Things you need to know –
– CPI – surprises to the upside
– Super Core CPI though – proves even more of an issue.
– Bond yields SURGE
– Stocks get whacked – So, is this the beginning?
– Try the Classic ‘feel good’ Bolognese.
Reality Check – Aisle 5! Super Core Inflation on FIRE! Small & Midcaps falling off the shelves!
Stocks get whacked – algo’s all ‘run for the door’ at the same time – causing all kinds of chaos…Bids disappeared leaving a void in prices causing stocks to hit a sinkhole (That’s a Florida reference!) …. as the sellers go into ‘get me out’ mode all as the CPI came in a bit hotter and the Super Core CPI came in even HOTTER than expected leaving many to realize that the thought of any rate cut in the near future is all but extinguished. (Although – some are suggesting that the cut has just been pushed to July and that we are still getting 2 rate cuts this year – Are you kidding me? Inflation is STICKY, it is not going away anytime soon – get over it!). At the end of the day – the Dow lost 425 pts or 1%, the S&P down 50 pts or 1%, the Nasdaq lost 136 pts or 0.85%, the Russell lost 52 pts or 2.5%, the Transports gave up 365 pts or 2.3% while the Equal Weight S&P lost 110 pts or 1.6%.
Bonds got whacked as well as treasuries get repriced – the TLT down 2.2% and the TLH down 2% – causing yields to surge! The 2 yr. rose by 21 bps to to end the day at 4.95% this after testing 4.98%. The 10 yr. shot up by 18 bps to end the day at 4.53% – this after testing 4.56%…and bonds are beginning today in a weaker position.
Now are any of you really surprised? Did you think the inflation monster was dead? Did you really think we are getting ‘multiple rate cuts’ in 2024? Now, that doesn’t mean I getting all worked up about it, I am not, because I have been in this camp for months now, I have been playing it expecting the news we got, I put money to work where I found value and if you have been following me – you know this. I never understood the 6 – 7 rate cut narrative that the street created, in fact I kept saying ‘It’s illogical!’
In any event – maybe now we will get that much needed pullback in stocks that I have been waiting for….and if you are a long term investor – you should hope that we do too….So yesterday’s move extended the early April losses – leaving the S&P down only 2.5% off the March high – hardly anything to call ‘mommy’ about.
Remember – when the month and qtr. began, I warned you that the first couple of weeks in April tend to be volatile and weak – some of it can be credited to the new qtr., some of it can be credited to tax day, some of it credited to the start of earnings season -as investors wonder how that will turn out. I am not bearish on earnings, I think that we will continue to get the 75%+ beat rate on both the top and bottom lines….and I think forward guidance will be mostly upbeat, maybe not for TSLA as pointed out yesterday, but I am excited to hear about how everyone else is viewing it. The only thing that would change my mind is what the C suite says about what inflation is doing to margins…. To that point –
Yesterday after we got that jarring CPI report – we heard from the DAL CEO and guess what he told us? Things are GREAT at Delta, – he sees ‘record revenue’ as business travel accelerates, capacity expands and premium ticket sales surge. 1st qtr. revenues up 8% y/y, adjusted operating revenue up 6% y/y – both top and bottom lines BEATING consensus estimates…EPS of 45 cts/sh – handily beating the 36 ct estimate. In the end – travel remains ‘strong and healthy’. The stock traded higher out of the gate – but couldn’t fight the overall negative tone in the broader market – taking it down 2.8% to end the day. Just to clarify – even after that move – DAL is still up 15% ytd. – Capisce?
So, let’s tear it apart – shall we? Top line CPI came in +0.4% m/m and Ex food and energy came in at +0.4% m/m – both higher than expectations. Y/y numbers came in at 3.5% and 3.8% respectively. Ok – so slightly hotter than expected….but if you look at the SUPER Core CPI – which strips out food, energy and housing – you find a ‘slightly different’ story….it was up 4.8% y/y and is running at more than 8% on a 3 month annualized basis…..and this complicates the story for JJ and all of those traders that created the multiple rate cut story….as some of the most stubborn parts of this story are things that we all need – think car & housing insurance and property taxes.
You see – cars are more expensive to buy and to FIX, Houses are more expensive to buy and to FIX and property taxes never go down. In fact – 6 months ago – I got rear ended on 95 South – what I thought was maybe $7k worth of damage – turned out to be $24k worth of damage (think camera’s and other tech along with the body damage) – I mean it’s ridiculous really….they kept my car for 3 months while they waited for parts forcing me to rent a car – creating another $4500 worth of rental charges – and I rented a Volkswagen Jetta! It wasn’t a Bentley. In any event – I am sure the woman who hit me is about to get a HUGE increase in her insurance premium if they even keep her! And if they don’t, she will either find another insurer or just forgo having any insurance at all, which is very possible in Florida – which I never understood! Hello, Ronnie? What’s up with that? You allow people to own a car but don’t force them to insure it? Is it me?
Ok – so today we are going to get the PPI report – which defines inflation at the producer level…what manufacturers are paying for the raw materials they need to produce the stuff that we buy….and that is expected to be slightly lower m/m BUT slightly higher y/y….(Think rinse and repeat!).
