Things you need to know.
– The big money center banks did not disappoint – Super Regionals are next and then the smaller regional will report.
– Big week for earnings….20% of the S&P will report JNJ, NFLX, TSLA to name just a few.
– Fed Governor Waller suggests more hikes – with an S, Bostic calling for 1 more. Mkt pricing in a 60% chance of a May hike and then a pause
– Treasury yields rise, dollar rises and oil and gold decline (a tiny bit)
– Try the Shrimp Francese
Crisis? Did someone say banking crisis? If so, you would never know it by what we heard on Friday from the ‘money center’ banks……. JPM, WFC & C all crushed it……as did BLK & PNC. Now UNH (United Health) also crushed it, but they are a healthcare company and right now we are talking banks! Now, the ‘Regional Banks’ represented by the KRE etf did not do as well…and in fact fell by nearly 2% as the concern is that the crisis took an extra toll on them – but we’ll learn more about this week and next. Names here include NYCB, RFC, TFC, MTB, HBAN and more.
Jamie Dimon – CEO at JPM – and a fan favorite reported record revenues and a 52% increase in first qtr. profits. And there were a couple of reasons – first was the movement of money out of some of the regionals (think KRE) and into the ‘big money center banks’ after the collapse of Silicon Valley Bank in early March, – JPM saw about $50 billion in new deposits, Citi saw $30 billion, even WFC saw money move into their bank! Then there are rising interest rates -which allows the banks to charge more on any loan that they make without increasing the amount of money that they pay depositors by nearly as much – this is known as ‘net interest margin’ and is the amount of money that they collect on loans vs. the amount of money that they pay depositors….so for example – If they were loaning money at 2.5% and paying interest of 0.25% – the margin was 2.25% (2.5%-0.25%)….and today if they are making loans at say 8% and are paying 4% to depositors then the net interest margin becomes 4% (8% – 4%) or a 77% increase in net interest margin…..See how that works?
Together – these 3 banks reported more than $22 billion in profits on Friday….up 33% vs. last year…and total revenues reported by these 3 was more than $80 billion – up 20% vs. last year…and as you might expect – investors, traders and algo’s went wild over these results taking JPM up 7.5%, C up 4.8%, WFC flat, BAC which reports tomorrow also rose on the excitement – gaining 3.3% on the news. (Another one of my favorites). I joined Maria Bartiromo’s Wall Street on Friday evening and discussed the outcome as well as what to expect going forward…. You can access that interview here.
https://video.foxbusiness.com/v/6325085593112#sp=show-clips
In any event – the excitement over the bank stocks did NOT help the broader market trade up on Friday – but they did end the week in the plus column. On Friday the Dow lost 144 pts, the S&P down 9, the Nasdaq lost 42, the Russell gave back 15 pts while the Transports rose 60 pts. For the week though the Dow gained 2.5%, the S&P up 0.8%, the Nasdaq rose by 0.1%, the Russell gained 2.5% while the Transports added 2%.
The market came under pressure after comments by Fed Governor Chris Waller said that ‘he favored’ more rate hikes (plural) to allow the FED to continue to battle inflation which is becoming a bit stickier with each passing month. This on top of Atlanta’s Raffi Bostic who reiterated that he is also calling for a 25 bp hike in May before any pause….so you see what they did here….Waller says hikes as in more than one, while Bostic says he favors just one more…and they do this to keep all options open….just in case something changes….they can always point to the commentary that fits the narrative.
Now, you know what I think – one more hike gets the terminal rate to 5%-5.25% and then they pause….because at this point – rates and inflation are just about even…and if inflation continues to decline – then interest rates will be higher than the inflation rate – something that has to happen if the FED is going to succeed. Now if inflation rears its ugly head again and they need to raise rates more – they can always point to Waller’s commentary and say – ‘we said it might happen, why are you so surprised?’ Recall that Minneapolis’s Kashkari and St Louis’s Bullard are also in the ‘higher’ camp as well – both have suggested that rates need to go to 5.6% before they are finished….and Cleveland’s Loretta Mester has floated the 6% handle…just to put it out there in the global public square.
Eco data on Friday showed that Retail Sales fell more than expected, but if you take out Autos and Gas – (known as the core rate) they it fell less than expected…..Industrial Production and Capacity Utilization rose more than expected while the U of Mich Sentiment survey came in at 63.5 – well above the expected 62.1. And this all sent treasury yields higher…. the 2 yr. rose by 13 bps ending the week yielding 4.10% up from 3.97%. The 10 yr. rose by 8 bps ending the week yielding 3.51% up from 3.44%. As you might imagine, talk of higher rates sent the dollar higher (and while it is still low, it is off the low of the year) and that put some pressure on the commodity complex – think oil and gold….
Remember though – both oil and gold has seen significant rallies over the past month – Oil up 28% since March 20th while Gold is up nearly 10%- so any excuse for traders to take some money off the table is what they will do….Ringing the bell and taking profits is called ‘creating alpha’ so when you hear asset managers tell you that they are ‘creating alpha’ that is what they are doing…
They are taking short term moves in stocks, bonds, commodities etc. and cashing in the short term profits while maintaining a core position….So think of it like this… An asset manager owns 5 million shares of AAPL – 4 million of which is the ‘core’ position and 1 million of which is the trading position…. if Apple moves up 10%, they might sell 1 million shares to take advantage of the short term move up while continuing to hold a core position of 4 million shares…only to buy it back (the million shares) when AAPL trades lower again…it’s called ‘trading around a core position’.
