Things you need to know
- Stocks test higher and find resistance at 4560 – will it try again today?
- Vlad pushes to take control of the Eastern part of Ukraine – while Zelensky reaches out to ‘find a solution – not surrender’
- China shuts down a city of 25 million to test for covid after 50 new cases were reported
- Oil – takes a small hit, but demand remains robust
- Crypto’s advance…. Bitcoin up $5k since last week.
- Try the Braised Short Ribs over Polenta
Stocks ended the week higher – marking the second week of higher prices – suggesting that investors ‘think’ that the economy can hold up even as the FED continues to get more and more aggressive in order to fight the building inflation that does not appear to be ‘ebbing’ at all….in fact – the smart money is betting that we haven’t seen the worst of it (yet) – on Friday the we saw the 5 yr. treasury end the day yielding 2.63% vs. the 30 yr. bond yielding 2.595% – this is the first time that the shorter dated treasury has yielded more than the longer term treasury and historically that suggests that a coming recession…..Now, you’ll get the argument on both sides – on the left hand the administration and FED members will tell you that ‘it’s different this time’ that history will not repeat itself because the world is a different place and the old metrics won’t work in this new world. On the right hand – you will get the more traditional view that disputes the logic that ‘it’s different’.
In any event – rising inflation exacerbated by the crisis in Eastern Europe and the more hawkish talk out of the FED has only raised the possibility for this potential slowdown. Look – we are going to land…the question is will it be a ‘soft landing’ or will it be full of potholes causing the wheels to come off the plane…Recall my pendulum example from last week – typically the pendulum swings too far left – think zero rates and much to much stimulus for far too long and now they need to correct it, so expect that they will also overshoot – causing the pendulum to swing way far to the right – (causing a recession) then they have to attempt to fix that by easing up and trying to get the pendulum to settle down in the middle – swinging slightly left and then slightly right….So – what do you think? Will it be a soft landing or a hard one?
In any event – stocks (mostly) advanced on Friday – The Dow rose 153 pts or 0.44%, the S&P is up 22 pts or 0.5%, the Nasdaq lost 24 pts or 0.2%, the Russell up 2 pts or 0.1% and the Transports gained 57 pts or 0.35%. 10 Yr. Treasuries ended the day yielding 2.51% while oil ended the week at $112.60/barrel while Gold fell $4.50 to end the day at $1,963.
Energy – XLE, Financials -XLF, Utilities – XLU were all the biggest gainers….Tech and Consumer Discretionary led the losers….
The SOXX (iShares Semi-conductor ETF) churned in line after its recent surge saw it gain 15% in 2 weeks….and the S&P Metals and Mining ETF – XME continues to soar….now up 33% since Russia invaded Ukraine – only 5 weeks ago….individual names included in that ETF include CLF +88%, NUE +35%, AMR +57%, FCX +27%, X + 77%…..all since late February and they are expected to continue to rally as the Russia/Ukraine crisis remains an issue and by all accounts it appears that this is not coming to an end anytime soon.
A quick look at the Geo-politics –
The morning – word has it that President Zelensky is willing to come back to the table to talk, – NOT surrender, just talk about a solutions…which includes ‘territorial integrity – Remember – Russia wants total control of the Eastern part of Ukraine all the way to Odessa which would give him complete control over the port systems along the Black Sea – essentially rewarding Vlad for invading that country. That is a non- starter for the Ukrainian’s and rightly so.
And by now you have heard about Joey’s ‘off the cuff ad lib’ when he gave a speech in Europe before he headed home…..Saying” “For God’s sake, this man can not remain in power” – suggesting that he was calling for regime change – something the WH was quick to deny – as they went into overdrive trying to explain what he meant (which wasn’t regime change – although it sounded like it was…) ….In any event – it was the topic of conversation on the Sunday news programs as everyone attempted to understand the nuances….The question now is – will Vlad respond to that comment or will he remain focused on destroying Ukraine? And if he responds what will that look like and then what will be the US response – if there is one?
OK – back to the FED…
Now the recent rally in stocks – the S&P now up 10.25% since the February 24th invasion lows…is now suggesting that investors are ‘ok’ with what is expected to be a more hawkish FED giving Jay a possible green light to act even more aggressively and that is where investors are missing it. Now look, Jay has warned the markets and investors that rates will rise 50 bps in May and then another 50 bps in June and if inflation FAILS to respond by July – then expect him to continue with 50 bps rate moves….and not the gentle 25 bps that he initially promised. Citibank is now projecting 50 bps hikes thru September…. (That is 4 – 50 hikes or a full 2% – Watch what happens to housing…. mortgage rates are already hitting 5% for conforming loans and will only go higher if this aggressive stance proves true and that will cause housing to retreat.) And this is where investors are missing it, they have given Jay a pass – and believe that he can engineer a soft landing and when it becomes clear that it won’t be so soft – markets will react….and re-price….