Futures this morning are down…. Dow down 100, S&P’s down 14, Nasdaq down 40 and the Russell down 10. Tensions are running high, the algo’s ready to pounce…as we await the 8:30 am report. In the end – the stronger jobs report on Friday, yesterday’s inflation report that was hotter, the FOMC mins – which showed that the FED ‘favors’ a slowdown in any talk of a rate cut, are all complicating the timing of any rate cut discussion. In fact – what is happening now is talk of a possible rate HIKE rather than a rate CUT and while it is not what I expect – you have to put it back on the table as an option. Again, – the economic data remains robust, unemployment still has a 3 handle on it, the Biden’s print and spend money like nobody’s business so the idea that inflation was going to go away is and was ‘illogical’. Period.
And this is what will cause investors to rethink what they are willing to pay for stocks….currently – the market is trading at 23x’s 2024 earnings…a bit rich considering what we now know….and bit rich when 2 yr. treasuries kiss 5% and the 10 yr. is about to kiss 4.75% on its way to +5%. And so, all this means is you need to be more aware of what you do with your money. If you’re nervous – stick some cash into your money mkt fund (that is paying you 5.25%) – because that too IS an investment decision, and it keeps you completely liquid in the event you see an opportunity to ‘jump in’.
Oil is trading at $85.70; Gold is trading at $2355 – both off a bit after the dramatic run we’ve seen. This should also not be a surprise.
In the end – stocks are in retreat, bonds are in retreat, yields are at 4 month highs, economic reports are strong and prices for commodities, food, utility, gas, housing, insurance, airline seats, gym memberships, fast food, wine, beer, dry cleaning and more continue to go up – somewhere between 3.8% and 4.8%.
Earnings officially kick off tomorrow – with the big banks…JPM, BLK, WFC, STT & C. Listen to what the C- suite has to say about NII (Net Interest Income) Sales & Trading, Investment Banking, and the ever-important Loan Loss Reserve accounts. I am a big Jamie Dimon fan, (JPM) I do not expect him to disappoint – but the stock is up 15% ytd….so I would not be surprised to see some investors hit the sell button to lock in those profits…. Great – go for it. Unless the fundamental story changes – its all noise…So, I guess you know what I’ll be doing!
European markets are under pressure as they (and we) await today’s ECB policy statement…. Not sure what’s the wait – Christine Lagarde and others have been very clear – the ECB will remain on hold…. Capisce?
The S&P closed at 5160 – down 50 pts…. yesterday I said that I suspect we will see some churn lower rather than churn higher and I remain in that camp. As noted above – the S&P is only down 2.5% from the high – I would love to see us shake the branches a bit more…. think 5% – 6% – which would take us back to 4900 ish…a level last seen in February. But while I would like to see that, I do NOT think we will….
Yesterday we tested 5,138 on the S&P and if today’s PPI report causes angst – then we will test 5100….and that would represent a 3.5% decline….and leave us sitting on the short term trendline. A level I think will end up holding….and if it doesn’t, then it doesn’t and 5050 is the next stop….
I remain cautious – which does NOT mean I am a seller of my long-term assets; it just means I remain cautious and will put money to work strategically. Remember if you’re nervous – leaving money in a gov’t mm fund (that is completely liquid) is a decision….….an April pullback is not uncommon at all ( we discussed this) – As a long term investor you want take advantage of price dislocations caused by anxiety, not caused by a negative fundamental change in the story. Keep your eyes on the long game…. remain focused, stick to the plan, call me to discuss. Always happy to help you create a long-term wealth plan that will provide for you and generations to come.
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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Classic Bolognese – It’s a feel-good meal when you’re not feeling so good.
For this you need – Olive oil, butter, chopped onion, chopped celery, chopped carrots, 1 lb. ground chuck (80/20 blend), ½ lb. ground pork,(you can use all ground chuck if you prefer), s&p, whole milk, nutmeg, dry white wine, 2 cans of San Marzano tomatoes – hand crushed and freshly grated Parmegiana cheese.
Heat a large heavy bottom 5 qt pan over medium heat with 2 rounds of olive oil and ¾ stick of butter – when the butter stops foaming, add in the celery, carrots and onion and sauté for 5 mins.
Next add in the meat. Season with s&p – breaking up the meat with the back of the wooden spoon.
Reduce heat to low and pour 2 c of whole milk and simmer until the milk is all evaporated – takes about an hour.
Now stir in a pinch of nutmeg, add the wine (2 cups), stirring frequently until evaporated -about another hour.
Now add in the hand crushed tomatoes – turn heat up to med hi, when it starts to boil – turn the heat to simmer and let it just simmer away – stirring occasionally. Do not let it dry out or stick to the bottom of the pan. If you need to, add a ½ c of water. You’ll know when it’s done – the water will be gone, and the fat will be separated from the sauce.
Taste and adjust seasoning if necessary.
Boil the pasta – Tagliatelle works really well with this dish. Cook until aldente, when done – strain the pasta – saving a mugful of the pasta water. Add back to the pot and toss in ½ stick of butter (cut into pieces so it melts) and let it coat the pasta.
If the pasta appears to be drying out -then remoisten with a bit of the water. Do not puddle.
Serve in bowls and top with a ladle of the Bolognese – always having the cheese on the table for your guests.
Buon Appetito.
