Things you need to know
- Oil, Geo-politics and qtr end window dressing all adding pressure to stocks.
- Trump offers Iran a ‘deal they can’t refuse’ – what will they do now?
- Oil up, bonds Down, Yields Up, Gold getting Clobbered.
- Try the Rib-eye with Gorgonzola Cheese Sauce
Coming to you from NYC this morning…. where it is raining –
Stocks ended the week under pressure again on Friday as investors continued to wrestle with the implications of the escalating conflict in the Middle East and what it means for oil prices, inflation and ultimately Fed policy. But geopolitics wasn’t the only factor influencing the tape. With quarter-end approaching, portfolio managers are actively rebalancing portfolios, trimming risk and doing the usual window dressing* ahead of the marking period — flows that tend to exaggerate market moves when volatility is already elevated only adding to the selling pressure.
*Window dressing is when asset managers clean up portfolios ahead of the reporting period — selling some of the underperformers, so they don’t appear on your statement while beginning to build positions in companies and sectors expected to perform better in the next quarter. Those flows can exaggerate moves in both directions and often add pressure to weaker stocks while giving a late boost to the names that have been working.
Here is what the scoreboard looked like at the end of the day on Friday – the Dow lost 443 pts or 1%, the S&P lost 100 pts or 1.5%, the Nasdaq gave up 443 pts or 2%, the Russell lost 56 pts or 2.2%, the Transports gave back 97 pts or 0.5%, the Equal Weight S&P lost 118 pts or 1.2%, while the Mag 7 gave back 635 pts or 2.2%.
Of the 11 S&P sectors – only Financials ended higher…. up 0.2%. the other 10 sectors were lower with Utilities taking it on the chin – down 4%. Real Estate was down 3.2%, Tech down 2.2%, Consumer Discretionary down 1.7%, Industrials down 1.5%, Basic Materials down 1.5%, Healthcare down 0.9%, Consumer Staple and Communications down 0.8%, while Energy lost 0.1%.
Of course, the Contra trades – continue to outperform…the DOG +0.9%, the PSQ + 1.9%, the SH + 1.5%, the SPXS added 4.4% while the VIXY was up 7.1%.
In addition, traders and algos continued to reduce exposure going into the weekend amid the potential for additional geopolitical uncertainty over the weekend and that did not disappoint. Trump gave Iran a clear ultimatum, reopen the Strait of Hormuz within 48 hours or risk significant strikes (I think he said obliterate) on their power infrastructure, dramatically raising the stakes in a conflict that already has global energy markets on edge. (That ultimatum ends at 7:47 pm est today). Iran immediately responded – telling Trump that – should that happen, then any target in the middle east in any country is now fair game…. power infrastructures, water desalination plants, even any of the int’l banks or other financial institutions that support this conflict by buying/owning US Treasuries.
And that is not helping the tone of markets on Monday…. Asian markets sold off overnight – South Korea getting hit the hardest – down 6.5%, Japan, Hong Kong and China all lost more than 3%, Taiwan down 2.5% while Australia lost 0.7%.
European markets have also begun the day a bit lower…. with Spain down 2.5%, Italy and Germany down 1.8%, the UK down 1.6%, Euro Stoxx down 1.5% while the France is down 1.4%.
And US futures are lower, but they are off the lows seen overnight as markets reprice risk. At 5 am – Dow futures are down 240 pts, the S&P’s down 43 pts, the Nasdaq is down 190 pts while the Russell is down 30 pts.
The VIX ended the week at 26.80 – a range that signals investors are nervous but not yet in panic mode. But overnight – we saw the VIX surge up and thru 30 – to trade as high as 31.04 at 4 am this morning….and that put us closer to panic mode – but as of 5:15 – the VIX has fallen back below 30 and appears to be trying to find some stability. Remember – the VIX is a headline driven index – and considering the headlines are HOT, you have to expect the VIX to reflect that….and with so much of the market controlled by algo’s – the reaction to those headlines is swift and sometimes painful.
Oil remains the central macro driver for markets as traders price in rising risks…. – WTI traded up and thru $100 overnight and this morning is trading up 11 cts at $98.31. Brent is trading at trading at $113.12 up 95 cts.
Oil remains in the $90/$100 trading range…. if Iran does not concede, then I suspect that oil will surge higher…should they reconsider Trumps ‘offer’ then we should see oil retreat – just a bit – but remain in this defined trading range.
In the bond market, Treasury yields pushed higher as investors reassessed the landscape for rates – given concerns over energy-driven inflation pressures. Remember – that rising oil prices feed directly into transportation, manufacturing and consumer costs — a dynamic will keep the pressure on inflation expectations.
