Things you need to know
- Kevy keeps his promise and promises nothing.
- Momo guys and algo’s throw a fit! SELL, SELL, SELL.
- Bond Market quietly does the work – yields rise – Done!
- MSFT crushed it and gets bought! META disappoints and gets sold.
- Lots of Eco data today, then Apple and Amzn report.
- Try the Penne alla Diavola (think the Devil – it’s HOT down there)
Stocks hit the skids yesterday…..as investors tried to reconcile the FOMC decision vs. the message that Kevy delivered……By now you know the FED did nothing, they held rates steady – even as the market was pricing in a 30% chance of a hike – pitting the algo’s and Momo guys against the FED – at 2 pm we got the news…NO CHANGE – and that didn’t’ cause much of a reaction – stocks were already weak, the reaction came when Kevy took to the podium….It was then that they realized – the new chair had no intention of telling anyone what comes next….
No roadmap. No promise. No September hint. No “we’re done.” No “we’re hiking.” Just uncertainty. That uncertainty forced the Algo and Momo crowd to reduce risk. And so, they threw a temper tantrum and hit the sell button in what a classic – Sell first, ask questions later reaction – hoping to force ‘daddy’ to change his mind…It was comical really – because the majority of the committee as well as the majority of investors got exactly what they expected – no change.
And if that wasn’t enough – Warsh told us that 3 members – Hammack, Kashkari and Logan all dissented- voting for a hike – saying that inflation is a problem – even as the other 9 of them did not – and that only amplified the anxiety.
Now layer in oil ripping higher – up 6.5% on fresh threats of increasing tensions in the Middle East and end up with an ugly, but (imo) necessary session.
At the end of the day – the Dow gave up 1150 pts or 2.2%, the S&P gave up 112 pt sor 1.5%, the Nasdaq lost 433 pts or 1.6% – putting it firmly in correction territory – now down more than 10%, the Russell gave back 48 pts or 1.6%, the Transports lost 427 pts or 1.9%, the Equal Weight S&P gave up 75 pts or 0.9% while the Mag 7 lost 448 pts. or 1.4%.
Let me just say it again, the selloff wasn’t really about the hold, it was more about the fact that they didn’t get what they wanted, they didn’t get a FED chair that rolled over because one group (in the minority) demanded a change…. Period.
The bond market though, did not react the same way – there was no drama, it just did what you’d expect….it sold off sending yields higher…..the 10 yr surged 7 bps to end the day at 4.67%, while the 30-yr surged by 10 bps to end the day at 5.2% – and this morning both are a bit higher at 4.69% and 5.23%.
Now think about what that means. Warsh didn’t raise rates. He didn’t even hint that he would. Yet borrowing costs across the economy moved higher anyway.
Why? Because the bond market is doing the heavy lifting. Remember, the Fed doesn’t determine what consumers and businesses actually pay to borrow money—the bond market does. Mortgage rates, auto loans, corporate debt, and commercial real estate financing are all tied much more closely to Treasury yields than to the Fed Funds rate.
Case in point: The Fed has left rates unchanged for five straight meetings, Yet financial conditions have tightened anyway. The average 30-year mortgage rate has climbed from 5.9% in late February to about 6.7% today. Commercial real estate borrowing costs have done the same, rising from roughly 5.8%–6.25% to 6.15%–6.8% for high-quality borrowers.
Think about that. Borrowing costs have risen across the economy even though the Fed hasn’t done a thing. Which raises an important question: If the market is already tightening financial conditions on its own, why should the Fed raise rates again?
And here’s the other point that the algo’s and Momo guys are missing. If inflation is being driven primarily by higher oil prices caused by the conflict in the Middle East, then raising interest rates isn’t going to pump one extra barrel of crude out of the ground or reopen a single shipping lane. Raising rates will NOT resolve that problem.
Monetary policy can’t fix a geopolitical supply shock. The real solution will come when the conflict eases, supply concerns fade, and oil prices begin to retreat. If that happens, a significant source of today’s inflationary pressure could ease naturally.
The Fed knows it. The bond market knows it and now YOU know it.
So, the question really is- when will that happen? When will the conflict end? That’s the conundrum.
And then came the other ‘event’ …. MSFT and META reported after the bell….and it was a tale of two cities….
MSFT crushed it, beat across the board –
Revenue of $90.01 billion versus $87.72 billion expected. Adjusted EPS of $4.74 versus $4.25 (helped by their investment in Anthropic).
Cloud revenue of $59.30 billion and Intelligent Cloud revenue of $39.31 billion both ran ahead of estimates, with Azure growing 43% against a 40% bar. Full-year Azure revenue crossed $100 billion for the first time.
The kicker – Capex came in at $41 billion, up 69% year-over-year but BELOW the $42.37 billion that analysts expected. That combination is what took the stock higher in the post market and in the pre-mkt today…..
This morning MSFT is quoted at $425 up $34 or 8% higher adding $90 billion in market value. I hope you backed up the truck when they took it down to $350.
META on the other hand – didn’t. Their quarter wasn’t bad—it just wasn’t good enough for a market that’s demanding proof that all this AI spending is actually paying off.
