Things you need to know.
– PCE Deflator due out at 8:30
– Eurozone inflation in retreat, Eurozone economies on the brink of recession?
– Bets are now that the ECB is CUTTING rates – Lagarde says – not happening.
– Is the US bond market doing the work for the FED? Feels like it.
– CRM and SNOW Crush it! It’s all about AI.
– Try the Pasta alla Genovese.
Stocks rallied hard yesterday morning in the pre-mkt and then during the first hour of trading only to lose steam, bounce along the unchanged line to end the day flat to lower for the indexes…The Dow rose 13 pts, the S&P fell by 4 pts, the Nasdaq lost 24 pts, the Russell gained 11pts while the Transports ended flat.
The soft-landing narrative continues to gain steam…. Stocks appear to want to kiss the 2023 4608 high (something I told you 2 weeks ago), bonds rally, yields decline, and the trader types await further signs of not IF the pivot will happen, but WHEN.
Eco data today includes more inflation data…..the gov’t is due to report the latest PCE Deflator…which is expected to continue its decline…coming in at +0.1% m/m and 3% y/y – the Core PCE Deflator coming in at +0.2% m/m and 3.2% y/y – ALL of those reads are lower thus the excitement.
Now this follows yesterday’s economic data that revealed a stronger than expected GDP revision – coming in at 5.2% up from 4.9% last month…and better than the 5% expected revision – the surprise – MORE than expected gov’t spending. Personal Consumption though, fell to 3.63% down from 4% and that suggests that the consumer may be tiring….(or maybe not) – Remember – the PCE is a measure of consumer spending on goods and services among households in the US – A declining number suggests slowing by the consumer….all of this pointing to that ‘soft landing narrative’.
OK- so let’s discuss this…. Fed Fund rates are 5.25% – 5.5% – Not high by historical standards, but high by recent standards (think 2009-2022). The FED has raised rates 11 times to get us here over some 18 months…. NOT swift by any measure – Although some would argue that point. The 10 yr. treasury teased just above 5% only 2 months ago and that allowed so many – including some members of the FED to say – ‘the FED can pause BECAUSE the bond mkt is doing the work for them’. OK – that’s legit. So, then I ask – when the bond market reverses course and falls by 14% taking the 10 yr. down to 4.29% – how come the same argument doesn’t apply?
Isn’t a weakening bond market ‘doing the work for the FED’? You can’t have it both ways…. If it works on the way up – then it works on the way down. And to prove this point – 30 yr. mortgage rates (priced off the 10 yr.) surged up and thru 8% when the 10 yr. kissed 5%….30 yr. rates today are 7.6% (10 yr. rates are 4.29%) and expected to go lower as the market adjusts to lower 10 yr. yields. So, the bond market IS doing the work for the FED. So then WHY then is the perpetual stamping of the feet for the FED to DO SOMETHING? It’s NOT like the economy is circling the drain (when the FED should do something) ……Why does the FED have to do anything right now? The economy is strong, unemployment remains at historical lows, the consumer is spending, inflation is retreating, there is NO recession (or at least that’s what they tell us) – so WHAT am I missing? I’m not. 5% rates are fair and normal in a functioning economy. Lower rates are stimulative – are you telling me we need to ‘stimulate the economy’? I didn’t think so, so stop the whining.
The market CAN and does function in a normal rate environment – and unless we get back to some sense of real normalcy – they will keep stamping their feet for the FED to ‘do something.’ It’s ridiculous….
OK – let’s move on to the latest stars of the show…. Salesforce (CRM) and Snowflake (SNOW). After the bell last night – they reported, and boy did they report…both names blowing up any of the analysts estimates…. CRM (Application Software Company) reports an 11% increase in 3 qtr. revenues, EPS of $2.11 vs. the $2.06 estimate. Free Cash flow up a stunning 1,088%, Operating margins 17.2%…and BOOM – they took that stock up 9.3% in the afterhours session – this on top of the +2.5% during the day…. taking that stock up 81% ytd….
SNOW (Infrastructure Software company) was up 2.2% during the day and then exploded higher by another 8.2% after the bell – when they reported EPS of 25 cts vs. the 11 ct estimate. Revenues rose to $734 million vs. $557 million last year. 4th qtr. expectations are now between $716 – $721 million – up 30% – vs. earlier estimates of $696 million. The stock is now +30% ytd.
Both companies pointing to the role that AI is playing and will continue to play in their businesses….and that is all anyone needed to hear…. As the AI story continues to drive the action….
Overnight – the news gets even better…. Euro zone inflation is in decline! It only rose by 2.4% – below the estimates and the French economy. It’s in contraction mode….and so with inflation in retreat across the EZ economies and with those same economies on the brink of recession (are they?) – traders are now betting on (in fact pricing in) an ECB rate cut in April. And that is in direct contrast to what Christine Lagarde and other ECB members have been saying. At 7 am – all European markets are higher by about 0.4%.
