Things you need to know.

–         It’s T-Time…. CPI due out at 8:30.

–         Stocks stumbled into end of day and are weak this morning.

–         Bonds did nothing, but yields remain well above 4%

–         Oil is UP – Demand projections remain strong.

–         Gold remains trapped in the trading range.

–         Carley is a seller and I’m a buyer.

–         Try the Pasta Vesuvio

OK – I’m about ready to say that this is getting ridiculous….Stocks keep rising, defying valuation and logic……At one point yesterday – 1:30 pm – all of the indexes were up considerably (again)….as if there is absolutely nothing to be concerned about, pricing everything to perfection….,….and then the S&P hit 5,050 and it was like the broader market hit a wall…All of the euphoria just dried up…and the S&P, Nasdaq and Transports gave back all of the gains ending the day in negative territory…..while the Dow and the Russell and equal weight S&P ended the day higher……and that does make a little sense – but it’s just a little…

You see, the Dow, the Russell and the Equal Weight S&P have been lagging all year….so, if there is some re-allocation taking place that’s it….money moving away from the outperformers (S&P and Nasdaq) into the laggards….which is positive – vs. money coming out of every index, with sellers tripping over each other trying to ‘get out’  and go into cash as the indexes sink….….. which would be viewed a bit more negatively…. but that is NOT what happened.

At the end of the day the Dow gained 125 pts or 0.3%, the S&P gave up 5 pts or 0.1%, the Nasdaq gave back 48 pts or 0.3%, the Russell added 36 pts or 1.75% (way outperformed), the Transports lost 5 pts or 0.03% and the Equal Weight S&P gained 10 pts or 0.15%. 

“SELL Mortimer SELL!!!”

Yesterday, my friend Carly Garner (decarleytrading.com) – posted this Tweet.

“I might regret the decision, but I’m shifting my long-term investment portfolio’s mostly away from equities. This is NOT investment advice…but when things feel too good to be true, they often are….” 

Note, what she said there…. I might regret the decision – which suggests she is not completely convinced it was the right decision – yet Carley is one of the street’s most dynamic traders – she is a big options trader and can be seen on The Cow Guy Close (rfd.tv) with my friend Scott Shellady and on CNBC with Cramer…. etc.…  She has a definite point of view and is not afraid to speak her mind – she clearly feels like it is ‘overdone’….  and so, you have to respect that… As she said – She may regret the decision…….The answer to that question will become clearer maybe today or maybe in the weeks ahead…..Investors have different points of view and that is what makes this a dynamic and exciting market.

Remember – today we are getting the latest CPI report….and the media is making it out to be the ‘event of the decade’…….You’d think that everything is riding on this one data point…..Yes, it’s an important data point, but it is not THE data point….It is expected to cool, – coming it at sub 3% for the first time in 2 yrs.….but that may not be enough to justify this ‘rapid shift’ in policy.  Remember – services inflation remains elevated, and we are a 75% services economy…. Employment, manufacturing and economic growth have surprised to the upside – even as the FED raised rates at ‘historic speed’ (that’s sarcastic – I do not think we did anything at historic speed…. but I’m sure someone will debate me).

But the trader types and the algos’ have so much riding on this data point – as if this ONE data point will decide future monetary policy…Let’s be clear – it will not….– but traders either resurrect the March cut narrative or they won’t ….…. the algo’s and the trader types have taken the S&P up 23% in 3 months while they have taken the Nasdaq up 29% in the same time frame – all in anticipation of multiple rate cuts in 2024 that should begin anytime now… …something I have been warning about for weeks. It is those dramatic moves that are at risk if the FED does not do what the algo’s and traders want them to do… and we all know that the risk is that a move lower would happen swiftly….

Now, I too, feel like it’s a bit ‘overdone’ but unlike Carley I am not shifting my portfolio away from equities…but I am also NOT chasing anything tech….  I own it, I have plenty of exposure to all parts of the space, but any new money is getting directed to sectors that are typically boring, non-sexy, less volatile… So think gov’t money mkt accts (for cash – that is earning 5%), Consumer Staples – names like PG, WMT, CL, COST & KMB… or think Utilities – like NEE, or ED or Industrials – names like HON, FAST, DOV, GWW….I mean we can go down the list and include Financials and Healthcare too.  The point is – I am not chasing stretched valuations in Tech.

And I say this because everything we see points to a robust economy, cooling inflation, strong job growth, rising wages, historically low unemployment, rising PMI’s, New Home Sales are up, Building Permits are up, A GDP report that surprised even the Ivy League economists…So, for me, (and the FED) it does not appear as if we are ‘circling the drain’….. it may cause me to be more cautious for sure, but that is different than jumping ship.  In this case – I’m a buyer and Carley is a seller.

And Jo Jo reminds us – the stock market is making new highs on an almost daily basis so it must mean ‘life is good’…… which is really interesting – because a January 24^th, 2022, CNN article specifically stated that (and I quote)

“Unlike his predecessor, President Biden does NOT look at the stock market as a means by which to judge the economy.” 

Hmmm…funny how that works…isn’t it….

