstable (at the moment) and that they will most likely get more unstable in the days ahead as 10 yr. yields continue to rise….it’s a momentum trade now….and like the ‘meme’ stocks the momentum will take yields higher whether its justified or not and that will send stocks lower – because that is how the math the works…It’s not rocket science and no matter how much anyone stamps their feet – they can’t change the math…..In the end – traders didn’t hear what they wanted to hear so they threw a temper tantrum…..By the end of the day – the Dow lost 345 pts or 1.1%, the S&P gave up 51 pts or 1.3%, the Nasdaq gave back 275 pts or 2.1%, the Russell down 62 pts or 2.8% and the Transports down 328 pts or 2.4%.

As noted above – the Nasdaq is now in ‘correction’ territory……it is down 11.4% off the highs…. while the Dow and S&P are off just 5%, the Russell is off 7.3% and Transports down 5% from their highs….so no reason to raise the flag yet…. – but will most likely change today….as global markets are under pressure and US futures are pointing lower again…. Do I think this is over now?  Absolutely not…. I have been calling for the broader market to retreat by 7 – 9% – so we are not there yet….
The battle over the pace of any rate rise is what is troubling the markets….and is what will continue to trouble the markets…and while many analysts/’strategists agree that rates will go to 2% this year – the question is – will that happen sooner or later?  Sooner will have a more immediate impact on prices – just fyi…. (think expectations….).

So – has the action caused anyone at the FED to change their minds in the last 24 hrs.?  Most likely not – but we may hear chatter around ‘clarifying’ what Jay said vs. what investors/traders and algo’s heard….as they try to jawbone the market into a state of stability…. Remember – jawboning is an ‘attempt to persuade or put pressure on just by being a person of authority’.  So, in this case – Powell – who is FED chair (person of authority) will attempt to talk markets off the edge…. hoping to send yields lower so that stocks stabilize…. How is that working?

Energy was the ‘safe place’ for investors yesterday….the XLE rising 2.4% as money pours into that sector and oil continues to surge – word that OPEC + will maintain the production cuts only added fuel to the demand/supply conversation…..so I guess all that chatter about demand destruction last year was wrong….demand is fine and in fact is more than fine…..the world is reopening and demand for energy has never been greater and so the Saudi’s and OPEC will take advantage of that (oil is up 120% since April 2020)  all while the Biden Administration imposes restriction on the US oil industry  – currently the world’s largest producer of oil and gas…. Causing more angst in the oil markets sending oil and gasoline prices surging…. Gas – at the pump has gone from $2.20 gal to more than $3/gal in some locations and that is a 36% increase and with summer only months away – we can expect oil/gas prices to surge even more as the country opens and Americans once again begin to travel…. But hey – we do not see any inflation anywhere!

Homebuilders got whacked – XHB – falling 2.2% as talk of higher mortgage rates hurts that industry… And then with lumber, copper, windows, tile, appliances, roofing etc. all surging – homebuilders will have to pass those costs onto home buyers – making homes more expensive at a time when mortgage rates are rising. In fact, 30 yr. mortgages are now hovering around 3.25% – up from 2.875% only months ago…. a 13% rise in rates…causing a 5% rise in monthly payments…and only going higher…

Suffice it to say that all sectors got slammed yesterday – some more than others but other than energy – everything was down…

This morning – US futures are all over the place…. down triple digits early on and now as the sun rises – futures have turned positive…. which by the way should not be a surprise after yesterday’s assault?  Dow futures are up 75, S&P’s up 8 pts, Nasdaq higher by 12 pts and the Russell up 8 pts.  European markets are also attempting to stabilize as the morning turns to afternoon…. Eco data today is all about Jobs!  The Non-Farm Payroll report is due out at 8:30 and we are expecting an increase of 198k new jobs…. Recall that Wednesday’s ADP report was a disappointment – so there is some chatter that we may be disappointed again today…. Unemployment is expected to remain at 6.3% and Avg Hourly Earnings of +0.2%.  Underemployment to remain in the double digits at 11%.

Expect to hear more and more discussion about what Powell said but more importantly about what he did not say…. along with the talking heads trying to define what ‘patient’ means…. because what it does not mean is ‘never’…. the question now is ‘when’….and if rates surge – he will find himself in a tough position….

European markets which were down all morning – are now teasing the flat line…Investors there are trying to decipher what Jay meant when he said –
‘the re-opening will create some upward pressure on prices and that the FED will be patient and he expects to see transitory increases in inflation…’

In Germany – the finance minister is asking for a supplemental budget for 2021to assist in financing higher covid 19 costs.  There is no other economic news.  At 7 am – the FTSE +0.45%, CAC 40 -0.30%, DAX -0.50%, EUROSTOXX -0.30%, SPAIN +0.05% and ITALY +0.12%.

The dollar index (DXY) kissed resistance and finally pierced it yesterday and is moving higher again today…. trading at 91.92 leaving resistance at 92.98 as the next frontier to conquer….and while it may test it – I do not suspect it will pierce it on its first attempt…. with rates ticking up though, there is more interest in the dollar – so is the dollar telling foretelling us what is about to happen to rates?  Is it the canary in the coal mine?

And oil is up $1.65 or 2.5% at $65.44….as the story remains bullish…. demand is up, OPEC production cuts to remain, – US shale producers are not responding to higher prices by increasing output yet…. but I ask – What are you waiting for……?   I continue to think we will remain in the $55/$65 range – but like the meme stocks – oil is now becoming a momentum trade and with Goldy pushing the $75/barrel story – and production cuts in full force – we could see WTI challenge $70 as the excitement builds.

Bitcoin – is down $600 at $47,500.

The S&P closed at 3768 – after testing as low as 3723….Yesterday I identified 3730/3750 as a support range….and that is where we found it…This morning futures are pointing a bit higher but not significantly higher….which will leave us below what was support but is now resistance at 3819……They will try to use any strength in the NFP report today to settle the markets….and any weakness to support the FED not going anywhere story…..either way – it should bring some calm to the tone….
But like I have been saying – 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…. understanding that there is a floor underneath to prevent a complete fallout….

Yesterday we broke down and out of the channel that we have been discussing – 3770/4040……  Let us see what today’s action produces….

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

Grilled Shrimp on a Bed of Orzo

For this you will need:  about 2 doz large, clean & deveined shrimp, 10/12 skewers, olive oil, oregano, fresh lemon juice, minced garlic, s&p, feta cheese and some Orzo (Orzo is a rice shaped pasta – used in many types of pasta salads or soups or in this case as a bed for the shrimps).

Now we are going to grill the shrimps using skewers –

if you are using wooden skewers – you must soak them in water for at least 20 mins so that they do not light on fire and burn.

Now – pierce the shrimps onto the skewers – maybe 4 at most per.  Set aside in a deep Pyrex dish.

Next mix the olive oil, garlic, oregano, some lemon juice, s&p – shake well and then pour 1/2 over the shrimps.  Place in fridge and let marinate.

Heat the grill – using a grill brush –clean the grill rack.

Bring a pot of salted water to a rolling boil and add the orzo…cook for about 8 mins or so…do not let it get mushy…. keep it a bit aldente.  Strain and mix with the feta.  Now pour the remaining mix into the pasta with the feta and stir well to coat.  Place the orzo in a large family style platter and make a bed.

Next – remove the shrimps from fridge and place on hot grill….be sure to not burn…. should take no more than 5 to 7 mins max.  Now place the skewers on top of the orzo and feta.  Take a picture to remind yourself of this great and simple dish.

Buon Appetito.