Fed fund futures are now expecting a 75% chance of rate hike in May before the FED pauses….and I say 75% because the prior week the odds were only 60%.
This morning – Oil is trading down 30 cts at 82.20 and remains in the $80/$90 range while Gold is trading up $7 at $2023 after trading lower by $38 on Friday…. see comments above and that remains in the $2000/$2100 range.
US futures are mixed…. Dow futures + 13, S&P’s +2, Nasdaq down 14 and the Russell is up 5. Nasdaq under pressure because of the rising rate narrative and because TECH has so outperformed the broader market….Nasdaq is up 15.8% while the S&P is up 7.7% – so if investors are pricing in more rate hikes then they will take some money off the table in the outperformers and invest it in sectors that will hold up under pressure….In addition – we are smack in the middle of earnings season…this is a big week with 20% of the S&P ready to report….Expect to hear from GS, BAC, JNJ, SCHW, MS, TSLA, NFLX, UAL MTB as well as many more….Just maybe we’ll all get a break from the FED speak and get to focus on earnings and forward guidance – because that will speak volumes about what companies think of the balance of the year.
Over the weekend – Janet Yellen told CNN that if banks become more restrictive with lending that will give the FED cover to stop raising rates and go into pause mode after the May hike. Let’s be clear- that is nothing new…she is just repeating a narrative that has been in the public square. CNN is just trying to divert the conversation away from the 21 yr. old – that had top security clearance – and posted covert American intelligence documents on Discord….The democrats (Eric Swalwell) describing him as a ‘right wing, antisemite lunatic’ leaving many republicans asking the Dems how this kid even got into that position….How did the Dem’s allow this kid (with a checkered past) to get past all of the security measures required for top security clearance in the first place if he is as they describe. But let’s not go there, because that is not important.
European markets are mixed…as investors await this week’s earnings calendar and the start of earnings across the continent. In addition – the Europeans are awaiting China’s GDP on Tuesday and UK CPI numbers on Wednesday. At 6:30 am – the UK was up 0.5%, CAC 40 FLAT, DAX +0.1%, EUROSTOXX -0.2%, SPAIN +0.3%, and ITALY +0.3%.
Eco data today is all about the Empire Manufacturing Survey…. expected to be -18…. Later in the week -we will get Building Permits, Housing Starts, Fed’s Beige Book, Philly, Chicago and Dallas Fed outlooks, Existing Home Sales, and Manufacturing and Services PMI’s. So, it is sure to be a busy week and one that has the ability to really move markets.
The S&P closed at 4137 – down 8 pts…. Now even though bank earnings are coming in strong, they were expected to be strong…so this should not be a huge surprise….and while the big money center and may be some of the Super Regional’s banks will perform well, it will be the smaller regional banks that will come under pressure. In addition, y/y earnings for the S&P are expected to be lower by about 5% on balance…so let’s see how that turns out in the weeks ahead. For now, if you’re a day trader -get ready for the action and if you’re a longer-term investor then get ready to add to your holdings on any weakness. I think we could test the March/December lows of 3800 during this earnings season IF we get some significant misses or worsening inflationary data points.…and that would represent about an 8% decline from here… Either way – it’s an exciting time. And we haven’t even talked about the coming debt ceiling drama…that will unfold beginning in late May – because it is expected to implode in late June if nothing gets fixed…Just a note…that won’t ever happen….the US is not defaulting on anything…don’t let them fool you….but it will be all very dramatic…..and today – Speaker of the House – Kevy McCarthy will be speaking at the NYSE to highlight the coming drama…..Interesting that he has chosen the center of global finance as the place that he wants to launch this fight….It’s all very dramatic….
We are at a crossroads…. Stick to the plan….
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
“The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kace Capital Advisors.”
Shrimp Francese
1 lb. of colossal, butterflied shrimp, 4 large eggs, olive oil, butter, garlic, flour, white wine, chicken stock, lemon and lemon juice, s&p and parsley for color.
Set up the production line. Butterflied shrimp, seasoned flour, and beaten eggs.
Heat up a large sauté pan…. with ½ stick of butter and a splash of olive oil.
Pat the shrimp dry with paper towels and dredge in the seasoned flour, now dip in the egg wash then add to the sauté pan. Do not overcrowd…you’ll have to do this in a couple of batches. Add more butter with each batch…. Sauté the shrimp for 2 mins per side – then remove and place on a wire rack to drain. When complete – just wipe the pan clean – do not wash it….
Now add more butter and garlic – sauté for about 2 mins…. add 3 tblsp of the flour and whisk over med hi heat…for about 30 seconds…. Add ½ c of white wine, bring to a boil, continue whisking – another 30 secs or so……Now add 1 ½ c of chicken stock and the juice of one lemon – turn heat up and bring to a boil – continue whisking…. Now turn heat to med low, taste and adjust s&p if needed….
Return the shrimp to the pan and top with lemon slices…. let it heat up for about 3 mins…. spooning the sauce over the shrimps….
When ready – serve this over white rice or linguine or better yet just have some toasted garlic bread. Delish. Enjoy this with your favorite chilled white wine…
Buon Appetito
