Things you need to know.
- It’s the end of quarter week – and there are lots of macro data points to help drive the action.
- Pending & New Homes Sales, and manufacturing data, but Friday’s PCE report is KEY.
- Talk of higher rates sends the dollar up and commodities down.
- 48 hours of chaos in Russia, where is Vlad? Who can he trust?
- Try the Spaghetti in a Pepper and Pancetta Sauce
Good morning…I need to include this weekend action as it sets the tone for the days ahead for both the geo-political state of mind as well as the financial markets state of mind.
By now you know about the attempted weekend coup in Moscow – or was it? Was it all for show? Was there really a threat? Some say yes, others say, not so fast and ask – is there a method to this madness?
Over the weekend we learned of a ‘possible coup’ by the Russian mercenary leader – Yevgeniy Prigozhin – head of the Wagner Group (which is a sabotage and assault reconnaissance group in Russia that is 25,000 strong) as he launched what looked like a coup attempt on Vladimir Putin…..taking his troops towards Moscow – with Moscow’s military leadership unable to stop them. The chaos and fast-moving events have put Vlad at the center of an internal crisis….and elected leaders around the world watching the story unfold…. Secretary of State – Antony Blinken saying that the uprising is a direct challenge to Putin….and provides a battlefield advantage to Zelensky… It also raises the stakes for Vlad….and for Yevgeniy.
After 36 hours there was an agreement to stop Prigozhin brokered by Belarus President Alex Lukashenko – which will allow Prigozhin to leave Russia and live in exile in Belarus – or will it? Exiled Belarus opposition leader Sviatlana Tskihanouskaya thinks that this relocation poses a NEW threat to Belarus’s independence as well as the safety of its NATO members…. saying that
“If Prigozhin comes to Belarus with his thugs, it will threaten our neighbors too – Poland, Lithuania & Latvia” (All NATO members).
Recall – Belarus joined the NATO Cooperation Council in 1992 (but is NOT a full member). In the spring of 2021 NATO leaders stated that recent Belarusian actions threatened regional stability and violated the principles that underpin a partnership with NATO. In November of 2021 NATO allies have condemned Belarus for supporting Russia’s unprovoked invasion of Ukraine and for its complicity in Moscow’s aggression and suspended all ‘practical cooperation’. Leaving Belarus to snuggle up to Moscow.
So, this does create a new chapter in Putin’s ongoing war and his obsession of rebuilding the USSR. Neither Putin nor Prigozhin have been seen since yesterday….In any case – while it’s all very dramatic- global investors do not appear to be raising the warning flag (yet)…..global markets were relatively calm overnight and futures this morning are not suggesting any type of ‘nervous selloff’ – but that could change in a moment’s notice….so I suspect investors to be a bit more cautious….and for buyers to be a bit more pricey if the heat gets turned up and sellers ‘run for the door’.
At 5 am – European markets are all lower after opening in positive territory – markets across the region are down between 0.4% and 0.8%. US futures – which were slightly higher overnight have now turned slightly lower…. Dow futures down 30 pts, the S&P’s down 5, the Nasdaq down 35 and the Russell off by 8. Now – recall, I have been calling for a bit of a pullback anyway (4200) – so this is not surprising…. I’m just surprised investors are not a bit more nervous considering the latest news.
OK – and now we are in the final week of the 2nd qtr.……hard to believe, but it is what it is – In any event it has been a crazy first half of the year….We have the Dow up 1.7% ytd, the S&P up 13% ytd, the Russell +3.4% and the Transports up 9.5% ytd. We have seen an amazing performance in the Nasdaq – currently + 29% ytd….but to be clear – It was also last year’s worst performer – losing more than 30% in 2022….so it should not be a complete surprise that we are seeing some outperformance from this sector…..toss in the ChatGPT news – AI to be exact – that hit the wires in late December and you can begin to understand the excitement and angst…….as AI became THE buzzword in 2023….