On Friday the TLT and TLH lost 1.9% and 1.8% respectively and that did nothing but send yields higher…. The 10-yr ended the week yielding 4.38% and this morning it is up again, yielding 4.41%. The 30-yr ended the week at 4.94% and this morning it is up 1 bp at 4.95%. Remember – a 4.5% 10 yr and a 5% 30 yr is just one more headwind for stocks…. now some will say that we are already pricing that in others say, not so much, in any event – it looks like we are about to find out.
Gold, which many expected would surge as a safe haven, has actually gotten slammed. Gold is now down 24% since this conflict began. The thing to remember is that rising interest rates and a stronger dollar will put pressure on commodities (think precious metals) because the opportunity cost of holding a non-yielding asset increases as bond yields rise. And let’s not forget what gold has done…. a look at the charts shows a parabolic rise as ‘Momo” investors were mostly betting on lower global rates…. taking it higher and higher in what many thought was clearly unsustainable.
This morning – gold is down 5.25% TODAY and has now broken thru both the short and intermediate term trendlines at $4,970 and $4,603 and overnight we kissed its long term trendline at $4,090. For now, we are holding it, but should we retest and fail then we could see gold fall to the $3,600 level – a far cry from the January high of $5,595.
While we have a fairly long list of eco datapoints this week – I think they take a back seat to the Middle East headlines…. unless Iran reconsiders their stance.
Now today includes the Chicago Fed Index and Construction Spending. Tomorrow we’ll get the March 7th – ADP report and Unit Labor Costs – which are expected to surge to 3.7% up from 2.8% and that is not a positive. We will also get S&P Manufacturing and Services PMI’s- with both expected to remain in the expansionary zone – and that is positive.
So, as noted – US futures are lower and will most likely remain lower as investors continue to price in the risk and tension building in the markets. But look – do not forget – we are in the middle of a 4th industrial revolution, no matter what is happening on the other side of the world. The pullback in the markets – especially tech – presents a longer-term opportunity. Do not forget that.
On Friday the S&P closed at 6,506 – down 100 pts….we are now right where I suggested we were going….If we hold here, that would be a positive, but if we fail to hold – then 6,350 ish is potentially the next level to test and that would represent a 9.3% move off of the high….which and I know you don’t necessarily want to hear it- is still within what is considered a normal trading band.
Look – I said this early in the year…. Expect a pullback…. currently we are still in a tier one pullback (less than 10%), should we enter tier 2 (10 – 20%), then you need to reconsider where the thesis has changed and adjust accordingly. I remain in the camp that long-term investors, who are properly allocated need to just ride it out, taking advantage of dislocations in high quality names when they occur. History shows us that discipline and a diversified plan always wins in the end.
The tension remains elevated…. investors from around the world are watching the clock – 7:47 pm est is now the focus. What will Washington’s next move be if Iran does not step back? And what will Iran’s reaction be, if the obliteration begins? Those are legit questions…. but in the end – geo-political drama does not price stocks in the long term. Doing nothing is an investment decision – holding cash is an investment decision. In the end – long term investors need to stay focused and disciplined.
Call me to discuss – you can reach me at 561-931-0160.
Take good care,
Kp
[email protected]
Source: Bloomberg, CNBC, Reuters, Wall Street Journal
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Grilled Rib-Eye with Gorgonzola Cheese Sauce
For this you need – the Rib-eye on the bone, olive oil, s&p, Dry Vermouth, cream cheese, Gorgonzola Cheese, a “bouquet of thyme & rosemary” and black pepper corns (crushed).
Light your grill to get It ready. Season the rib-eye with s&p and olive oil – set aside.
Begin by putting enough vermouth in a small pot and bring to a boil – add in the bouquet of thyme and rosemary and allow it to reduce by half.
Now turn heat down to med – remove the bouquet and add 1 tbsp of cream cheese and whisk until smooth. When ready – add in an equal amount of crumbled gorgonzola and mix well – remove from heat and allow the gorgonzola to melt slowly.
Throw the steaks on the grill and cook to perfection- 4 mins / side gives you a perfect med rare steak. When ready – remove the steaks, Slice generously and place on a warmed plate. Drizzle some of the Gorgonzola sauce on top and have plenty more in a bowl on the table. Serve with a large mixed green salad with a balsamic dressing.
**This is also great on a sliced steak sandwich with caramelized onions, fresh mozzarella on a fresh baguette. Mmmmmm.
Buon Appetito.