Things you need to know.

–         Oh boy, do I have a headache!  CPI is HOT and Stocks got ‘slapped’

–         Bond prices plunge, bond yields surge

–         The ‘contra’ trades were the winners – the VIXY up 13% mid-day

–         So?  Was that it? All over?  Not so fast……

–         Now the FED Heads will emerge from under the rock – what will they say?

–         PPI is out on Friday.

–         Try the Chicken Cutlets Milanese

–

**Happy Valentine’s Day – but you can’t buy roses – because of what ‘they do’ to the environment….Well, it’s not the rose itself – it’s the need to transport and refrigerate them – large demand causes more shipping and that increases emissions of ‘greenhouse gases’.  And then when you get them here – they need to be kept cold and alive with a mix of humidity, oxygen, and CO2.  The refrigerated trucks they need burn MORE fuel (25% more) than non-refrigerated trucks and you know what that means…..….So, the left is screaming about the roses….  Makes sense, right?

BOOM!  Can you say “HOT, HOT, HOT…”

(Buster Poindexter Hot, Hot, Hot – June 1987)

CPI TOPS ESTIMATES DRIVING A SPIKE THRU  THE IDEA OF ‘MULTIPLE RATE CUTS’

(I think it kills the idea of any rate cuts….but that’s me!)

CPI rose more than expected for both the m/m and y/y on both measures!  And services inflation?  Oh yeah, that surged by the most in nearly 2 years….(and remember – we are a 75% SERVICES economy – so that is not good).  Just to be clear – Economists have long contended that the road was going to be long and full of pot holes – but yesterday’s report suggests ‘sink holes’!

And all that HEAT sent wave after wave of SELL orders to the NYSE, Nasdaq and anywhere else that would accept them…. – sending stocks reeling … Some in the media – acting like this was a surprise.  10 yr. Bond yields jumped by 10 bps….to 4.277% BEFORE the market opened.  The VIX – Fear Index – surged by 28%,  the ‘get me short’ ETF’s (DOG, SH, PSQ) rallied by more than 2%. The VIXY ETF jumped by 13% while the Direxion S&P 3 x’s levered SHORT ETF rose 6.2%…..and stocks got their arse’s kicked….and so I ask –

Were you surprised?  Were you still in the 6 rate cut camp?  Are you still in the ‘any’ rate cut camp?  Futures markets are now pricing in a July rate cut…..I say, not happening….What is it about yesterday’s CPI that suggests rate cuts?  In fact, the market got punched in the face because it is assuming NO rate cuts.

I mean – I’m thinking that the CPI is stuck right here in the 3% range…. And will be stuck for longer than you’d like…..and that means – at the very least – rates will stay right here….so get used to it….and by the way – right here hasn’t been so bad for corporate earnings and forward guidance…I mean – 83% of the companies reported have beaten the estimates and offered upbeat guidance causing stocks to kiss all time highs….and just to be clear –

APPLE did not earn $119 billion in 3 months because the FED was supposed to cut rates, AMAZON didn’t earn $170 billion in 3 months because the FED was supposed to cut rates……..And all the others did not report their results because they assumed that the FED was cutting rates – They achieved those results because the environment was fertile, demand for products and services was (is) strong.  They cleaned house (think threw people out), and that helped to improve margins… Not one company reported results because they thought the FED was cutting rates……it was investors, traders and algo’s that PAID the prices for these stocks based on the idea that the FED was cutting rates. And ‘their’ expectations for the quantity of cuts is what spun out of control…..Not sure why – JJ has been very clear….But we’ve discussed this ad nauseum.

As morning turned to afternoon – losses accelerated…..At 3 pm the Dow was down 742 pts or 2%, the S&P gave up 100 pts or 2%, the Nasdaq gave back 380 pts or 2.4%, the Russell lost 90 pts or 4.3% , the Transports lost 530 pts or 3.2% – but by 4 pm – the losses had improved (think rally)….the Dow down only 525 pts or 1.3%, the S&P down 80 pts or 1.6%, the Nasdaq lost 285 pts or 1.8%, the Russell down 88 pts or 4.3% and the Transports lost 425 pts or 2.6%.

