JJ Makes it Clear AGAIN – Try the Veal Scallopini

Kenny Polcari Uncategorized

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Things you need to know 

  • JJ repeats the message and makes it very clear –
  • Rates are going even higher than consensus!
  • Stocks plunge on the news
  • 2 yr. treasuries have now PIERCED 4%
  • Try the Veal Scallopini

Remember – ‘Lower for Longer’?  Well, now it’s ‘Higher for Longer’….

It was the September SURPRISE…….While the FED did as expected – they raised rates by 75 bps…..they surprised markets with this:  The FOMC committee has now raised their terminal rate (neutral)…..to 4.6% and that is up from 4% – 4.5%….and that means that we can expect ANOTHER 75 bps rate hike on November 2, 2022 – just days ahead of the mid-terms…..then expect another 50 bps in December and then 25 bps in early 2023….to get us to 4.5% – 4.75%………and investors, traders and algo’s did NOT like that….at all….stocks which were trying to stabilize and move up – got whacked…..the surprise announcement making it very clear that the FED remains behind the 8 ball and needs to remain aggressive – so anyone that continues to think that the FED will pivot in early 2023 or even mid to late 2023 – needs to go back to the drawing board….a pivot is NOT happening….

And as expected the algo’s went berserk…..in line bids disappeared – leaving a void in prices and that caused markets to plunge…..as waves of sell orders caused that hurricane that JPM CEO Jamie Dimon warned us about months ago…in the end – higher rates will have to cause investors to re-price risk….Period – It’s just a math problem…remember that.

And a soft landing…..STOP already…..and the idea that investors and stocks ‘fear’ that the FED’s action might put us into a recession….you need to re-think that narrative….and that includes Joey,  Brian Deese – Biden’s Director of National Economic Council, KJP (Karine Jean-Pierre)  – the Press Secretary, Jay Powell – the FED Chair, Janet Yellen – Treasury Secretary and anyone else that chooses to repeat that narrative….  Let’s be clear – we are in a recession …what we need to understand now is – how long and deep it will be?   

Remember what we discussed – The FED has been stimulating since the GFC (Great Financial Crisis) in 2007/2009…..When that crisis was over – the FED chose to keep rates artificially low WELL PAST THE TIME NECESSARY…….but that crisis ended around 2011 ish….yet everyone was walking on eggshells – the mere thought of changing monetary policy got you ‘tarred and feathered’ in the media…..and so they never did, Bernanke, Yellen and now JJ all found ways to justify and keep rates at 0… And then we got hit with the global pandemic that brought the world to a standstill and so they kept going….and then we made it through that….and were told that once CPI pierced 2% – THAT would be the signal to change policy…..and that happened in April 2021…..YET the FED did nothing……They continued to stimulate well past the time they should have……Which is why we are where we are….and which is why the FED is now backed into a corner…like a trapped rat……they have no choice now….but they could get some help IF the Biden’s backed off of their spending spree….their ‘Inflation Reduction Bill’ and many of the other wasteful spending programs that they shoved down our throats….Now, don’t get me wrong, some of the spending is ok, but the majority of it?  Wasteful….and inflationary….and that is making JJ’s job more difficult and that is going to make your life more difficult as well.  JJ said it…. he acknowledged that his actions will cause pain for American’s and the economy….

“We have to get inflation behind us.  I wish there were a painless way to do that, but there isn’t” – JJ Powell 9/21/22 – WSJ

An A list of US companies are ‘pre-announcing’ (after the warnings they all gave in the July beauty pageant)…and it isn’t pretty…..words like ‘restructuring, cost cutting, and layoffs’ are now the headlines…..GS, JPM, BBBY, F, TSLA, FDX, META, WMT, etc….have all laid the groundwork – so expect to hear more in the next couple of weeks – ahead of the next beauty pageant – that begins the week of October 10th.

The Dow – which had surged to +300 pts prior to the announcement ended the day down 525 pts or 1.3%, the S&P lost 66 pts or 1.7%, the Nasdaq fell 205 pts or 1.8%, the Russell lost 25 pts or 1.4% and the Transports gave back 130 pts or 1%….

2 yr. treasuries busted up and thru 4% and are now yielding 4.10%. Bond guru Jeff Gundlach telling investors yesterday that “risk assets (think stocks) are the LAST place you want to be when the 2 yr. is over 4%” – did nothing to help soothe the mood – and in fact, I would argue only helped to exacerbate the move lower….but it is what it is…remember – valuations are just a math problem….so with rates now expected to go higher – then you have to expect stocks valuations to come down…and now that you can get 4% on your money ‘riskless, guaranteed, sleep at night’ (for 2 yrs.) many investors will consider it during this anxious time and that means money will move out of stocks into short term notes and bills.  (Answer:  Stocks will suffer).  And if the 2 yr. goes even higher – then expect stocks to go lower….

