Debt Talks Stall, Mkts remain on Edge, Yellen calling for DISASTER – Try the Chicken Capricciosa

Kenny PolcariUncategorized

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Things you need to know.

–        Debt talks continue –

–        Janet reignites the DEFAULT scenario.

–        Joey claims to have compromised but insists on tax INCREASES.

–        Oil steady, treasuries steady, gold a bit higher.

–        Greek Elections cause a surge in Greece but do little to inspire buyers across the continent.

–        Try the Chicken Cappricciosa  

Stocks fell on Friday as the week came to a close – Feeling tired after the drama pushed stocks into a new century (4200) before ending the week just a bit below it.  Stalled debt discussions once again responsible for the angst…. Treasury Secretary Janet Yellen trying to raise the temperature in the room by saying that these stalled discussions risk sparking an unprecedented financial crisis as early as June 1st defining it as a ‘hard deadline’….….  (It’s really crazy to me that this is the hill they want to die on – Q:  When does the gov’t ever have a ‘hard deadline’ when it comes to spending, budgeting, legislating etc.….?)  A:  They don’t.

Janet again – telling us that seniors won’t get SS payments and the military won’t get paid….yet – we just sent billions more to Ukraine and now the Dems are floating the idea that we must pay illegal immigrants ‘unemployment benefits’ now that they are here (in addition to housing and food stamps) – so how does any of this make sense to you?  You’re telling me that the US gov’t will default on our debt (just to prove a point) yet pay all of these expenses because we have an ‘obligation’ to do the right thing?  OMG – just listen to that?  It’s stupidity, isn’t it?

Now – Jo Jo did say that a default is not happening – which suggests that if they can’t make a bi-partisan deal, he is threatening to invoke the 14th amendment – which allows him to raise the debt ceiling without the participation of Congress….which is another issue – the 14th amendment has NEVER been invoked – so again – does Jo Jo want that this to be his legacy as well?  Do the Dems’ want to be the party that said, ‘screw the rules and screw compromise?’

A gov’t shutdown is what should happen first…. close the parks, furlough gov’t workers, shutter the IRS, send elected officials home and STOP their paychecks – then watch how fast this comes to an end.  That should save us plenty of money and take us thru June and into July….But this idea that we are going to run out of money next week is irresponsible – and btw – Again, I ask – Does Joey want to be the President that ‘defaulted on his debt’?   Now, he will try to pin it on the GOP, but he is the President, the Dems will have to wear this – period.  A shutdown is not a big deal, (well it kind of is for anyone that doesn’t get paid) – but we’ve done that before and the world did not stop….Those people that don’t get paid, just don’t pay their bills…it’s not rocket science….It’s just want it is.

In any event – the Dow lost 110 pts, the S&P down 6, the Nasdaq gave up 30 pts, the Russell down 11 while the Transports gave up 95 pts. 

In addition to all of that drama – we have more conflicting commentary out of the FED….Dallas’s Lori Logan – someone we don’t hear from a lot – spoke up and told us that ‘she’ doesn’t think the FED is done yet raising rates – and she joins – Cleveland’s Loretta Mester, Minneapolis’s Neely Kashkari, St. Louis’s Jimmy Bullard, Vice Chair Lael Brainard etc.….keeping the June rate hike alive…..and then on Friday afternoon – FED Chair JJ Powell came out and said that he is ‘open to holding interest rates steady at the June meeting’…..suggesting that the FED will pause….saying

“Until very recently, it has been clear that further policy firming would be required. As policy has become more restrictive, the risks of doing too much vs. doing too little are becoming more balanced.”

This leaves the June hike a split among the members and over the weekend – Neely – changed his mind – NOW saying that he might favor a pause in June (a 180 degree turn from last week) but would not rule out further hikes if necessary…..I guess he must have gotten a phone call on Friday night – that he better jump the fence and support the Chairman – ….. and for those that suggest more possible  disruptions due to another ‘banking issue’ as a reason to pause or even pivot – Powell says ‘no need to worry’….you see the FED can use ‘emergency lending tools to address any financial / credit market disruptions, so that their monetary policy tools (interest rates) can remain focused on high inflation’.  But let’s be honest – you can never do just one thing….one action causes a number of reactions…some intended, and some are unintended – so this continued debate and uncertainty will have plenty of unintended consequences on history, on gov’t on American’s and on financial markets. In the end – a failure to get inflation under control will only increase the social costs and harm that American’s are feeling, so whether or not we raise or pause in June is not as important as whether we hold rates higher for longer….again – the idea of a pivot – is not happening.

Eco data today includes nothing…but tomorrow we will get S&P US Manufacturing PMI of 50 (sitting right on the neutral line), S&P US Services PMI of 52.5 (expansionary), New Home Sales m/m -2.9%, Richmond Fed Survey of -8. 