Real Estate – losing 2%, Tech – 2.3%, Utilities – 1.8%, Consumer Discretionary – 2.2%, Financials, Basic Materials and  Communications – 1.6%, Consumer Staples and Energy – 1.1%, Industrials – 1.1%, Healthcare – 0.9%.

Homebuilders – XHB – 3.25%, Regional Banks – KRE – 4.25%, Semi’s – SOXX -2.%,  Aerospace & Defense -0.8%, Airlines -JETS 1%, XOP – 1.6%, Disruptive Tech – ARKK – 5.5%, Expanded Tech – IGM – 2%, Robotics – BOTZ 2.5%, Metals and Miners – XME – 3.4%, Mid-Cap 400 – IJJ – 3%, Small Cap Growth – IJT – 3.3%, the Value Trade – SPYV and the Growth trade – SPYG both – 1.5%…

On the contra side – we found strength in the ‘contra trades’.  DOG +1.5%, SH + 1.2%, PSQ +1.5%, SPXS + 4.25% & the VIXY had gained 13% but ended the day up only 7.5% – still a winner.

Now, the problem will be (note the future tense) what happens when Janet brings $2.3 trillion worth of debt financing to public markets and that’s just 2024? Let’s not even think about 2025 and 2026 needs yet.  $2.3 trillion worth of bills, notes and bonds….I just hope that there is enough demand to support all of this…and at what price does it all clear?  Remember – buyers in bonds (like buyers in most everything) will bid lower when the supply is higher…..Again – it’s classic Econ 101 – Chapter 2 – Supply and Demand.  And when bonds trade at lower prices – it sends yields higher…..and higher yields will cause investors to re-think where to allocate dollars….and that could take a toll on equities….Capisce?  Just food for thought.

As you would expect bond prices got slammed – the TLT & the TLH both lost 1.6% and that sent yields soaring….…the 2 yr. jumped by 18 bps to end the day at 4.66%, the 10 yr. up 14 bps at 4.32% by end of day.

And Oil shot higher as well…..up 1.3% or $1/barrel to $77.95 – after teasing as high as $78.47.  Yesterday it was both the upbeat OPEC/Saudi prediction of increasing demand but it was also renewed tensions across the middle east…..The Hootie’s fired two missiles at an Iran bound cargo ship – just reminding us that the conflict is not over….….. as they continue to target ships with ties to the US, Britain, and Israel…

Oil is now above all 3 trendlines and appears to want to test $80 any day now. At 5:30 am – oil is trading at $78.

Gold which had been trapped in the $2,030/$2,050 range is no longer trapped.  Yesterday I told you that traders would try to handicap the FED’s next move after they learned what the CPI report said….….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 did you see what happened???   Gold got smashed (think NO rate cuts)…it lost $30…to test a low of $2002….it has now broken all 3 trendlines and will most likely test $1975 – a level last seen in November. This morning it is holding $2000.

And as gold got hit, the dollar rallied… – rising 74 cts to end the day at $104.91….blowing right up and thru resistance at $104.29……So, resistance is now support with $106 in the bullseye.

The only eco data point today is Mortgage App and revisions to the PPI – just like they did to the CPI last week. Tomorrow – brings us Empire Manf, Retail Sales expected to be -0.2% but Ex autos and Gas +0.2%.  Philly Fed Business Outlook, Industrial Prod, Capacity Utilization and Business Inventories.

Fed’s Goolsbee and Mikey Barr both due to speak today. They will be the first FED heads to address the nation post yesterday’s CPI…..Can’t wait to hear what they have to say.

US futures rallying this morning – in what could still be a ‘knee jerk’ reaction to yesterday’s losses……..While it seemed dramatic – lets be honest….it wasn’t that dramatic…..it was more like a slap in the face that you got from your ‘mother’ when she told you to ‘smarten up’! (remember when you did something stupid?)  In this case – she reminded you that ‘trees do NOT grow to the sky’ – What were you thinking?