It’s like the housing story…. mortgage rates go up and prices come down…. it’s math….And yesterday brought us the latest housing data – Existing Home Sales fell by 0.4%  – which was a bit better than the estimate – but remember – that report reflects July sales that were reported in August…..when mortgage rates were 4.5%…..Mortgage rates are now 6.5% and going higher – so the cost to carry rises – which means the price of the house has to come down to make it affordable……….

On Tuesday we learned that Building Permits (which reflect future demand) plunged by 10% – much more than the expected 4% loss and what that tells you is that home builders are pulling back on building new homes because mortgage rates are much higher than what buyers are used to …..2.5% – 4% mortgages are NOT happening again anytime soon.   Get ready for 7% mortgage rates by year end.

And 10 yr. Treasury’s are yielding 3.54% and that is causing increased concern, angst and anxiety for so many….and stocks got slammed (again). The Dow falling 315 pts or 1%, the S&P down 44 pts or 1.2%, the Nasdaq down 110 pts or 1%, the Russell lost 25 pts or 1.4% and the Transports gave back 300 pts or 2.3%.….so, the change in plans caused the algo’s to go berserk….in line bids disappeared – leaving a void in prices and that caused markets to plunge….as waves of sell orders caused the hurricane that JPM CEO Jamie Dimon warned us about months ago… In the end – higher rates will have to cause investors to re-price risk…. Period – It’s just a math problem…remember that.

And then the latest Putin headlines did nothing to help the mood…. threats of nuclear war and mobilization of more troops only adding to the angst…. all while the UN General Assembly carried on in NY.

US futures are higher this morning…but off their best levels overnight….Dow up 80 pts, the S&P up 8 pts, the Nasdaq up 20 and the Russell ahead by 4 pts. Eco data today includes Initial Jobless Claims, Continuing Claims, and the Kansas City Fed Survey…..none of which will cause the markets to react……the focus will be on dissecting and digesting the FED’s latest comments and what that means for stocks……

European markets are all lower as they now react to the FED’s decision and what that means for the ECB (European Central Bank) and the BoE (Bank of England). Recall yesterday the Swedes raised rates and today Norway’s central bank raised rates as well….so you can see the way this is playing out…. Everyone is raising rates…trying to normalize them after years of stimulation….so get ready…. This morning – markets across Europe are all down by 0.6% or so.

The S&P lost 66 pts to close the day at 3789……taking us ever closer to the June lows…. of 3636 – which is another 4% lower from here – which would take the S&P back down to a yearly loss of 25%.  The idea that the June lows will offer plenty of support is now the question….S&P 3400 may be more realistic if the 3rd qtr. earnings season proves to be as weak as some are no suggesting……remember – JJ kept telling us that the economy is strong enough to handle rising rates….but that is proving to be ‘fake news’…..and that might cause the seasonal weakness (which I have also been warning about) to become even weaker……

So, the answer here is – you need to do what makes you comfortable…. what makes you sleep at night…. but if you are a long-term investor – you need to stay focused…. make sure your thesis hasn’t changed.  If the fundamental story for your stocks remains intact – then take advantage of lower prices, but if the story changed then you need to be more dynamic and adjust.

You know me – I remain cautious about the coming earnings season….and am being patient…which does not mean I am paralyzedit just means I am putting money to work in cash and a handful of names that I believe are at the core of a long-term portfolio.  

I expect the markets to remain on the edge as we move into late September and October…. Remember – October 19th was a day of destruction in 1987 – when we were NOT in the situation, we are today….and as it approaches – don’t be surprised to see the markets remain anxious as well.

Remember – we are in a seasonally difficult time –and a test lower is still very much a reality.  Stick with the Big, Boring names/sectors…. Healthcare, Consumer Staples, Utilities, Energy and Big Tech.…. take advantage of the lower prices.
Take Good Care

Chief Market Strategist

Veal Scallopini

All this is  – is a creamy twist on the Italian favorite… add the cream to soften the flavor and create a luscious, delicious new classic….20 mins max….

For this you need:  olive oil, butter, veal cutlets (pounded thin), flour, s&p, Marsala wine and some room temp heavy cream (you can use light cream or even ½ & ½)

In a large sauté pan – heat up some butter and olive oil on med high – let the butter foam and when it subsides – dredge the veal in seasoned flour  (s&p) and brown quickly in the pan on both sides – maybe like 30 secs per side….remove and set aside.

Now turn the heat up to high and add some Marsala wine – like ½ – ¾ cup…. – bring to a boil and scrape the bottom of the pan….as the wine begins to boil away – add ½ cup of the cream – turn heat to med and stir until the cream is reduced and you have a semi thick sauce…..reduce heat once again to low (not simmer) and add back the scaloppini – turning them to coat well.

When ready – serve on a warmed platter in the center of your table.  Serve this with a green veggie – something like steamed French cut green beans or asparagus – something simple – not garlicky…. steamed – then seasoned with a dab of butter and s&p.

Try a nice medium bodied red with this meal….

Buon Appetito.