Things you need to know.

–         Israel takes control of their border.

–         Risk off – turned to Risk on as the FED made some ‘neutral comments.

–         Energy and Defense stocks surge

–         PEP reports and beats while raising guidance.

–         Gold Up, Oil steady and the Dollar down

–         Bonds prices up sending yields down.

–         Try the Chicken Soup

Mid-East update

Israel has now confirmed that they are now in control and have sealed off the border at the Gaza strip after bombarding Gaza with multiple airstrikes on Monday…. Netanyahu ordering a complete siege – cutting off food, water, and electricity to the region.  Hamas threatening to execute hostages one at a time if Israel hits civilian targets in Gaza…. Iran claims no responsibility for this invasion, and we await the next move….

So the geo-political risk was short lived yesterday…stocks opened lower, in what appeared could have been a substantial decline – but investors took a cue from the headlines…that were focused on the latest developments in this middle east war as well as comments by members of the FED that suggest in fact we are done with raising rates. Investors – as I pointed out yesterday –  remained very concerned about whether or not this war will escalate into a wider conflict that threatens to up end the Arab/Israeli world – even more than it already is…..so they went straight for the safety assets – gold, silver, platinum but also considered what the impact would be for energy and defense stocks……as money moved into those two sectors. 

The XAR & ITA (2 Aerospace/Defense ETF’s) surged – rising more than 4% on the day…. the big military contractors doing even better – RTX +4.6%, LMT +9%, NOC +11%, LHX +10%, GD +8.5%….

And energy names also surged – the XLE rising 3.3% – HAL + 6.8%, BKR + 3.2%, SLB +4.5%, XOM +3.5%, CVX + 2.8%, BTU + 4.5%, CRK + 7.5%, AMR +2.2%, ARCH +3.2%.

But in the end – nearly everything ended up positive on the day – …. with the exceptions of travel stocks (think cruise and airlines) and the contra trades…. but most everywhere saw green on the screen. The Dow gaining 198 pts or 0.6%, the S&P up 28 pts or 0.6%, the Nasdaq tacked on 53 pts or 0.4%, the Russell gained 10 pts or 0.6% while the Transports added 133 pts or 0.9%.

Energy way out in the lead, followed by Industrials +1.6%, Communications +1.3%, Real Estate +1.3%, Utilities +1%, Tech +0.5%, Healthcare +0.3%, Basic Materials, Financials, Consumer Staples and Discretionary up by 0.1%. Mid-cap Value and Small Cap Growth also found buyers…up 0.5% and 0.8%.

Interesting that Cybersecurity was up 1% yet the Semis were all lower…. the SOXX – 0.25%.  Both the Value and Growth trades ended higher as well…Up 0.6% and 0.7% respectively.  The triple levered S&P Long trade – SPXL gaining 2% on the day…which means that the triple levered S&P Short trade – SPXS lost 2% on the day….

Much of the shift from negative to positive is being credited to FED Vice Chair Phil Jefferson and Dallas FED President Lorie Logan both intimated that the recent surge in treasury yields may mean ‘less need for the central bank to tighten again’ and that seems to be the narrative that they are now running with….as more and more of them are singing that tune – we just have to wait for the WSJ’s Nicky Timaraos and the Goldman Sachs economics teams to verify that fact…..Recall though, that a pause does not change the ‘higher for longer’ narrative, it only changes the ‘we will continue to hike’ narrative….and the way investors/traders and algo’s reacted seems to suggest that they think the ‘higher for longer’ narrative is also no longer true…….

In addition – we can also assume that the FED is now concerned about what havoc  the middle east conflict could inflict on the US economy….i.e. continued high energy prices could send the US economy over the edge, so raising rates even more will only further complicate that equation…..So, in the end – the script has changed….no one saw this event coming….or at least most of us did not…but here is an interesting tip….On Friday – just ahead of the close – someone in the options market made a very BIG bet on FRO (Frontline PLC) –  they own a fleet of very large crude carriers and tankers that transport oil and oil products around the world….from the Middle East to the Far East and nearly everywhere in between…..Then on Saturday – the news hits, the invasion begins and on Monday morning – FRO surged….gapping up 70 cts or 3.8% on the opening….trading to a high of $19.50 before settling to end the day at $19.26 up 5.25%…. and that option buyer made a lot of money….  My question is – who was the person?  What made them make such a bet right before the mkt closed? Their insight is almost unbelievable…much like the people who made big bets on the airline’s stocks ahead of 911. I wonder if they made the same bet on the defense stocks as well…. It’s just a question…. I’m just curious which school teaches you how to make ‘winning bets’ like that? 

In the end the odds of a rate hike at the end of the month have dropped dramatically – this after Friday’s strong NFP report gave investors a reason to think that another rate hike was not only on the table but could be followed by another in December…that narrative is now all but dead….and so the move into equities is alive and well. 

Now yesterday the bond market was closed so we got no direction from that sector, but this morning it is open and bond prices are rising and that is sending bond yields lower… at 6 am – the 2 yr. is yielding 4.99% down 8 bps, the 10 yr. is yielding 4.66% down 13 bps,  even the 30 yr. is down 12 bps at 4.84% – this after kissing 5% last week.  Now look, many analysts said that a 5% 30 yr. was a KEY level to watch…..if it held – then that might signal that we’ve reached a top…and that bond yields would thrash around here, but not push higher in the markets quest to find some stability…..and remember – current rates are historically normal rates, so allowing the markets to adjust to these rates is healthy…..and stocks can do well in this environment….this morning – higher bond prices (lower yields) means higher stock prices as well and US futures are rising….Dow futures up 50, the S&P’s up 5, the Nasdaq up 18 and the Russell up 2.

