Things you need to know.
– NFP surprises everyone (except JJ).
– META takes the Win! Advancing 20%!
– Note the weighting of some of the biggest ETF’s.
– US strikes back, Iran calls it a ‘strategic mistake’.
– This is the last big week of earnings…
– Try the Spaghetti Carbonara
So, in January 1984 – the Eurhythmics sang “Here Comes the Rain Again, Falling on my head like a memory, Falling on my head like a new emotion……. Is it raining with you?
And the answer to that question is NO! No rain here, no rain insight…
Stocks surged again on Friday – The Dow added 135 pts or 0.4%, the S&P’s up 53 pts or 1.1%, the Nasdaq leapt higher – jumping 268 pts or 1.7%, the Russell (smids) though did not participate – they lost 12 pts or 0.6%, the Transports added 155 pts or 1% while the Equal Weight S&P lost 5 pts or 0.1%….
Again- the message here is that stocks like META and the Magnificent 7 continue to warp the S&P…. remember – it is a market capitalization index….so as the market capitalization of those 7 names continues to grow exponentially – it has that same exponential effect on the index. All you have to do is look at 2023 – The SPX was up 25% in 2023 – much of it driven by the magnificent 7 as they dominated the index, while the SPW was only up by 12.5% – when you took out that ‘effect’.
The S&P equal weight (SPW) – is more suggestive of the undertone of the broader market. I’m just sayin’ – “Don’t go chasing waterfalls…..a metaphorical warning against pursuing self-destructive behavior” Remember – ‘waterfalls are mesmerizing – but their currents run strong and lead to violent endings’ as the water smashes on the rocks below….Remind yourself of the dot com BUBBLE and BURST….that would be 1998/2001 for those of you too young to remember. The Nasdaq rallied 278% from Oct 1998 – March 2000 and then fell by 76% from March 2000 – September 2001. It took 15 yrs. to repair the damage…. but – that’s another story.
Apple’s ‘disappointment’ doing little to stop the excitement…..as META (+20% or $80.21/sh) carried the day…..News that they tripled their profits – thanks to digital ads, announced a $50 billion stock repurchase plan and are instituting a quarterly dividend of 50 cts ($2 annually) all played a part in lighting that stock on fire and taking the broader market with it….…
The dividend announcement by META now OPENS the door to a whole new world of investors who previously could NOT own META – because they did NOT pay a dividend…Strategas ETF Strategist Todd Sohn tells us that there are 146 ‘divy oriented ETF’s’ and guess what – they can ALL now own META….so just think of the ‘demand’ that creates and that was obvious in Friday’s action….And then what about all those investors that are not in those ETF’s but are DIY (Do it Yourself) ‘divy’ investors! The stock traded 85 million shares on Friday – this vs. the usual daily average of ~ 17 million shares…that 5 x’s the daily average volume.
Sector performance – note the names.
The XLC – S&P Communications etf – surging by 4.02% on Friday…META & GOOG are 40% of that etf….Consumer Discretionary – XLY +1.8%, AMZN & TSLA make up 40% of that etf, Tech – XLK +1%, APPL, MSFT, NVDA and AVGO holding the top four spots at 53% of the etf, Industrials – XLI +0.7%, Financials – XLF +0.4% and Energy – XLE + 0.15%, Utilities – XLU – 1.8%, Real Estate – XLRE – 1.3% (think higher rates for both), Basic Materials – XLB -0.6%, Consumer Staples – XLP – 0.3% and Healthcare – XLV – 0.15%
And then there was the eco data……
Friday’s NFP report confirmed that the economy remains ‘robust’ maybe even more than JJ had hoped…. The report blew the roof off the house – Unemployment remains steady at 3.7% and new jobs created came in at +353k, that’s 160k MORE jobs than estimated…. was completely unexpected and caught many street analysts by surprise…. They also went back and RAISED the NFP reports for both November 2023 and December 2023 – again not what JJ wants to see.
