Welcome to the Tril $ Club, Mester Hints at Higher Rates – Try the Mostaccioli

Kenny Polcari Uncategorized

Free Gas Oil Rig photo and picture

Things you need to know.

–        NVDA joins the Trillion $ club; Cathie missed the move!

–        The Debt Deal runs into trouble – but is that just smoke and mirrors?

–        Loretta is at it again…. calls for higher rates as inflation remains ‘sticky.’

–        Oil collapses under a weak China re-opening! (Stop already)

–        Europe awaits more inflation data.

–        Try the Summer Risotto

OK – Let’s get this out of the way…. Investors/traders and algo’s drove Nvidia higher once again…. crowning it a TRILLION-dollar chip tech company…. And we can credit the soaring demand for those specialized chips needed to power a new generation of AI products for the move this past week and this year…. CEO Jensen Huang telling us that you should –

‘Run, don’t walk, either you are running for food, or you become the food’… 

At a conference in Taiwan, he detailed his willingness to take outsized risks on AI years ago– when others would not – and yesterday he was crowned the winner!  The stock has been on a tear ever since he shattered every street estimate last week and then over the weekend – he announced even more AI related products that will continue to transform the world…..and they include robotics, gaming, advertising and networking technology…..and then he pulled back the curtain and introduced DGX-GH200 – which will make ChatGPT look like nursery school….and he expects all the big boys to be buyers!  MSFT, META, GOOG, AMZN and anyone else (and that’s a lot) that is considering upgrading their AI efforts and that includes everyone….

What is now clear is that the tech industry is not keeping up with the new world of complex computing of AI and to keep up with it they are all turning to Nvidia to fill the void….in fact he said.

“We have reached the tipping point of a new computing era – Everyone is a creator now.”  The future is here, and it is both exciting and scary….

On the other side of this is Cathie (Wood) – who isn’t so bullish – of course not – she dumped her position in NVDA in January…. telling Bloomberg listeners that the ‘boom-bust’ cycles of the chip industry pose risks and that the competition among firms in that space is growing…. In the end -she called it a ‘check the box stock’! Guess what?  I’m happy to ‘check that box’.  Well, give her a break, she has to be kicking herself – she only missed the last 120% move higher…

In the end – we all realize that AI has real potential – both good and bad and yes it has and will change the world and yes, you should have some exposure to the sector – and if you own APPL, AMZN, IBM, MSFT, NVDA, JPM, BAC or a host of other names – then trust me – you have exposure…

And that was the stock story yesterday…. now onto the that other headlines….

So, what exactly did the ‘debt deal’ do for the markets on Tuesday?  Absolutely, nothing….the idea that the deal brokered between Jo Jo and Kevy was going to drive the market significantly higher was a pipe dream…..first because I believe it was mostly already priced in, and as I have said all along – the DEBT deal will NOT price stocks in the long term….it did and does provide chaos in the short term, but in the end, it will not drive stock valuations…..at all.

On top of that – it became clear almost immediately that the deal is NOT as done as they suggested over the weekend.  There are a lot of pushbacks from the far right and far left and that has helped to raise the temperature in the room when they thought it was cooling. 

So, while futures were higher going into the opening bell – much of that can be tied directly to overnight comments given by Nvidia CEO Jensen Huang at the COMPUTEX conference in Taiwan….….some of it was also be attributed to the idea that we avoided a ‘catastrophe’…..That was until it didn’t……which is why we saw the Dow Industrials and the Russell do a complete 180 soon after the opening bell…..And that says a lot – because it speaks to what investors think about the industrials and the SMID’s relative to the state of the economy… and it is very different than what the TECH sector thinks…..or at least what AI tech investors think…. In any event – stocks churned all day – as DC tried to put a tourniquet around the wound to stop the bleed and get people on board….….