The top names stealing the spotlight this year as investors go all in on Artificial Intelligence are: AMZN +55% ytd, AAPL +44% ytd, NVDA +188% ytd, AI +200% ytd, GOOG +38% ytd, MSFT +40% ytd, META +140% ytd, AMD +70% ytd, TSLA +108% ytd etc.…all seeing double if NOT triple digit returns as they rush to cash in on the AI theme….…. but what is interesting and obvious now to investors is that EVERY publicly traded company is using AI in all parts of their processes (and that was very clear during the April reporting season…..recall that nearly every C suite personality tried to incorporate how they are using ‘AI’ in all aspects of their businesses – stressing that in their forward guidance)….so think every sector – Utilities, Financials, Consumer Staples, Basic Materials, Healthcare, Industrials, Energy, Aerospace, Biotech, even Homebuilders and the list goes on….so the truth is – you are getting AI exposure everywhere you look and everywhere you invest…So – just in case you thought you were missing out – you’re really not.
Now, let’s talk about what happened on Friday and what to expect as we move into the final week of the qtr. Stocks had a losing day on Friday…the Dow lost 220 pts or 0.65%, the S&P’s down 34 pts or 0.8%, the Nasdaq gave up 140 pts or 1%, the Russell suffered a loss of 26 pts or 1.5% while the Transports gave back 110 pts or 0.8%.
It’s a bunch of things, right…It was JJ’s testimony on Capitol Hill – about how he (they) are not done yet raising rates, It’s about how global central banks are not done yet either, it’s about a slowing economy, the elusive recession, stretched valuations, sticky inflation in the US and sticky inflation across the Eurozone all issues that drive valuations. It is also about the unfolding geo-political issues – The Russian coup just the latest – which in the long term do not really price stocks but in the short term can cause angst, drama and chaos for global investors think stocks (and bonds).
In the end – it is about how investors/traders and algo’s are coming to the realization that while the FED may have avoided a ‘crash landing’ – it is yet to be seen what kind of a landing it will be…..leaving so many to guess that maybe there is just a bit too much optimism….and that ‘some’ stocks are just a bit pricey – and you know which stocks I’m talking about. We’ve seen the move out of some of these highflyers into some of the year’s underperformers over the past couple of weeks – which makes sense as we close out the qtr. Asset managers have been doing some ‘window dressing’ (rebalancing) ahead of the marking period and expect to see more of that this week. My guess is that we will see more pressure on tech as asset managers rebalance their portfolios to reflect performance. Remember they are paid to ‘manage risk’ – so expect them to manage it.
In any event – We are seeing money move into those underperforming sectors – think Industrials, Basic Materials, Healthcare, Financials and Utilities. We have seen the SMID’s (Small and Mid-caps) begin to raise their heads…..all as investors are betting on that softer landing….rather than the crash landing many (myself included) expected….And while I am ‘softening up’ to the idea of a softer landing, I am not completely convinced that we will get it, which is why I continue to build out and add new money to those defensive (underperforming) sectors and why I am not chasing tech at all….(Happy with my current allocations to the space). I suspect that we will see strength today in Aerospace & Defense – names like RTX, GD, LMT, & NOC…. all lower on the year, but my gut says that is about to change. In the end though – you have to decide for yourself, you have to recognize where you are on the time and risk scale and then allocate accordingly…. Remember – investing is dynamic, it is not static….
Eco data this week includes a lot of data points – some more important than others, yet we will get bombarded with numbers…….The ones I think are worth paying attention to are – today’s Dallas Fed Manufacturing Survey – expectations of -20, Tuesday’s Dallas FED’s Services Survey, Durable Goods – expectations of -0.9% vs. last month’s +1.1% (that’s a big swing), New Home Sales – expectations of -1.2% (which I think is wrong – based on prior housing reads and how home builders can make current mortgage rates more appealing via their in-house financing), Conference Board Consumer Confidence numbers and the Richmond Fed Manufacturing Survey of -12.
Then on Thursday we’ll get the final revision to 1Q GDP – expectation of 1.4%, Pending Home Sales of -0.5% m/m – again which I think will surprise you….and Friday brings us the real data point…..The PCE Deflator m/m and y/y and the PCE CORE deflator m/m and y/y. Remember – these are the FED’s ‘favored’ inflation reads and they are expected to decline on the top line (PCE Deflator) but are expected to remain sticky at the PCE Core level…and that speaks exactly to why JJ says, ‘they are not finished yet’! If they remain elevated – it suggests that inflation remains sticky – Capisce? So, get those rate CUTS out of your head….and brace yourself for a 6% terminal rate…. now what is curious is that St Louis FED President Jimmy Bullard is floating the 7% handle…. which no one is buying YET…. but that could change….