Now new home sales are going to be very interesting, and I think we could see a surprise in that number – why?  Because home builders are also lenders and they can ‘buy down the rate’ to assist new home buyers, or they can toss in upgrades to make new home look more attractive….think kitchen upgrades, bathroom upgrades, landscaping, etc.….all things that cost money to the buyer if they do it themselves, but cost nearly nothing to the home builder as they are building thousands of homes and they get the ‘buyers discount’.  So suddenly the new home buyer is told – “oh, we’re offering a range of upgrades for free!’ and you know what happens next….and off we go….

US futures are flat…. Dow +2, S&P’s -2, Nasdaq -12, and the Russell up 2. The negotiations failed again over the weekend, but Joey and Kevy are due to meet today to try and make a deal.  Joey telling us that ‘he had done his part and made some compromises on spending, but that Kevy needs to put tax INCREASES on the table in order for this to move forward…..Whatever….in any case – they will be sure to keep the tension high to make it even more dramatic so that it comes down to the wire….down to the 11th hour….whenever that 11th hour is…and it is NOT set in stone that it is May 31st at 11 pm.  Could be, but it is not a drop-dead date, by any stretch.  Janet Yellen telling us that if we hit the limit and force a default (on June 1st) – then 7 million people will lose their jobs and the stock market will fall by about 45% – destroying massive amounts of wealth – My question is – what mathematical formula is she using to come up with that analysis? And does it happen on June 1st at 12:01 am?  It’s ridiculous……it’s histrionics….

Treasuries remain confused and inverted…. The 2 yr. is now yielding 4.24%, the 5 yr. is yielding 3.7%, the 10 yr. is yielding 3.65%.  Shorter dates bills continue to pay you more than 5% on an annualized basis.  1-month bills are now yielding 5.5%, 3 & 6 months are yielding 5.29% and 5.34% respectively.

OIL is trading at $71.50/barrel – down 7 cts….they are using the debt ceiling stalemate, a housing slowdown AND concerns over the Chinese recovery as the reasons for weakness….citing a failure to come to a deal along with weak housing will cause the Chinese economy to slow down and that is bad news for consumption and demand…. A housing slowdown in the US will cause the Chinese economy to crash?  Ok – let’s run with that idea…. Just wait until the June 4th OPEC+ meeting where they will discuss more production cuts to help stabilize prices…. Stabilize at higher prices…. not lower prices. And Dominick Schnider – head of commodities and Asia Pacific Forex at UBS paints a picture of $95/barrel for oil later this year – suggesting that going forward – the market will be ‘undersupplied’…. Hmmm – think more production cuts by OPEC+?

Gold which had fallen to $1,978/oz last week – on the idea that a debt deal was ‘done’ is now trading back at $2000/oz on the idea that a debt deal is ‘not done’.  Last week – we tested and held trendline support at $1970 – which suggests that we could see us test trendline resistance at $2021/oz.  So, for now – we remain in the $1970/$2020 range until we get clarity out of DC.  A failure to arrive at a deal will cause Gold to move up…. while a deal will see gold fall – but even if it weakens, I suspect that trendline support will hold.

European markets are mixed – the UK and Spain higher, while the rest of the region is lower.  News out of the Greek elections is causing that market to surge by 7% after the ruling conservative party retains a hold on the country. Talks of a new coalition gov’t are under way. 

The S&P closed at 4191, down 6 pts on Friday.  And while the debt negotiations will put some pressure on stocks today….What is key is that we did trade up and thru 4200 last week…..So 4200 is now in play…..and if the mood changes and a deal gets done – we could see a relief rally that tests of the August highs of 4325. A debt discussion failure and talk of ‘default’ will cause the algo’s to go into a free fall….as sellers all run for the door – leaving the buyers to bid lower…  In any event – that only re-enforces my mantra – stick to the plan, do not try to pick tops and bottoms – continue to DCA (dollar cost average) on a monthly basis and re-invest your dividends until you need them as income… (If you need them as income.)

You know the deal – As a long-term investor – stick to the plan.  Eliminate the noise….

Take good care.

Chief Market Strategist

“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.”

Chicken Cappricciosa 

This is a “simple dish,” easy to make and takes no time at all… you can also use with veal or pork cutlets – as you prefer.

For this you need:

Chicken cutlets – pounded thin, homemade Italian breadcrumbs, Arugula, Red Onion and Shaved Grana Padano Cheese, Eggs, flour.

You begin with pounded chicken cutlets. Rinse under cold water and pat dry with a paper towel. Dredge the cutlet in flour, then dip in egg wash, then cover in the homemade Italian style breadcrumbs* and set aside.

When completed – heat up olive oil in a baking dish under the broiler… (being careful to watch as the oil will ignite if it gets too hot before you begin cooking.) Dip one side of the breaded cutlet in the hot oil and flip to the other side and broil – 3 to 4 mins. While broiling, prepare the Arugula for the finishing touch.

Mix the arugula with the chopped tomatoes and red onion – season with s&p and dress with fresh lemon juice and olive oil and toss.

Flip the cutlet and broil the other side. When done remove from oven and place on center of warmed plate. Now using salad tongs place the Arugula salad on top of the cutlet top with the shaved Grana Padano and drizzle with olive oil.

Buon Appetito