Wages surged by 0.6% m/m and +4.5% y/y…- a number that ‘worsens the inflation outlook – again a larger increase than expected – and not what JJ wants to see…..The administration loved it – because wage growth at that rate is now beating inflation – so as far as Jo Jo is concerned – it’s all good – he can take a ‘win’….…..But the reality is – as my good friend Economist John Lonski tells us – ‘Unless we see average wage growth slow to 3% – there is absolutely no way core inflation sinks to 2% and the FED will not cut rates with wage growth topping 4%…’
Now there was all kinds of commentary about this number…. Was it real or was it more smoke and mirrors? Is it the Biden administration manipulating the numbers to support the ‘Bidenonmics’ narrative to try and convince Americans that they are better off – I mean it is a presidential election year. So, here is the issue with that – a strong number may help Jo Jo, but it does not help JJ deliver rate cuts and it throws the March (and May) rate cut story into question.
Now- if that number is true then it does suggest that we are in a strong economy which has to mean that it’s all good and if it’s all good – why would the FED have to stimulate the economy…. So – you can kiss those rate cuts goodbye…. But does kissing them goodbye – actually mean that stocks are a Good BUY? Well, apparently yes it does – at least on Friday!
Now remember – the FED has been pushing back on the rate cut narrative – although even this morning Fed fund futures are still pricing in a 100% chance of a May cut and no matter what JJ says – the market still expects 5 rate cuts this year…(again sounds completely illogical to me) – JJ has always intimated that the committee needs more data and the data last week only further supports the ‘wait and see’ approach. Now for stocks all that means is the data confirms the stronger earnings forecasts – and that justifies the move up…. Remember – 2024 S&P earnings are projected to grow by 10% and 2025 earnings are projected to grow by 11% – now in order for this to happen – we need to see the data remain ‘robust’ and if the data remains robust – how can JJ justify a cut in rates? I mean – someone tell me how???
As of Friday- the S&P is trading at 22.5 x’s forward earnings (very rich)….and much of that based on the bet that the FED was going to ease, but also based on the idea that sentiment is improving and AI is changing the world…….10 yr. bond yields did drop to a low of 3.88% last week – on the idea of a rate cut, only to end the week yielding 4.01% when it became clear that that is not happening (yet). So, if yields continue to rise as the FED holds the line – that will prove to be a short-term challenge for valuations (and stock prices) …Currently the 2 yr. is yielding 4.36%, the 10 yr. at 4.019% and the 30 yr. at 4.22%. At the moment – the 10 yr. is 1 full percentage point below where it was in October – when the market came under pressure…if the 10 yr. yield approaches 5% again – then expect stocks to retreat…And then –
The dollar index shot higher on the back of the ‘higher for longer narrative’….…. rising 0.9% to end the day at $103.96 and that put pressure on commodities….…. the dollar remains in the $103.55/$104.3 trading range.
Oil fell by 2% on Friday to end the day at $72.28 – the argument here is that the ‘NO rate cut narrative’ will dampen demand for energy. I do not buy that argument…. Did your demand for energy change when interest rates went from 0% to 5%? Will demand change if the economy is as strong as they tell us it is? No, it did not and will not – demand is growing at record rates – non-OPEC producers flooding the oil markets and that is not because there is no demand – quite the opposite – they are filling a void left by the OPEC+ cuts…..Oil demand is expected to grow – OPEC expects demand to grow by 2.25 million bpd in 2024 and another 1.8 million bpd in 2025….The EIA (Energy Information Administration) projects that demand for oil and natural gas will increase thru 2050.
Oil has ‘low elasticity’ of demand – and all that means is that demand for oil does NOT change significantly when the price changes and nor does it change significantly when interest rates rise or fall (it’s inelastic)– Now it does change (like so many things do) when the economy circles the drain – but according to Jo Jo – we are NOT circling the drain….…. Thus, demand for energy should not go down.