 Kevy – trying to ‘sell it’ as a good deal, Joey urging all members to accept it as the details came out…. Republican Congressman Bobby Good (VA) called it an ‘abysmal failure of leadership’ Chip Roy (Rep: TX) and Andy Biggs (Rep:AZ) urging all GOP members to vote AGAINST this bill – warning Kevy McCarthy that ‘his day of reckoning is coming’ – a veiled threat to throwing him out of his speakership…. …and then we heard from more members that railed against it – hoping that if they screamed loud enough, they may get some ‘pork’ for their districts that would ‘allow’ them to support the efforts. Then late last night – we got word that the bill narrowly passed the 13 member House Rules Committee…and so today it moves onto the full house….and the battle lines are drawn…what will the full house do and say today? 

Ok – and then there is the FED, interest rates, ongoing inflation concerns, and what the terminal rate should be……and to that end – we heard from one of the FED’s most hawkish members – Cleveland’s Loretta Mesterwho told us that there is ‘no compelling reason’ to pause rate hikes…in fact – she see’s a more compelling case to continue to raise rates until the FED is sure that they have beaten inflation.   (Remember she has floated the 6% terminal rate idea for months now) She is pushing back against those that argue for the FED to pause in June….and the idea that the FED will cut rates in the fall…. Don’t be ridiculous.  In the end – the economy may be slowing but inflation is remaining sticky and that is the issue…. 

And while the weekend debt deal agreement does take some of the uncertainty off the table concerning the economy, it isn’t enough to convince her that the FED should pause. But she did leave the door open a tiny bit by saying that she could be ‘swayed’ by Friday’s NFP report and June’s CPI and PPI reports due out on the 13th and 14th…The FED is due to announce on the 14th…so it is a close call.

As the day came to a close, we saw the Dow down 50 pts – after having traded in a 240 pt range, the S&P down 3 – after trading in a 40 pt range, the Nasdaq only added 41 pts after trading in a 185 pts range, the Russell lost 6 – after trading in a 23 pts range and the Transports gained 62 pts after trading in a 173 pt range…. 

7 of the 11 broad S&P sectors were lower…. Energy – XLE -1%, Consumer Staples – XLP down 1.1% (which honestly makes no sense to me), Healthcare – XLV down 0.6%, Basic Materials – XLB – 0.5%, Financials – XLF -0.04%, the Industrials – XLI off 0.15% and Utilities – XLU 0.4%.  Tech – XLK, Consumer Discretionary – XLY, Communications – XLC, Real Estate – XLRE all higher.

As expected – NVDA surged all over again – on the back of the CEO’s comments….it ended the day up another $11 or 3% taking some of the other tech with it….Interestingly enough – the Semi’s did not participate…the SOXX etf ended the day lower  by 0.1%, although Disruptive Tech – ARKK was up 1.8%, Cyber security + 0.4%,  APPL +1%, AMZN +1.2%, QCOM +5%…Get the picture?

Eco data was a bit surprising…. Consumer confidence was UP (vs. the expected decline) while Dallas FED Manufacturing survey came in worse than expected….and worse than last month….and that caused the Dallas FED to put out this statement.

“We are seeing all indications of a continued slide in demand (3 qtrs. now). Business is slowing down – that is certain. There is NOTHING encouraging on the horizon. The war on fossil fuels and higher rates continue to make things worse.”

Hmmm – doesn’t sound so bullish to me…. but what do I know?

Today will bring us the ADP employment number and that is expected to show 165k new jobs…the FED’s Beige Book, the Dallas FED SERVICES survey, Mortgage Apps, and Challenger Job Cuts…..Now unlike manufacturing, the US economy is a 75% SERVICES economy, so today’s Dallas number is important – as it speaks more directly to the services sector – April’s reading was -14.4, what will the May reading reveal?  If it doesn’t weaken further that will only substantiate Loretta’s position. 

US futures this morning is lower…. – Dow futures are -45 pts, the S&P is down 7 pts, Nasdaq is down 15 pts, while the Russell is flat.    