Revenue rose 28%, advertising remained healthy. But earnings missed expectations.
Free cash flow plunged from about $8.6 billion to less than $1 billion as AI infrastructure spending accelerated, operating expenses continued to climb, and Marky raised his capital spending outlook. That’s what spooked investors.
The message from Wall Street was clear: Show us the money. That’s where the comparison with MSFT becomes so important. MSFT showed investors that its AI investments are already translating into faster Azure growth and stronger profitability. META, on the other hand, is still asking investors to believe the payoff is coming. And that’s the defining theme of this earnings season. Companies can no longer announce another $100 billion in AI capex and expect everyone to ‘buy it’ – Investors are demanding evidence. Microsoft delivered proof. Meta did not. Period.
Today after the bell, we will hear from AAPL and AMZN…. the last two members of the Mag 7 to report this week. After what we’ve heard from MSFT and META investors are no longer satisfied with promises. They want proof that AI spending is translating into revenue, earnings and cash flow. Sit tight…because these two reports could determine what happens next.
Before we get there, though, we’ve got a full slate of economic data to digest. Personal Income and Spending are both expected to moderate a bit from last month, while June’s PCE inflation report—the Fed’s preferred inflation gauge—is expected to confirm what we’ve already seen in the CPI and PPI: inflation pressures continue to ease, helped in part by lower energy prices. Great! That was then, but this is now and we can expect that these reports will be short lived as oil exploded higher over the past 2 weeks. We’ll also get the first look at second-quarter GDP, with economists expecting the economy to have grown at a 2% annualized pace.
European markets are all higher…. the BoE (Bank of England) is expected to leave rates unchanged today, but investors will be listening closely to Governor Bailey’s comments for any indication that the recent spike in oil prices is changing the inflation outlook. Recall that the ECB met last week and also chose to stand down and leave rates unchanged – adopting the same data-dependent approach we’re hearing from Kevy.
US futures are up! Go figure! Dow up 120, S&P’s up 18, Nasdaq up 275 pts while the Russell is up 12. Cooler heads appear to be prevailing after yesterday’s algo and momo temper tantrum. Now we’ll see whether today’s economic data and tonight’s earnings from Apple and Amazon give investors a reason to keep buying—or send them right back to hitting the sell button.
The S&P closed at 7,316 down 112 pts…. The move takes us deeper into the official 7200/7460 trading range. (trendline support/trendline resistance). But we are approaching the June lows at 7300 – which might just prove to be an area of support, and we will find that out today. While futures are pointing higher – yesterday’s selling will need to be tested once again. Which is why 7300 is important. If we test it and hold – that’s a positive, if we fail – then expect 7200 to be the next support. In either case – No one should be surprised at the action – we have discussed this – ad nauseum. For the long-term investor – the selloff should be seen as a gift – there are a lot of opportunities, time to take out your shopping list and see what you find. Have you seen IBM? It’s up 15% off its recent pullback – HELLO????
If you’d like to discuss your goals, evaluate the risk in your portfolio or simply get a second opinion, give me a call at 561-931-0190.
I’m always happy to provide complimentary portfolio review and risk assessment.
Take good care,
Kp
[email protected]
Source: Bloomberg, CNBC, Reuters, Wall Street Journal
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Penne alla Diavola (The Devil’s Penne) -When Arrabbiata isn’t angry enough!
The Calabrian chiles bring a slow burn, the tomatoes give it depth, and just when you think it’s going to knock you over, the cream steps in and smooths everything out. It’s rich without being heavy, yet spicy without being punishing. Let’s go.
For the sauce -1 lb. penne rigate, olive oil, 4 cloves garlic, thinly sliced, 1 small shallot, finely diced, 2 tbsp Calabrian chili paste (more if you like serious heat), 1 tsp crushed red pepper flakes, ¼ cup tomato paste, 1 (28-ounce) can San Marzano crushed tomatoes, ½ cup heavy cream, ½ cup freshly grated Pecorino Romano, s&p.
To finish it off – Fresh basil, torn, extra Pecorino Romano, olive oil for drizzling
Bring a large pot of well-salted water to a rolling boil.
In a large sauté pan heat the olive oil over medium heat. Add the shallot and cook until softened, for about 3 minutes. Stir in the garlic and cook for another minute – do not burn.
Now add the Calabrian chili paste, crushed red pepper, and tomato paste. Let that cook for 2–3 minutes, stirring often. This is where the magic starts.
Add the crushed tomatoes, season lightly with s&p, and let the sauce simmer for 12–15 minutes until it thickens.
Reduce the heat to low and stir in the heavy cream. The sauce should turn a beautiful deep orange red.
Add the penne to the boiling water and cook until aldente – 8 mins. Using a slotted spoon – add the penne to the sauté pan and mix well – Add a ladle of the pasta water – tears of the Gods.
Stir in the Pecorino Romano and continue tossing until the sauce becomes silky. Add another splash of pasta water if needed.
Finish with torn basil and a drizzle of olive oil. Always have fresh Pecorino on the table.
***You can always make this even more delish & HOT by sautéing crumbled hot sausage in a bit of olive oil and adding it to the finished sauce.
Buon Appetito