Eco data today includes Small business optimism and the NY Fed 1 yr. inflation expectation – that number is 3.6%….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…. let’s hope the report confirms the expectations….

Gold surged yesterday – up $30 or 1.6% to end the day at $1865/oz. And this morning it is up another $6 at $1871 – it did trade up to $1879 overnight and could resume that climb depending on what the next headline is……. What would an attack from the northern side of Israel mean…. where is Hezbollah and what are they doing? And Iran – right, they said they had nothing to do with it, but at the same time they praised Hamas for the invasion …. military analysts suggest that Hezbollah is waiting in the wings – waiting for ‘go ahead’ signal that is sure to come from Iran.

The dollar index retreated yesterday – this a direct result of the ‘pause’ narrative coming out of the FED….and that also helped to boost commodities…. remember the inverse relationship – dollar up/commodities down, dollar down/commodities up. This morning the Dollar index is down 20 cts at 105.88 – this is down from last Friday’s high of 107.30 – when the narrative was more rate hikes….because more rates hikes will make the dollar more attractive to buyers, while a pause or (gasp) a cut will cause the dollar to retreat making it ‘less’ attractive to buyers.  If we continue with the pause narrative – then we could see the dollar retreat back to the 104.50 range.

PEP announced earnings this morning….and guess what? They beat…. reporting $2.25/sh vs. the estimate of $2.15/sh. – Price increases being cited as the reason for the boost in profits…. (Duh!!  Did we need them to tell us that if they raise prices more than what it costs them to make it, then that falls directly to the bottom line?)  and by the way – they raised their forecast (guidance)….and the stock is trading up $5…. or 3.1%. and we’re off (to the races….) Could this be the narrative in the weeks ahead…what does this say about the consumer staple stocks that have also raised prices – either by raising them directly or by shrinking the package and keeping the prices stable – which is really RAISING prices…. I guess we are about to find out….

Now, officially we kick it off with the banks…. on Friday, the 13th – now financial services are expected to report an earnings growth rate of 12% y/y…. Banks specially to report growth of 4% y/y – diversified banks at +7% while the regionals are expected to be down 15%….As usual, Jamie Dimon will be the first DOW stock to come out of the gate and he is expected to report $3.90/sh….but I expect that he will ‘beat’ the number in fact, I suspect he will beat both the top and bottom lines….but maybe that just because I am a Jamie Dimon fan and shareholder in JPM….Look for PNC, WFC, UNH, BLK & C to report on Friday as well.

European markets are all up…. better than 1.5% across the board…. the IMF raised the US growth projection to +2.1%. they also lowered the Eurozone forecast to 0.7% while leaving global growth at 3% for the year. UK sales did rise by 2.7% in September which is up from 2.2% last year- that’s good, but still below the 12-month avg of 4.2%…. German CPI due out tomorrow and the ECB will publish their September meeting notes on Thursday.

The S&P ended the day at 4335 up 27 pts. and it looks like we are going higher again today…. We remain in the 4200/4380 trading range….and while I thought we would test 4200 before we tested 4380, the narrative has changed – so we need to listen to what they say…. and we will hear more about what the Fed plans to do today. We will get not 1 but 4 FED speakers to opine on the state of the economy and the thinking behind the iron curtain…. Look for comments from Raffi Bostic (Atlanta). Neely Kashkari (Minneapolis), Mary Daly (San Fran) and Chris Waller (Member of the Board of Governors) as they reveal their own thoughts on the next move….but you have to wonder –  are their own thoughts ‘really’ their own thoughts – let’s see if they all speak the same language or if they present a fractured narrative.  Now, Neely has been calling for a 6% terminal rate – along with Loretta Mester – if he changes his tune then that would be a notable change…. Later in the week – we will hear from Mishy Bowman (another Member of the Board of Governors) and Raffi Bostic again.

Which again – only supports my point as a long-term investor…. stick to your plan…don’t try to pick tops and bottoms, build a strong, diversified portfolio.

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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Chicken Soup

So as your mother always says:  “Have some chicken soup – it’s good for you”.

For this I use: 5 thighs (skin on), chopped onions, carrots, celery, water, s&p, and one chicken bouillon cube.  You can add in a can of cecci beans at the end (if you want).

Rinse the chicken pieces -place in the pot and fill with water. Now add the chopped veggies. Season with s&p, add the bullion and bring to a boil. Once it boils – turn the heat to med low and let it simmer for about 1 1/2 hrs. – adding water as you go – as much of it will steam off. After it’s done, Turn heat off – remove the meat and allow to cool.  Add in a can of the beans of your choice.

When cool – remove the skin and debone the chicken. Slice into chunky pieces and return to the soup. Now – place the pot in the fridge and allow to cool overnight – the fat from the chicken will rise to the top and form a ‘skin’.

Remove from the fridge and take the fat off and discard. Re-heat and serve alone or with rice or with elbow macaroni. Have plenty of fresh grated Parmegiana cheese.

Buon Appetito