Things you need to know.
– Stocks remain confused – downs are dramatic, and ups are dramatic.
– Bond auctions show signs of weakness, sending yields up.
– Moody’s downgrades outlook to negative, leaves credit at Aaa.
– Gov’t shutdown looming, Can Mikey Johnson Save the Day?
– Try the Scallops bathed in Vermouth.
Stocks rallied HARD on Friday…. this after they sold off HARD on Thursday when JJ told us that it is too ‘early to declare victory against price pressures’ (think inflation) …. which didn’t help Janet’s 30 yr. bond auction…. – that followed the weaker 10 yr. auction earlier in the week.
Let’s recap for quick second… Last week’s auctions are beginning to show cracks in demand (which means lower prices/higher yields) …. The 10 yr. was a bit weaker and the 30 yr. on Thursday forced the primary dealers to accept 25% of the $24 billion bond offering – Why? Weak demand….and you know what happens when buyers are cautious? Prices usually go lower…….This latest auction had what is known as a ‘long tail’ – which means that the Treasury had to entice buyers by discounting the price over where the current 30 yr. bonds were trading (which results in a higher yield) and that sent stocks down…Last week I said this – “It’s a supply/demand issue – at current prices – there is less demand, so in order to create interest – the clearing price must be lower and what does that mean? Yields will be higher and that will continue to put pressure on the markets.” And don’t forget – Janet still has $660 billion to bring to the market before the year end and another $860 billion in the 1st qtr. of 2024.
Then on Friday – it was like Thursday never happened….all of the angst that was created seemed to disappear, yields paused and in fact fell ever so slightly and that sent stocks on a tear….…..The Nasdaq saw its BEST day since May….rising 2.05% or 277 pts! The Dow gained 390 pts or 1.15%, the S&P rose 68 pts or 1.5%, the Russell added 18 pts or 1% while the Transports gained 160 pts or 1.1%.
The year’s strongest sectors resuming the push higher…..Tech +2.6%, Communications + 1.6%, Consumer Discretionary + 1.7%, Homebuilders +2.1%, Disruptive Tech + 1.6%, Semi’s +4%, Cybersecurity + 1.9%, AI +2.5% (those last 4 are all a subset of TECH)….the growth trade – SPYG +1.7% (again tech). In fact – almost everything was higher except the contra trades! DOG -1%, PSQ – 2.2%, SH – 1.5% VIXY – 4.3%.
The 10 yr. treasury yield fell to 4.627% down from 4.629% on Thursday….the 30 yr. yield went from 4.7646% to 4.7618% – and while you don’t’ think that means much – You would be incorrect….at this point it means a lot….and so that small pullback allowed the buy algo’s to go all in….the same way the increase in yields allowed the sell algos to go all in on Thursday…..which only proves my point….Eliminate the noise, build your plan and then stick to it. Don’t get caught up in the noise…. because after all that – what did we get other than drama? In the end – the S&P began the week at 4358 and ended the week at 4415…up a little over 1%.
At this point though the markets will remain choppy and on edge – investors and the markets want clarity and right now it’s cloudy not clear…. Remember – the FED left rates unchanged at their last meeting but sent a mixed message – ‘maybe we’re done or maybe we’re not….we’re not sure yet’…..But that allowed some to ‘assume’ we were done and then place bigger bets on the idea that the FED’s next move was a CUT in rates rather than a hike in rates…
And then we got the latest U of Mich Sentiment Survey numbers….and it was a disaster….Sentiment came in at 60.4 vs. the 63.7 expectation, Current Conditions at 65.7 vs. the expected 70.3 and the 1 yr. inflation expectation ROSE to 4.4% up from last month’s 4.2% and well above the expectation of 4%….and the 5 – 10 yr. inflation expectation jumped to 3.2% up from 3%…… So, the first two data points suggests weakness and supports the idea that the FED can at least hold steady while the second two data points suggests that inflation is sticky and is expected to remain sticky and that consumers are not convinced that JJ has this under control…. suggesting that the FED has at the very least to hold rates higher……. Again – anything but clear.
And so, this very choreographed dance continues…. Now look – stocks sold off hard (~9%) from the August highs to the October lows on fears of ongoing hikes and sticky inflation….….only to reconsider that argument and rally back by 6% off those lows….giving some analysts the idea that that was a meaningful recovery…..that we were in an oversold position caused by the rise in rates .– and I do agree with the rising rate part of that… BUT they will also tell us that a breakout above 4400 seals that deal and provides a clear path for higher prices in the weeks ahead…..and that is where we diverge…I am not convinced just yet….and so I remain cautions….not panicked, not lighting my hair on fire, just cautious….
And then on Friday afternoon (after the bell) – Moody’s came out and cut the ‘outlook’ for US debt from stable to negative…. while leaving the credit rating at the highest investment grade notch at Aaa. So, they had to make a splash and say something to try and remain relevant – but remember – they (and the others) were also the ones that gave stellar credit ratings to all of the crap that caused the GFC in 2007-2009 (massive conflict of interest – but we can discuss that later) …. Billy Foster – Senior Credit Officer at Moody’s had this to say.
“Interest rates have shifted materially and structurally higher. This is the new environment for rates. Our expectation is that these higher rates and deficits around 6% of GDP for the next several years, and possibly higher, means that debt affordability will continue to pressure the US.”