In the end – it remains a ‘tug of war’…. valuations vs. monetary policy, stocks prices vs. economic data, earnings vs. guidance. But it is also a ‘tug of war’ between how stretched valuations are vs. how much more investors are willing to pay for stocks. Almost everyone agrees that we are due for a pullback – but that too is a contra indicator – everyone expecting a pullback that never comes and then they all throw in the towel and go all in….….and then BAM – the bottom falls out.  Which is exactly why – you create a plan and then execute. Remember it is not ‘timing the market, it is time IN the market’.

Bonds prices rose…the TLT & the TLH both rose by 0.1% but that did very little for yields…3- & 6-month bills are still yielding 5.4% and 5.3%, the 2 yr. is at 4.47%, the 10 yr. is at 4.17%. 

Oil is trading up 1.2% at $77. 82! Why all the excitement?  Well, all that talk about demand destruction and global weakness was pushed to the back burner after OPEC Secretary-General Haitham Al Ghais revealed that.

“We are seeing positive signs of good revisions to some parts of the global economy, most notably in the US.  I think talking about peak oil demand is probably something way far out.”

On top of this – forecasters predict that oil demand will remain strong…. even as we switch to renewable energy sources and EV’s.  The IEA predicts that we will hit peak demand before 2030 while OPEC thinks it won’t happen until 2050.

Notice that there was no mention today of geo-politics – think RED Sea or Israel/Gaza in terms of defining oil prices…It is all about demand….and that takes us back to Econ 101.

Gold is up $7 at $2,040….a look at the chart – shows you that we have been bouncing between $2,030/$2,050 for weeks now…..as gold traders try to handicap the FED’s next move….a cut in rates will weaken the dollar and that will cause gold to rise, a hold in rates (or a rise in rates) will strengthen the dollar and that will cause gold to decline……and so, it remains trapped in that trading range – until we get clarity on the timing of a shift in policy.  

The dollar index – DXY is down 3 cts at $104.135…..it too remains closer to the most recent high – currently hugging the trendline at 104.29…..Dollar traders too are patiently waiting for the CPI report in order to make a decision on the direction of rates….the dollar remains in the $103.64/$104.29 range.

US futures are trying desperately to tick higher but are unsuccessful.  The Dow – 60 pts, the S&P -20 pts, the Nasdaq is down 113 and the Russell is down 8.   And this should not surprise you at all…. I am hoping that this is the beginning of a pull back – maybe a 5 – 8%’er…. That will be enough to flush out some of the weak hands and will offer an opportunity for some ‘stretched stocks’ to reprice.

European markets are all a bit lower……European tech names are under pressure…. down 2.8%, semi-conductor names taking it the hardest…. ASML (a favorite) is down 4.2%……see what I mean?  The down drafts happen much faster…. Be patient – let them shake a branch a bit…. BOE Governor Bailey to testify in form of the House of Lords tomorrow.  ECB President Lagarde and ECB Chief Economist Phil Lane will speak on Thursday and ECB board member Izzy Schnabel will speak on Friday.

The S&P closed at 5021 – down 5 pts…… Ok – in just 2 hrs. we will get the latest read…. what will it really say?  I don’t think it says much, unless of course it is vastly different that the expectation…. what will make the difference is what is the commentary after? Who is the first FED head to speak?  What will he/she say?  Will they suggest that this one data point has changed the FED think?  I don’t think so…. so slow down boys….

Now Chicago Fed President Goolsbee and Fed Vice Chair of Supervision – Mikey Barr will speak tomorrow. Atlanta President Bostic and Fed Governor Chrissy Waller to speak on Thursday. And San Fran Fed President Mary Daly takes the mic on Friday.

Do you see what’s happening…. they are bringing out everyone to address expectations both in Europe and in the US….

Remember – I am in the camp that they do nothing….5.25% rates are not ‘historically high’, and the economy is apparently working just fine with rates at these levels…. but here is the rub….cutting rates risks igniting inflation again.   Because that is what will happen…lower rates will stimulate demand and rising demand will stimulate inflation….and boom…. here we go again.

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.

Pasta Vesuvio… (a Neapolitan favorite – think Volcano)

This is an unbelievable dish…. You gotta try it.

You need 3 yellow potatoes, onions, sweet sausage, s&p, half and half, olive oil, Thyme, fresh basil, fresh mozz and 1 lb. of Cavatelli.

Bring a pot of salted water to a rolling boil on the back burner.

Peel the potatoes and cut them into bite size pieces. 

Then chop the yellow onion and remove the sausage meat from the casing.  Set aside.

Now in a large sauté pan – one that will accommodate everything…Turn the heat to medium high – add in the olive oil – toss in onion and sauté until soft.  Now add in the bite size pieces of potato and cook until they get soft.  Maybe 15 or 20 mins. Season with s&p and some dried thyme. 

Now place the cooked potatoes, and onions into your food processor, add in ¾ c of half & half (or whole milk), 4 or 5 basil leaves and puree.  Set aside.  Now in the same sauté pan – add in the sweet sausage meat and brown. Season with s&p.

Add the pasta to the water and cook until aldente….  When done – add the pasta directly to the sauté pan with the sausage…mix well. 

Now add the ‘crema di patate’ (the pureed potatoes).  Mix well.  Add in diced mozzarella – some people prefer ‘smoked mozz’ – I do not, I don’t like smoked mozz. 

If you want – you can top, this with toasted breadcrumbs – always have fresh grated parmegiana on your table for your guests.

Buon Appetito.