The dollar index ended the week at 102.90 – after kissing resistance at 103.06 – but it is still higher and that is putting more pressure on the commodity complex…something we have been talking about. Any talk of higher rates will continue to push the dollar up and if the drama in Russia heats up – then I would also expect to see the dollar move higher and that will continue to have negative effects on both oil and gold….
Now oil – ended the week at $69.16 and this morning is trading up 60 cts at $69.76 – on the back of the Russia news…….but oil is off it’s 2023 highs and analysts tell us that oil is weak because the ongoing rate hikes by global banks will ‘sap demand’ causing a ‘Risk Off’ mentality… and that causes traders to hit the sell button, leaving buyers of oil to step back – testing the limits of the seller angst….. Just to put it in perspective – The world produces about 82 million bpd, and it uses about 101 million bpd…. So, I ask – Is that a supply issue or a demand issue?
So, you ask Then why is WTI and Brent trading lower? The answer is that the market is handicapping the future FED moves – as it always does….….…. Remember – commodities are priced in dollars – so higher US rates will drive the dollar higher – causing oil and other commodities to trade lower regardless of demand…. It’s just a math equation…. A stronger dollar = lower prices while a weaker dollar = higher prices. Oil is now well below all 3 trendlines…testing the lows of the year – and while it is struggling to stabilize talk of a stronger dollar will keep the pressure on – funny thing is that lower prices will stimulate demand and some of that demand will be Jo Jo buying oil on the open market to refill the SPR.
Gold – same argument…. a stronger dollar will continue to put pressure on it. ……until there is some extraneous (black swan) event that causes investors to move into the safety trade – which is what we are seeing today…Gold is up $10 on the back of the Russian drama. The other event that will help gold would be a cut in rates, which at the moment is not happening….so, I suspect gold will struggle unless the Russian drama heats up. Gold is just $45 away from testing the 200 dma (long term) trendline at $1,895…. which I think will prove to be support while the intermediate term trendline – $1,975 will prove to be resistance.
And since we are talking commodities and the Russian drama – have you seen wheat? It is up 30% since the June low and is up 2.5% today – and that is while the dollar trades higher as well, which debunks the stronger dollar – weaker commodity price argument only because wheat is a FOOD product. Like oil, it is not a discretionary item…We need energy and we need food….those are not debateable.
Treasuries remain stable…. the 3- & 6-month bills are yielding 5.3% and 5.4% respectively while the 2 yr. and 10 yr. are yielding 4.72% and 3.71%.
Don’t forget – it is the end of qtr. week…so there will be plenty of action regardless. My suggestion is to sit tight as this week progresses…. Stick to the plan…I suspect that we could test short term support at S&P 4200….over the next couple of trading sessions and before you panic – that’s only a 3% move down…What happens when we get there will be the question.
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.”
Spaghetti with Red/Yellow Bell Pepper & Pancetta Sauce
This is a simple dish and one that will become a family favorite…. takes about 30 mins….
For this you need 1 lb. of spaghetti, 3 yellow bell peppers, 1 red bell pepper – cored and sliced, you need pancetta (you can use bacon if you don’t have pancetta), olive oil, and fresh parmegiana.
Begin by bringing a pot of salted water to a rolling boil.
Add the sliced peppers to a sauté pan – add some olive oil and sauté the peppers until soft.
In another pan – sauté the pancetta and nice and crisp. When done, remove and place in bowl until later. Save the rendering – you’ll use it in a moment.
When the peppers are soft – place them in the food processor with the fat from the pancetta (or bacon). Blend until smooth. At the same time – put the spaghetti in the boiling water – cook until aldente – maybe 8 mins.
Return the blended pepper sauce to the sauté pan – turn heat to simmer to keep warm. Add ½ ladle of pasta water to the sauce and stir.
When the spaghetti is done – using tongs – add to the sauté pan and mix well. Turn off the heat. If it sucks up the sauce – then add a bit more pasta water to keep it moist. Add a handful of fresh parmegiana and the crispy pancetta. Mix well and serve immediately.
Buon Appetito