This morning US futures are mixed – the Dow is up 18 pts the S&P’s up 1, the Nasdaq down 20 and the Russell is down 1pt. Overnight we heard that China is shutting down Shanghai – locking 25 million people down for 2 weeks because of 50 new cases of covid (in a city of 25 million) …the East side of the city from today thru April 3rd and then the West side of the city from April 3rd to the 10th which makes NO sense at all, but then again – it’s China we are talking about….None of it makes much sense…..
But this news is causing Oil to fall 4.5% or $5.20/barrel as the media spins this as demand destruction…to which I say – it’s a buy opportunity – recall all of the investment banks have a $130/$150 number on oil for this year…..with Bank of America going so far out of the limb that they say we could see $200/barrel – as demand will remain ‘robust’ but this spike will cause oil to ‘crash’ in 2023 as higher oil prices will force inflation even higher, causing Americans to wave the white flag.
Besides – the Russia/Ukraine crisis – this week if full of eco data what will speak to the health of the US economy and what we can expect going forward. Wednesday brings us the monthly ADP employment report – exp of 450k new jobs, the final revision to 4th qtr. GDP – expected to be 7%, Personal Income and Personal Spending, and the all-important PCE Deflator – the FED’s favorite inflation metric and that is expected to show an increase of 0.6% m/m and 6.4% y/y. Both of these numbers though, are expected to higher than the expectations…. On Friday – we will get the Non-Farm Payroll (NFP) report and that is also expected to show an increase of 490k new jobs…. Unemployment is expected to go to 3.7% while Avg Hourly earnings are expected to be up 5.5% y/y.
European markets are all higher…. up 1.5% – 2% across the board…. No specific news other than the geo-political crisis in Europe – but it appears that investors there are putting that on the back burner.
Crypto’s lighting up the space again with Bitcoin is trading at $47k up more than $5k from last week while Ethereum is at $3,350 – up from $2800 last week.
The S&P closed at 4543 on Friday after testing as high as 4546……remember what I said in Friday’s note – There are two key data points on the S&P to watch. 4420 and 4560….and Thursday night we closed at 4520 – so 4560 was only 40 pts away or less than 1% – this will be key to what happens next…if we kiss it and then pierce it – then the algo’s will kick in on the buy side, they will cancel supply on the sell side – leaving a vacuum causing prices to surge up and challenge the early January highs of 4800! Well, we almost kissed it and we might try to kiss it today…but I expect that it will prove to be resistance…. We are in the 4420/4560 range…. for now….
In the end – remember investing is not static, it is dynamic, and it is long term. The issues surrounding the markets right now will fade over time…but will continue to cause volatility in the months ahead. Stick to your plan, have names that will provide stability. Big, boring and beautiful US mega cap names will help protect your capital in an anxious time.
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Braised Short Ribs over Polenta
I made these this weekend – see the picture on my twitter @kennypolcari
Begin with 6 / 8 beef short ribs. season with s&p and then brown in a frying pan with a bit of Olive oil. Make sure to brown all sides being careful not to burn the meat. After you have browned them – place them in a large/deep baking pan. Lining them up on their sides.
Next – large Chop – 2 lg White Spanish Onions, 1 bunch of celery stalk, 1 bag of carrots. Smash 4 /5 cloves of garlic and add to the meat – making sure you disperse the garlic all around. Next add the chopped veggies right on top.
In the frying pan that you used to brown the meat – add: 1 can beef broth, 1 can tomato paste, and 1/4 to 1/2 bottle of red wine. mix well and let the broth come to a boil for a couple of mins as you steam away some of the alcohol in the wine. Bathe the short ribs in this mixture and cover tightly. Place the baking dish in the oven – preheated to 350 degrees. Let cook for 4 hours – tightly covered.
The presentation: Remove the baking dish from the oven. Puree 1/2 the veggies in the food processor. On a warmed serving platter – pour the pureed veggies down the center of the platter. Arrange the short ribs on top of the pureed veggies and then place the balance of the cooked veggies around the meat.
I presented this on a bed of Polenta and topped with the meat and veggies…. MMMMM…was so good.
Buon Appetito.