All this as we near another deadline for a gov’t shutdown on Friday, November 17th. Let me remind you – a gov’t shutdown is NOT a gov’t default….there is ZERO risk of default on US debt, ZERO…so don’t get caught up in the histrionics, the US is NOT defaulting….….in the end – markets and investors have paid little attention to the shutdown talk because ongoing continuing resolutions are expected……Just like the one that was passed on September 30th that resulted in the ouster of House Speaker Kevy McCarthy….so it is now up to House Speaker Mikey Johnson to figure it out….and he has a plan – and it’s a compromise that also leaves OUT the ‘hardline cuts to spending & curtailing migration. And that presents a roadblock for a handful of Republicans and so a shutdown becomes more realistic and that would only embolden Moody’s and the others to waste no time in cutting the debt rating – citing political dysfunction causing repercussions for both sides. Remember – the bill that raised the debt limit in August calls for 1% cuts across the board if Congress does NOT pass a budget by January 1st, 2024.
Over the weekend – we had more conversations about the Middle-East and what should happen next….Israel is at war, Hamas needs to be eliminated (even most of the Arab nations agree with this part of the argument) but this will not be easy…Ongoing protests around the world are calling for a cease fire, yet a cease fire will only embolden Iran and every other terrorist organization out there….and so the fighting continues…..
This morning US futures are lower….at 5 am they are down, but well off the overnight lows. The Dow – 6 pts, the S&P down 9, the Nasdaq down 45 pts and the Russell down 5. The talk this morning is all about the Moody’s downgrade…..but there is some underlying strength – the WSJ ran with an article over the weekend that outlines the FOMO ‘fear’…..That Fear of Missing Out Fear – which they say will cause stocks to move higher at least thru year end…..and while I agree that stocks will rally into year-end -I first think – we will pull back one more time before that happens and end the year in here….4400/4450 ish. – which only means stick to your plan. If the market backs off – use it to your advantage, and if it rallies, don’t panic – you’re invested….
Now the threat of a gov’t shutdown will hang over the markets and may create some short-term angst/chaos – but remember – it never creates long term chaos….so don’t go down that rabbit hole.
Jo Jo and Xi Xi are expected to meet on Wednesday this week in San Francisco at the APEC summit (Asia/Pacific Economic Cooperation). Expect all kinds of conversation around their meeting which is NOT expected to produce anything concrete at all. I heard that the Dem’s cleaned up the city, washed the streets, hid the homelessness, and put on a pretty face for this summit…. All in an effort to show how the administration has it all under control as Pacific leaders come to the US.
This morning Gold is up $5 at $1942 – this after trading down to sit right on the trendline…at $1938 and finding support. A hold here should see gold stabilize…a failure could see it test the October low of $1840.
Oil is flat at $77.15 /barrel after testing $75/barrel last week. The recent weakness being credited to ‘waning demand out of the US and China’ rather than any supply disruption out of the middle east. The EIA (Energy Info Admin) sees US crude production rising less than expected, but also see demand decline…Ok, whatever…. I don’t see it, but you need to make up your own mind. OPEC sure to come out and reconsider more production cuts in the new year.
The VIX is holding steady between $14/$16 – without a spike higher, stocks will continue to churn…
Eco data this week is all about inflation…tomorrow brings us the latest CPI report and Wednesday brings us the latest PPI report…. We will also get Retail Sales, Industrial Production, Capacity Util and both the Kansas City and Philly Fed outlooks.
I suspect that the CPI and PPI will reveal ‘sticky’ inflation, I do not think the FED will cut rates in the spring of 2024, which doesn’t mean that they will hike any further either, it just means that they won’t cut. I think the treasury market will do the work for the FED – as it has been doing over the past month.
European markets are up – but they closed lower on Friday – before the US rallied hard, so part of this is a game of catch up. There is not eco data to report – so the action is more churn… Mkts up about 0.5% across the board.
The S&P closed at 4415 – up 67 points on Friday…..leaving it just north of the trendline….setting us up for a move higher or not….The Dow is just 400 pts (1.2%) away from a ‘death cross’ – when the short term trendline slices down and thru the long term trendline which typically suggests weakness ahead….Now this technical signal is more important when it happens to the S&P (broader index) but the fact is you should be aware that we are potentially on that path…..which supports my cautious stance. So, I’m a buyer on weakness and I ride the wave on strength. It’s the same story – don’t chase!
Feel free to reach out – always happy to discuss.
Take good care.
kpolcari@slatestone.com
Sources: Bloomberg, CNBC, Reuters, Wall Street Journal
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Seared Scallops Bathed in Vermouth
If you like scallops – you will like this dish… simple elegance.
You will need – olive oil, garlic, cauliflower heads, scallops, butter, shallots, dry vermouth, s&p, and fresh basil.
Start by heating up some olive oil in a sauté pan… add some sliced garlic – not too much – now add the cauliflower – season with s&p and cook until slightly browned- maybe 5 mins or so… remove and set aside.
Add a bit more olive oil to sauté pan – heat… when nice and hot…add the scallops – season with s&p – careful not to crowd – sear for about 2 or 3 mins… flip over and cook for about 2 min more. Remove and set aside.
Now, add butter and the sliced shallots – cook until soft and the butter begins to brown… not long… Add about 1/2 c of dry vermouth and scrap the bottom of the pan… add back the cauliflower – reduce heat to med and cover and cook for about 5 mins or until the cauliflower is tender… add the scallops to reheat only… no more than 1 or 2 mins… Serve immediately on a warmed plate – garnished with fresh basil. Enjoy a chilled dry white wine – nothing fruity…
Buon Appetito