US futures this morning is surging higher on the back of all this good news…. Dow futures + 163, S&P’s up 10, the Nasdaq is up 40 and the Russell is ahead by 3. Fed chair JJ Powell speaks on Friday…. Everyone will be listening to what he says and whether or not he flips sides – going from Hawk to Dove and if he does – watch out…it will only embolden the algo’s and the traders that are betting on that rate cut. In any event – it is what it is – but I still think we are just a bit ahead of ourselves and that while the algo’s will push the S&P to kiss 4608 – I suspect there are plenty of sellers waiting patiently for that to happen.
OIL! Have you seen this? It has risen for 3 days in a row….and is now up 9.5% off the November 16th low of $73.60. This after OPEC+ rescheduled their meeting to today…. Overnight on Twitter – The FT -Financial Times- (@FTMarkets) reports that ‘Saudi wins provisional backing for OPEC+ oil production cuts. This should NOT be a surprise to anyone…What did you really think was going to happen? The Saudi’s are pressuring some of the other members to ‘join it in restraining supplies in order to stave off a renewed oil surplus next year.’ Rumor is that they are looking to cut an add’l 1 million barrels a day…on top of the current cuts in place. This morning – oil is trading up 64 cts at $78.49…. only $1.50 away from that magic $80 number that the Saudi’s yearn for. Hello? What have I been saying?
Gold trades as high as $2072 yesterday on the ongoing push higher on the soft landing, FED imminent rate cut, soft dollar story…. Gold has rocketed higher in the past month and this morning it is taking a breather – down $9 at $2056.
And all this as the VIX remains near all-time lows….again – I think the VIXY is a cheap and simple insurance policy to help hedge your long stocks positions in the event we hit a tree- which we will hit….because if the FED in fact cuts rates – it will be because of a deteriorating economic environment not a healthy robust one. Which again does not mean ‘sell everything’ it just means know what you own, why you own it.
The next FED meeting is on December 12th and 13th…..CPI and PPI are also due out on the 12th and 13th….so it will be interesting…..I do not expect the FED to do anything else this year…I think they made it quite clear that they are in official pause mode….and unless we get hit by something out of left field – I do not think they change the narrative….
The S&P closed at 4550 – down 4 pts…after trading up to 4574. This morning – Futures are suggesting that the S&P will open up 10 pts….and if the data out at 8:30 reinforces the soft landing narrative – we can expect stocks to push higher….I said last week that it feels like the algo’s want to re-test the 2023 high of 4608 – just because they can – but if we do, I suspect that it will find plenty of resistance….… The market is priced for perfection – We are priced for a soft landing, we are priced for double digit earnings growth in 2024 earnings, we are priced FED to cut rates sooner rather than later, we are priced for bonds to rally. What could go wrong?
If you are invested – you’re good, if you have more money to put to work, be patient – don’t chase anything – especially the names that are up high double and triple digits (you already own them – you are participating) …. and if you are just starting out – go slow….…create your thesis, begin by feathering it in, time is on your side…Remember – there is always a starting point…. Call me to discuss.
Take good care.
kpolcari@slatestone.com
Sources: Bloomberg, CNBC, Reuters, Wall Street Journal
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Pasta all Genovese
This is a great, simple dish….and so good.
You need: 1 ½ lbs. of boneless beef chuck – cut into pieces. s&p, olive oil, diced celery, and carrots, 3 large Red Onions, chopped, 1 tblsp tomato paste, 1 c white wine, 1 bay leaf, 1 lb of Rigatoni pasta, and of course the fresh grated cheese – for this one though, it’s Pecorino Romano.
Start by seasoning the beef and then browning it in a deep pot. Once it’s all nice and crusty, remove and set aside. Now sauté the carrots and celery for 10 mins…. scraping the bottom of the pot. Season with s&p.
Next add the tomato paste and cup of wine – allow it to come to a boil and then reduce to low. Add back the beef. Now add the red onions – laying them right on top of the whole shebang. Add the bay leaf. Cover and let cook for 1 hr….. – the onions will melt. Be sure to take a look at it and stir so that you make sure nothing is burning. Now cook for another 30 mins or so…. The meat should be tender and soft and easily break apart with the wooden spoon and a fork. Adjust seasoning if necessary.
Discard the bay leaf.
Next bring a pot of salted water to a rolling boil and cook the rigatoni.
Now in a separate sauté pan – add 2 ladles of the sauce. Now add some of the pasta and ½ ladle of pasta water. Toss with grated cheese and serve. Repeat until you have prepared all of the pasta. MMMMM.
Buon Appetito
