Things you need to know
- Markets attempt to re-price based on the more hawkish comments
- Treasuries continue to decline sending yields higher
- Can the FED convince investors that they ‘got this’?
- Try the Spaghetti Al’ Tonno
**I am out tomorrow – so my next note will be on Monday – have a good weekend. **
And the FED mins did not surprise us at all. The FED plans to shrink the balance sheet by $95 billion/month (a massive move) while they rapidly raise interest rates in an attempt to fight surging inflation. Treasuries fell and yields continued their climb before, during and after the minutes hit the tape. By the end of the day yesterday – the yield on the 10 yr. settled at 2.606%! The 2’s ended the day at 2.43%, the 5’s at 2.67% and the 30 yr. at 2.62% – leaving the 5’s and 10’s and 5’s and 30’s still inverted
Stocks – as you can imagine were not happy….as the algo’s hit the sell button – in the all too familiar ‘shoot first and ask questions later’ reaction. The Dow down 145 pts or 0.4%, the S&P down 45 pts or 1%, the Nasdaq gave back 315 pts or 2.2%, the Russell lost 30 pts or 1.4% while the Transports continue to get punched in the gut – falling another 500 pts or 3.35%! Down 13% in 5 days…. leaving this index below the January lows AND below the closing level of the February 24th low of 14,826 – the day Vlad moved into Ukraine. Last night’s close at 14,562 leaves us just 400 pts away from the intraday February 24th low of 14,131…. a break there would certainly see it test the 14k level – taking us back to September 2021.
Now the transports are reacting so violently because the sense is that this round of FED tightening (over the balance of the year) will slow growth and bring on a recession and by the way the transports are acting – they expect it to come sooner rather than later and they expect it to be more than what the some of the talking heads are saying….The idea that a recession is 18 months away is almost comical when you look at the rhetoric – It’s totally confused ….
Then on Tuesday they sent Brainard out (a known DOVE) to say that rates need to move up by 50 bps – multiple times to combat rising inflation – blah, blah, blah…and that they should move faster to shrink the balance sheet – without defining what exactly that meant……all very HAWKISH statements and what that means to me and to the markets – is that the FED has been backed into a corner – they are trapped like rats and now need to do something more dramatic to appear as if they have it under control – because – just for the record – they don’t have it under control at all….And this isn’t hysteria – its an honest evaluation of where we are due to the extended period of stimulus that went on for way too long.
The idea that they send Lael out to disclose this news was telling…. I mean they could have had Jimmy B – a known HAWK come out and reiterate it and the markets would not have had the same initial reaction…. Why? Because Jimmy has been saying it for months now…. Lael has not…. And that was the defining moment…. At this point – it makes no difference who says it…. we all know what has to happen – so in my opinion – they should stop all of this ‘transparency’ and hand holding and just get on with it.
I mean no one should be caught off guard at all…. don’t forget how the FED enlisted the assistance of Goldman a month ago….to ‘float’ the idea that rates needed to go up in 50 bps increments, multiple times – an idea that the market initially ignored – but now it was out in the public square – it became a topic of discussion in the days that followed….… many of the talking heads making sure to continue the conversation to help get investors prepared for such a move and hopefully settle the markets – and that worked for a bit. The S&P, Russell and Transports rallied 10% in the weeks AFTER they floated the idea, the Nasdaq gained 16%, the Dow gained 7% in what appeared to be ‘investors are good with this’ kind of reaction……..until they weren’t…..and again it was the Transports that signaled the change in the mood on the 29th.
In any event – it is what it is– rates need to move faster – so think 50 bps increases at the next 6 meetings (May, June, July, Sept, Nov and Dec) which would get us to 3% by year end…..and that is still well below the inflation rate which is expected to remain elevated at the 9% to 10% level for the remainder of the year. (there are some that think it goes even higher – but let’s not go there right now) And that only means that we should expect rates to continue to rise in 2023….and so at some point the FED will force a recession (because they will have to) – what the market is telling us – is that it’s coming sooner rather than later.
And again, what sectors did ok? Yes ma’am – you got it…Utilities up 2%, Consumer Staples up 1.3%, Healthcare up 1.5% and Energy up 0.6%… do we need to go over this again? They are sectors that will do well no matter what – why? Because you NEED what they provide – what you don’t need is discretionary items, you don’t NEED to travel, you don’t NEED that expensive pant suit at Bloomies, you don’t NEED that new car, you don’t NEED that new house…and so we saw the Retail ETF – XRT fall by 1.6%, JETS – the airline ETF fall by 3.3%, Basic Materials – XLB fall by 1.4% we continue to see the Semi’s get clobbered – SOXX down 2.5%, and innovation technology down 4.6%! – Semis because of the supply chain issue and innovation tech, because of ridiculous valuations that don’t make sense in a rising rate environment.