In any event – at 6 am – Dow futures are +80, S&P’s +18, Nasdaq +100, and the Russell up 18.  Just a note – Yesterday it was the Russell and the Transports that got 2 black eyes vs. just 1. They lost 4% and 2.6% respectively – this vs. the ~ -1.5% for the others…..  Soooooo, while we’re gonna see lots of ‘bargain hunters’ I would expect to see more of them in those sectors……but remember – yesterday’s losses may NOT be 1 & done……so tread lightly…  I am still expecting another 4 – 5% in ‘re-pricing’ – shake the branches and see who else falls out.  Which doesn’t mean there are no bargains, it just means I don’t think the pullback is over quite yet….

European markets which also closed lower yesterday are all in the green today….The UK is the outperformer up 0.9% while Germany is the laggard – up only 0.2%.  UK inflation came in on point at + 4% y/y. On Thursday the UK reports on 4^th qtr. GDP and that could show that the Brits are in a ‘technical recession’.

BOE Governor Bailey to testify in form of the House of Lords today.   ECB President Lagarde and ECB Chief Economist Phil Lane will speak tomorrow and  ECB board member Izzy Schnabel will speak on Friday.

The S&P closed at 4953 – down 68 pts…….which was a win based on where it was earlier in the day.  Again – this was all about how (some) investors, traders and algo’s interpreted the conversation…..some of us remained skeptical at even 1 – 2  rate cuts while others were screaming for 6 – 7 rate cuts…Again, think buyers/sellers.  In the end – it’s OK for the market to re-price, in fact it had to….the frothiness was ridiculous…I would just caution about thinking that was ‘it’.  Remember – yesterday’s CPI was just 1 of many data points….so don’t go making yourself nuts…it’s OK…..

Speakers tomorrow include Atlanta President Bostic and Fed Governor Chrissy Waller and San Fran Fed President Mary Daly on Friday.

Days like yesterday only confirm and re-iterate the idea of having a plan.  Call me to discuss – 212-381-6194.  Happy to set some time on the calendar.

Take good care.

kpolcari@slatestone.com

Sources:  Bloomberg, CNBC, Reuters, Wall Street Journal

Disclosure: The content provided in this material is designed for educational and informational purposes only, and it is important to note that it does not constitute personalized recommendations. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment.  The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kenny Polcari or SlateStone Wealth.

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.

While considerable effort has been invested to ensure the accuracy and dependability of the information presented, we must clarify that we cannot guarantee the accuracy of third-party information. Our usual sources for third-party data include channels such as Bloomberg.

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.

Chicken Milanese

Ok – this is a staple in an Italian household…I mean my mother always had chicken cutlets in the fridge – because you never knew if someone was coming over for dinner.

For this you need

Thin sliced chicken cutlets.  Seasoned Italian breadcrumbs*, eggs, flour, Olive Oil.

*Seasoned Breadcrumbs.  Start with hamburger rolls – put them in the food processor and make breadcrumbs.  Place in a large bowl.  Now season with s&p, onion powder, garlic powder, chopped parsley and 3 handfuls of fresh grated parmegiana cheese.  (I actually mix – and use both parmegiana and pecorino romano cheese – Yum!).  Mix well.  – Good to go.

Put the oven on Broil.

Ok – now rinse the cutlets and pat them dry.  In a bowl – crack 4 or 5 eggs (depends on how many cutlets you are making) and scramble.  In a large plate add some flour. 

Now set up an assembly line.   Flour, then the eggs and then the breadcrumbs.

Dredge the cutlet in flour, then dip in the egg wash and then place on the breadcrumbs to coat.  Use the back of the fork to press the cutlets into the breadcrumbs on both sides.  Place on a clean plate.  Repeat until you have coated all the cutlets.

Use an aluminum pan – add the olive oil – enough to cover the bottom of the pan.  Place the rack on the second level from the top….then put the pan in the oven so that the oil gets hot….Watch this….it heats up FAST…..Do NOT WALK AWAY. 

When the oil is hot – add the cutlets one at a time…put them in the oil and then flip them over. Now broil them until they become golden brown. Remove the pan and flip them over again and broil the other side. 

When done remove and place on a clean plate…Once they cool- you just eat them!  And if you don’t finish them, put them in the fridge and eat them tomorrow. 

Eat them plain, eat them with fried sweet peppers and onions, eat them with a mixed green salad, I mean you can’t really screw this up….they are very versatile!

Buon Appetito.