Things you need to know.

–         War in the Middle East – Hamas attacks Israel from the North and South – 1200 dead.

–         Netanyahu prepares response.

–         Global markets skittish

–         Bond Market closed today; Stocks are lower.

–         Safety Trade is alive and well.

–         Try the Eggplant Meatballs.

And now it’s more GEO-POLITICAL risk….Hamas attacked Israel in the south over the weekend, all while Hezbollah launches rockets from the north….…Netanyahu declares a state of war…..and is planning their response – expect  a massive military retaliation on Gaza –  The Arab nations and the world line up – on different sides,  leaving many to ask if this will this result in a wider ‘bonfire’ that moves beyond the middle east? It was thousands of rockets, wide infiltrations, the taking of soldiers and civilians all coming at dawn on Saturday morning…. the scenes are horrific – and this has only just begun….

Asian markets seemingly unfazed by the tensions…. Japan down 0.3%, while Taiwan was up 0.4% – everyone else fell in between.

In Europe – markets there are responding to the latest outbreak…. The UK is up 0.6%, while the rest of the continent is under pressure…. Germany and the Eurostoxx index’s both down 0.3%….

In the US – futures markets were off about 0.75% overnight – but are trying to stabilize – at 5:30 am – Dow futures down 125 pts, S&P’s down 20, the Nasdaq off by 90 and the Russell is down 12 pts. (We’ll take another look at the end of this note).   The safety trade has found new life…precious metals all higher…Gold + $20. Silver +$1 & Platinum +$9 Oil is up as well…. trading up $2.50 at $85.31/barrel, Natural Gas is up 2% at $3.40. the Dollar index is up 50 cts at $106.53.  Don’t forget – Today is Columbus Day here in the states – so the bond market is closed…. treasuries not active…

As you might expect – Defense and Aerospace stocks are surging in the pre-mkt ……ITA (Defense and Aerospace ETF) is quoted up $2 or 2.1%….individual names up even more….RTX quoted up 5%,or $3, GD +3%  or $7, LMT +5.5% or $22, LHX + 2.4% or $4 and the list goes on….

Ok – back to Friday’s news…. the NFP report surprised BIG to the upside…. new jobs created were expected to be +170k – came in at double that number – 336k new jobs created……while last month’s report was revised up as well……something that the FED does not want to see. Part time workers were 150k of that number…..but no matter that you’re only working part time – they want to say that it doesn’t make a difference…..part time is still work, so therefore its gets counted as full time work in this data point…which is a little confusing…but it is what it is.  We saw the most hiring in Leisure and Hospitality, Healthcare, and professional and business services. And don’t discount the Biden’s – Gov’t payrolls also rose….

As expected – the algo’s interpreted that as a negative (because it was so strong) and the initial reaction was to sell (on the idea that the FED will definitely raise rates in 2 weeks) and futures plummeted, but then once the mkt opened….the human beings put their thinking caps on and boom – up we went….I think the focus was on both the wage growth which was actually lower than expected – suggesting that upward wage pressure – that we all have so concerned about – is maybe not so much…..in addition – I believe the part time worker number was a positive as well,  – because what it suggests is that full time labor market is not as strong as the headline number suggested….and that could mean that the Fed doesn’t have to do anything in 2 weeks – leaving rates unchanged and that suggests that we are at the peak of the cycle…and BOOM…up we went to close the day higher….The Dow added 289 pts or 0.98%, the S&P’s up 50 or 1.2%, the Nasdaq up 212 or 1.6%, the Russell ahead by 14 or 0.8% while the Transports added 130 pts or 0.9%.

Many are now suggesting that the FED may not have to do anything…as the bond market is carrying the load…. with higher yields working to slow the economy by making auto loans, mortgages, revolving credit, business loans (cost of capital) all more expensive. The higher yields go the more potential they have to slow the economy and potentially put us over the edge – in fact – the increase in yields since the last FOMC meeting is equal to a 25-bps hike (and that was when the FED paused!)  – leaving the holdouts to suggest that the FED will have no choice but to CUT rates in 2024…. Oh boy, do we have to go there again? I guess these guys haven’t heard about ‘higher for longer’.

Today is a holiday here in the states – banks are closed, no mail and the bond market is closed….the stock market is open, but we can expect muted volumes as a result and that can lead to exaggerated moves – up or down…and with the news over the weekend – it appears that the move will be lower today.

There is no eco data today so do not look for that to drive the action…. the focus will be on what’s happening in the Middle East.  And while geo-politics can create havoc in stock and bond markets in the short term – they do not usually create long term pricing…. Tomorrow brings us the September PPI report and that is expected to +0.3% m/m, ex food and energy of +0.2% m/m, while y/y reports are expected to be +1.6% and +2.3% respectively. Wednesday will be the CPI report and that is expected to show an increase of +0.3% m/m. ex food and energy of +0.3% while y/y numbers will come in at + 3.6% and +4.1% respectively….both of those numbers a bit lower….but it makes sense…right – because they drop last September’s numbers (which was high) and replace it with this September’s number which is lower….so mathematically – It HAS to be come down….

(Here is how that works…. you have 12 numbers…  7,7,6,6,5,5,5,5,4,4,4,4 = 62, they you drop the first 7 and replace it with a 3 at the other end 7,6,6,5,5,5,5,4,4,4,4,3 = 58….Capisce?)