30 yr. mortgages are now 5.02%! That is up 67% in the past 2 months…and going higher…..and while many of us (baby boomers) recognize that 5% was ‘normal’ there is a whole generation of people that thought 2.0% was normal….and if you locked in a 30 yr. rate at that price – then you did good…but if you are looking now – then not so good…because the cost of owning that home just spiked and will likely continue to spike in the months ahead…so the crazy prices for housing that we have seen will soon begin to correct….in addition- what will happen is that people who qualified for a loan at 3% may no longer qualify for a loan at 5% or 6%…if prices remain where they are….and don’t expect that they will….in order to allow the system to keep working – the price of the home will have to fall to accommodate the increasing cost to carry…it’s econ 101- it’s not complicated.
In the end the ‘irrational’ moves in so many assets are a direct result of what could now be described as ‘failed FED policy’ – failed because they kept it going to long…. if they had started to throttle back in the summer of 21 – we would NOT be where we are now….
For those of you who do not remember the famous Alan Greenspan “Irrational Exuberance” speech on December 6th, 1996 – it is just another example of history repeating itself. In this now famous speech, he said
“But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy…”
For those that need to understand it – Irrational exuberance refers to investor enthusiasm that drive asset prices higher than what the fundamentals suggest at the time… think of the Dutch tulip craze of 1636, or the Dot com bubble of 1996 – 2000 (there are more trust me) both driven by different factors….and today’s exuberance has been driven by the FED policy that left us with NO alternatives….but that is about to change and the ‘irrationality’ of asset prices will most likely retreat as our new reality comes into view.
US futures are up slightly this morning…and I do mean slightly. Dow up 25 pts, the S&P’s up 10, the Nasdaq up 67 and the Russell is up 4. Nothing to write home about at all….there is nothing new – other than stocks are trying to put it in perspective…we are still above the lows seen earlier in the year – so this is not a blood bath (yet)….the trick now for the FED is to convince investors that nothing has changed in the past week – that the pace of and frequency of rate hikes is what the market has known for months now – so everyone stop panicking….as they try to convince us that ‘they got this’. At this point – only time will tell.
Talk to your advisor – adjust the plan if necessary…. if you’re in the 20 – 50 category stick with the plan you got and add new money to the sectors to assist in providing stability. If you are in the 50 – 80 range – then tweak it so you are underweighting the most volatile names and look for strong divvy, big US multinationals to provide you exposure to the markets and dividend income. If you are in the 80+ range – then throw yourself a party – You deserve it!
Bitcoin is trading at $43k and Ethereum is at $3,200.
The S&P closed at 4481 last night… down 44 pts. … We busted right thru support at 4490 and are on our way to test support at 4420….in the days ahead…
.Now to be clear – the S&P is nowhere near testing the lows of January (4220) or February (4130) so there is no reason to light the place on fire….take a look at the most recent damage to some of the names you own and if the story remains intact – and you still like the name – then put more money to work, but if you remain a bit anxious – then put it in cash and sit tight – there is always time to deploy it.
Earnings start in one week…. And we are beginning to hear how the Russian crisis is affecting bottom lines…Shell the most recent disclosure…. Expect to hear more in the weeks ahead…. None of this should surprise you. But what we want to see is how these companies are dealing what could be a longer drawn-out war.
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Spaghetti Al’ Tonno
This recipe comes to us from the Island of Sicily – just off the tip of the boot…. Sicily is all about fishing and contains numerous fishing villages that are responsible for catching much of Italy’s seafood, including most of its tuna.
Giuseppe Garibaldi, Italian national hero was said to have eaten it upon his arrival in the Sicilian city of Marsala in the year 1860. Whatever its origin….it is delish…
For this you need – Tuna in olive oil (not water), olive oil, s&p, red pepper flakes, dried oregano, crushed tomatoes – (or you can buy whole peeled tomatoes and crush them yourself), capers, garlic, anchovies, white wine, and 1 lbs of spaghetti and freshly chopped parsley.
Bring a pot of salted water to a rolling boil.
In the meantime – in a large skillet, turn heat to medium – add some olive oil, 1 or 2 anchovies (depending on your tastes), and drained capers. Sauté until the anchovies melt – now add in thinly sliced garlic…. (3 cloves). Sauté for 3 – 4 mins….do not burn….
Now add in about ¾ c of dry white wine – I use a pinot grigio – turn the heat up to med high and bring to a boil, add some red pepper flakes and dried oregano reduce to about 1/3…. stir and reduce….
Now add in the crushed tomatoes…I use San Marzano…. stir to mix…. season with s&p. Let it simmer for about 10 mins…….
Now add in the tuna and oil…. break it up …. stir to mix well, add in the chopped parsley – now lower the heat to simmer and let it simmer as the pasta cooks.
Add the spaghetti to the boiling water and cook for about 8 mins…. you want this to be aldente…. Strain – always reserving a mugful of the pasta water. Add the pasta back to the pot…. add a splash of the pasta water and toss to moisten. Now add in the tomato sauce – mix well. Cover and allow to sit for 3 mins…. Open and look – does it need a bit more of the water to keep it moist? If so – add a touch more, if not, then not.
Now serve in a warmed bowl – top with a drizzle of olive oil and some more chopped parsley and grated parmigiana.
Buon Appetito.