Treasury yields fell and remain stable at those lower yields…as the drama unfolds in DC….today should be interesting – but in the end, the feeling is that the deal will get done and that would push yields just a bit lower….(for now)…..Janet emphasizing that June 5th is the X date….That’s it, not one minute more – yeah, but that is what she said about June 1st….so I’m not sure that anything she says concerning the X date is set in stone….…..I’m betting that there is NO real X date where the US will ever default on our debt….Never….an X date for a shutdown, sure….we’ve seen that before, but I am not in the camp that the US will ever default on our debt….because if we did, that would put us in the company of Venezuela, Argentina, Brazil, Russia, Greece, etc.….  Let that sink in.

Oil got crushed yesterday……falling 4.3% or $3.15/barrel to end the day at $69.54!  China reported that everything is NOT coming up roses and that their manufacturing data points are underwhelming….and that suggests that the China re-opening (that has been happening for months now) is not as robust as initially thought (an idea I do not subscribe to – just because I do not believe anything that comes out of that country)…Remember – when we talk about manufacturing, we also talk about diesel demand, so if the China re-opening is not robust then it follows that diesel/energy demand will slow…and that was the story yesterday.  To be fair – Global PMI’s have been in contraction, US manufacturing PMIs are in contraction and now even Japan reported that industrial output in that country unexpectedly declined. So, all signs are pointing to weakening global economy and that will mean weakening energy demand and so you know what that means for the Saudi’s and for OPEC+…. And we will hear all about that on Sunday evening/Monday morning.

Oil is now well below all 3 trendlines and is teasing with the March lows of $65…. At this level – the US becomes a big buyer – to replace the millions of barrels we took out of the SPR and that will prove to be a floor for oil prices…. what the Saudi’s say on Sunday will prove to be the catalyst for the next move.

Gold – remains hugging the trendline….at $1975 as gold traders await the next headline…. We remain solidly in the $1880 (long-term support) and $2000 range.

European markets are lower….…. the headlines want you to believe that European investors are sitting on the edge of their seats over the latest chapter in our debt deal talks…. which is laughable…. because even the Europeans know that a default isn’t happening…Flash inflation figures showed that French inflation is cooling, German numbers are out later today while the Eurozone flash figures come out tomorrow. Chinese data pouring cold water on the idea of a robust re-opening in that country. At 6 am – European markets are all down about 0.3% – 0.5%.

The S&P closed at 4205 – essentially flat on the day…. after testing as high as 4230…before falling back. Remember, I have been saying that the market feels tired and that a pullback would not be out of the question at all….We know have to recognize that the extent of any short term move lower now will depend on how this vote goes – the more dramatic move will be determined by what we hear from the FED on the 14th…..Is Loretta correct?  Is inflation ‘stickier’ than they hoped….is the terminal rate going to 6%?  Because if it does, then expect investors to re-assess what valuations should be….and that reassessment will cause prices to decline – not crash, just pull back….  For now, we are in the 4100/4225 trading range. A breach of 4100 would put 3800 back in play…something that I think is completely possible…and that would represent a 9% move lower from here…something that is also considered within a normal trading range….and honestly, it would shake the branches a bit causing the weak to run for the exits…creating more opportunity for the long-term investor.

Remember – 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.”

Mostaccioli Rigate W/ Cannelloni Beans, Sweet Sausage and Arugula.

This is a great dish, and you can make it vegetarian by just eliminating the sausage. 

Bring a large pot of salted water to a boil.

In a sauté pan – heat up some olive oil, crushed garlic and a sliced/chopped “red” onion. Sauté until the onion is soft and translucent. Now add the crumbled sweet sausage and sauté until browned. 

*Add the pasta to the water and cook for 8 mins or so…. keep it aldente…

Next – add a can of cannelloni beans – juice and all to the sauté pan and stir to heat up… about 4 mins or so. Now add the arugula and stir. Arugula will wilt – no worries.

Drain the pasta – saving a mugful of the pasta water… add the pasta directly to the sausage and beans and mix well. Add a handful of Parmegiana cheese and toss. If you need to add back some of the pasta water, now is the time to do it. The dish should not be soupy, but it needs to be moist. 

Serve immediately in warmed bowls with freshly toasted garlic bread.

Buon Appetito