But – it is what it is…….and we are now well below trendline support at $73.69 leaving us about to test the December and January lows of $70 ish…. You know the Kingdom doesn’t like it when oil prices plunge….so expect to hear 1 of 3 things… 1. They are considering more production cuts and/or 2 – China’s economy is suddenly turning the corner and demand is expected to surge or 3 – more instability in the mid-east caused by Iran. Any one of those will send oil higher…. Until that happens – we are now in the $70/$75 trading range.
Gold lost $14 to end the day at $2053/oz….and is now most likely going to test $2,030/oz. This morning it is down another $10 at $2,043/oz. Now over the weekend – we heard from Iran – who suggested that the Biden response over the weekend (that began on Friday) to the numerous attacks on America (over the last month) carried out by the Hotties (Iran) was a ‘strategic mistake’ – suggesting even more instability in the region – National Security Advisor Jakey Sullivan telling us on Meet the Press Sunday morning that that was just the beginning….…and if that happens – then there will be rush into gold as the ultimate safe haven play (and a rush into oil as a supply disruption play). If that does not happen – then I suspect gold will just churn a bit lower to test support at that trendline.
This morning – US futures are ticking lower! Dow futures – 102, S&P’s -16, Nasdaq -45, and the Russell is -10. The VIX feels like it’s ready to explode – it just needs 1 negative headline… Let’s see if we get one today….
Eco data today includes – S&P US Services PMI – expectation of 52.9 and ISM Services PMI – expected to be 52…. both in expansionary territory and both key data points – remember – The US economy is a 75% services economy.
We are in the final week of earnings….and it is going to be another big week…. we will here from LLY, PLTR, DD, CEIX, HTZ, SPR, AMGN, GILD, F, HLT, CVS, UBER, MCK, WYNN, PYPL, DIS and so many more….
The S&P closed at 4958 up 53 pts….….….as the momentum carries us higher but it is beginning to feel a bit ‘toppy’ as investors reconsider their appetite under the circumstances. Yes, tech did exactly as so many expected, yes, AI is changing the world, yes 78% of reports have beaten the estimates and yes, the economic data remains robust, but the market has priced that all in. Now the market has to price in the fact that rates are not getting cut as expected and that 5 rate cuts is pretty extensive – so do not be surprised to see us do some ‘backing and filling’, but it is that backing and filling that gives the long term investor the opportunity to ‘add’ to their positions.
Take good care.
kpolcari@slatestone.com
Sources: Bloomberg, CNBC, Reuters, Wall Street Journal
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Pasta Carbonara
It was raining here yesterday – so I made this. Posted my pics on my Twitter – @kennypolcari
For this you need – Thick cut bacon or Pancetta – diced, 3 egg yolks and 1 egg, Fresh grated Pecorino Romano cheese, pepper, ½ lb. of spaghetti.
Bring a pot of salted water to a rolling boil.
Begin by sauteing the bacon (or pancetta) whichever you are using. While that is happening – grab a bowl – crack 3 eggs and take just the yolk and then add one whole egg – scramble. Add in 2 or 3 handfuls of the cheese and some pepper to taste– mix well. Set aside.
When the bacon (pancetta) is nice and crispy – remove and place on a paper towel – SAVING the fat rendered from the meat.
Add the pasta to the boiling water and cook for 8 mins….
Now – slowly add some of the fat (after it has cooled) to the egg and cheese mixture – making sure to stir as you add. Combine it well. Leaving some fat in the sauté pan.
When the pasta is done – using tongs – add the pasta to the sauté pan – keeping the heat on med….add in ½ ladle of the pasta water (tears of the Gods)…and mix…..now turn the heat off and add in the egg/cheese mixture and mix well….you may need to add a bit more of the pasta water to help it emulsify.
Serve in warmed bowls adding the sautéed bacon (pancetta) on top. Yum!
Buon Appetito