It’s like magic….but the issue is that no matter what – prices are still rising…and while each month it will appear as if inflation is stalling, the fact is that prices are now set to a new HIGHER level….which will eventually be considered normal and then we can stop discussing it….

Like I said – precious metals are higher (safety), and oil is higher – think global unrest and ongoing production cuts…now what will be interesting is – What will the Saudi’s and OPEC+ do now? Will they turn on the spigots or keep them turned off?  We are about to find out.

Now, it is also the start to earnings week….and we kick it off with the banks…. on Friday, the 13th – let’s not hope that’s a sign…. Earnings for the 3q are expected to decline by 0.3% y/y….and if that’s true it will be the 4th straight qtr. of y/y declines…  4 sectors are to report higher earnings due to upward revisions of their EPS estimates….  76 – S&P 500 companies have issued negative guidance while 42 of them have issued pos guidance….  The market is trading at 17.7 x’s FORWARD earnings – which is below the 5 yr. avg of 18.5, and ahead of the 10 yr. avg of 17.5. 

So far – we have heard from 20 companies – and 17 of them have reported pos EPS surprises (85%) while 14 of them have reported positive revenue surprises… (70%).

Official earnings kick off with the financials – JPM, C, WFC, etc.…..This sector is expected to produce the 4th highest y/y earnings growth of all the major 11 sectors…..within this sector you have Insurance – and they are expecte4d to be the largest contributor….Property and Casualty up 113%, Multi-line +77%. Financial Services up 12%. Banks up 4% – Diversified banks +15% while regionals are down 15%…  The big thing to watch this time around is the effect of the rise in the 10 yr. yield and what it does to capital levels…. along with deposits…. are they stabilizing…. Also – what are loan loss provisions going to do? Expect big allocations to that line item – to reflect both current and future credit deterioration…  Mortgages weak…think 7.5% rates, what will they say about credit cards….

Now, the 30 yr. bond kissed 5% earlier last week – causing concern for investors. (5% is a big number for the 30 yr.) and ended the week at 4.96%.  Investors and the markets are also watching the 10 yr. treasury bond very closely as well because the 10 yr. is the baseline rate for which the risk of all other investments is assessed – think revolving consumer debt, mortgage rates etc.

Now, the 10 yr. ticked as high as 4.87% on Tuesday and ended the week yielding 4.8%, the 2 yr. ticked at 5.17% on Tuesday and ended the week at 5.08%. Shorter duration bills are still yielding 5.45% and 5.5% respectively – while your gov’t money mkt account is paying you 5.1% to hold cash.

Now while the markets have settled down after the recent rout, investors remain fragile, and the weekend events will only raise the temperature among investors at least in the near future…. Watch the inflation numbers this week…. They are key….and then we’ll start with earnings – which will drag on for the next 5 weeks.

But in the end – all of the markets are reacting the exact same way…. When the sellers are anxious – buyers take control and markets fall…. When the buyers are anxious – sellers take control and markets move up. The question now is – who will be anxious today? You can add stability to your account… – raise your cash portion – the gov’t is paying you 5% to be completely liquid.

Now at 6:45 – futures remain in negative territory and have weakened further…. Dow futures down 145, the S&P’s down 24, the Nasdaq down 106 and the Russell is down 13.

The S&P ended the day at 4308 – up 50 pts….and this morning, it looks like we are going to give that all up today……Again, I look for us to test 4200 (support) before we test 4385 (resistance).  The House has now identified 2 strong candidates, Scalese and Jordan…. the GOP will hold a vote to see where the bodies lie….and who rises to the top….and then hopefully – we get a Speaker of the House.

Remember – eliminate the noise, stick to the plan – even when it feels uncomfortable …. And don’t panic….

Take good care.

kpolcari@slatestone.com

Sources:  Bloomberg, CNBC, Reuters, Wall Street Journal

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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, which may not necessarily align with our firm’s standpoint.

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Kenny Polcari is the Chief Market Strategist for SlateStone Wealth.  Neither Kenny nor the partners of SlateStone Wealth are compensated in any manner by the issuers of any securities mentioned in the publication.

Eggplant ‘Meatballs’ It’s like Eggplant Parmegiana

(Made this yesterday – see my pics on X – @kennypolcari)

For this you need – 2 large eggplants, garlic, olive oil, s&p, fresh grated Parmegiana, breadcrumbs, 2 eggs, fresh Ricotta Cheese and home-made Marinara sauce.

Begin by slicing the eggplants into small cubes. (You can remove the skin if you prefer, I did not) Season with s&p and some oil – toss and then roast in the oven set at 400 degrees.  Maybe 30 mins or so…. make sure to turn them at the 15 min mark. Remove.

Leave the oven on – you’ll need it again.

Now puree in the food processor.

Next – Add the pureed eggplant into a large bowl and add parmegiana, breadcrumbs, s&p, chopped garlic and the 2 eggs.  Mix well. Now, place this in the fridge to cool for 20 mins, so that you can easily make ‘meatball’s out of the mix.

In the meantime – take out an ovenproof sauté pan. Add the marinara and heat it up a bit – then turn off the heat.

Now, take the eggplant mixture and make meatballs, roll them in your hands and fry then in olive oil to get them a bit crusty. Then place in the marinara sauce. When complete – place dollops of Fresh Ricotta in the sauce around the ‘meatballs’

Place the pan in the oven and bring to a bubbly finish – maybe 10 mins…. Remove and serve – be sure to take some of the ricotta as well…. It tastes like eggplant parm in meatball form. So delish.

Buon Appetito