Things you need to know ~
- 10 Yr. Risk Free Rate kisses 4.1377% – putting more pressure on stocks
- Solomon, Bezos, and Musk all joining the chorus of ‘possible’
- Oil – rises by 2%….as crude stockpiles unexpectedly FALL
- TSLA misses, IBM beats….
- Try the Campenelle w/Spinach, Sundried Tomatoes and Mascarpone Cheese
July 23rd, 2008……. was the last time that the 10 yr. treasury yielded 4.136%…. and if you use the 10 yr. as the ‘risk free’ rate by which you price other assets – you will now realize that the road ahead is full of potholes (and opportunity – if you have the guts to hold on…) as rising yields will cause some investors to choose ‘safety’ over ‘risky’. Remember – 4% is that ‘line in the sand’ that many consider to be the tipping point. Yesterday the 10 yr. treasury yielded as much as 4.1377% before settling in at 4.1335%…. The 2 yr. treasury yielded 4.46% and the 5 yr. yielded 4.3604% and stocks did what? They sold off (not big, but potentially getting bigger)– the Dow ended the day down 100 or 0.3%, the S&P lost 25 pts or 0.7%, the Nasdaq lost 92 pts or 0.8%, the Russell gave back 30 pts or 1.7% and the Transports lost 220 pts or 1.7%.
St Louis Fed President Jimmy B – spoke to Kathleen Hayes of Bloomberg fame telling her that he is ‘pleased that markets are pricing in anticipated interest rate hikes by policymakers. Suggesting to me that there is more to go…that he thinks and maybe others on the committee think that inflation isn’t going away anytime soon…. that ‘transitory’ has turned into ‘entrenched’ and that investors need to wake up and smell the roses. No! It ain’t roses, that I am sure of…! (Feel free to change as like…).
In fact- if you remember – it was Jimmy who suggested 2 months ago that he thought the terminal rate (neutral rate) was closer to 5% rather than 4.25% and if that is the case – We’ve got room to go….current Fed Fund rates are in the 3% – 3.25% range…..In order for us to get to 4.75% – 5% we need rates to rise by another 1.75%. He then confirmed that he ‘expects the FED to end its front loading of aggressive interest rate hikes by early next year before shifting to keeping policy sufficiently restrictive with small adjustments as inflation cools’.
There are only 2 more meetings this year…One on November 1st – 2nd and December 13th – 14th. And then the ball drops and it’s 2023 – the next meeting then is on January 31st – Feb 1st…. Remember – we have 5 more inflation specific reads between now and the end of the year…. PCE on October 28th and November 30th, CPI and PPI on November 10th & 15th, & December 9th & 13th. 4 of those reads take place between the November and December FED meetings, so there will be plenty of ‘data’ to consider.
So, I guess we need to play the odds – what combination of hikes will get us to 5% by February 1st? And when that happens expect the 10 yr. will be more like 6% and mortgage rates will be kissing 10%…. And speaking of mortgage rates – yesterday we learned the new weekly mortgage apps fell by another 4% leaving apps down by more than 40% ytd….Housing starts fell by 8.1% (more than expected) while Building permits rose by 1.4% – which suggests a bit of a disconnect, but let’s run with that….And like they say in the opera – ‘It ain’t over til the fat lady sings’…..does anyone hear her singing? Cause I don’t!
Ok – earnings season has gotten off to a good start – remarkably – 80% of reports so far are ‘beating the estimates’ – at least on the bottom line – funny how that happens – after analysts slashed and burned estimates heading into the reporting season….We saw the banks all beat and we saw Brian Moynihan of BAC – seemingly giddy when he described how ‘strong the consumer is’…blah, blah, blah – all while building up a massive loan loss reserve account to protect the bank against what they all expect to be the Jamie Dimon – (JPM CEO) ‘Hurricane’ – causing those same strong consumers to DEFAULT across a range of credit lines….Think mortgages, HELOC’s, revolving credit, Adjustable’ s etc…
And not to be outdone – yesterday brought Davey Solomon – CEO at GS and Jeffrey Bezos – Executive Chairman of AMZN and Lonnie Musk (needs no introduction) all warning of that ‘coming, possible, potentially, difficult recession lurking just around the corner’ (I mean can you use any more adjectives to describe it?) In fact – given the probabilities Bezos told you to ‘batten down the hatches!
They now join JJ, other Fed members, Treasury Secretary Janet Yellen and every other global CEO that is doing the same thing…. trying to find adjectives that describe what is already here…. Not one of them is admitting the fact that it’s here – We are in it already…. I say grow a set of…. (—–) and stop the madness. I think Joey & Jill, Kammy & Dougy, Nancy & Chucky, Press Secretary KJP, Jared Bernstein – Chief Economist/Policy Advisor to the President and Brian Deese – Director of the National Economic Council are the only ones that think we aren’t in one, nor are we headed for one! “Nothing to see here, move on…..” Talk about being ‘blinded by the light’ – Are you kidding me?
After the bell – TSLA reported and MISSED! $1.27 vs. the expected $1.32…. although after adjustments it was $1.05 vs $1.01…Whatever! Margins under pressure and demand is slowing…. battery supply constraints remain elevated…. The algo’s took it down 12% after that report and this morning it is quoted down $13 at $208/$208.50…leaving it down 49% ytd….
The other thing we are hearing – although no one should be surprised – is how the strong dollar is affecting earnings…. because remember – when the big multinationals earn revenues in foreign currencies and then convert them back into dollars – they get LESS dollars per each currency – which to me is a bit curious…why? Because we know this…this isn’t new info…JNJ is the latest to adjust their forward guidance – just a bit lower – because of the stronger dollar….and while the stock did end the day lower (-0.8%) – it is nothing to worry about in my opinion. Think about it – Does the strong dollar fundamentally change the investment thesis for JNJ? Does it change their product lineup? Does it cause customers that buy JNJ products to stop buying JNJ products? Does it change their 2.75% divvy or the fact that they grow the divvy by 6% per year? Hardly…. So, let’s not light your hair on fire…. It’s JNJ! (Big and Boring)
IBM on the other hand handily beat estimates…. $1.81 vs. $1.80…EVEN as ‘currency headwinds roar!’ (They planned better for the announcement) …. they confirmed their free cash flow estimate of $10 billion suggesting that demand for software, mainframes and hybrid cloud services are alive and well. They expect full year revenue growth to beat their original guidance…. the algo’s took that stock up 4% in the after-hours trading session. This morning it is quoted $125.80/$126.50. FYI – they are paying you 5.4% and growing their divvy by 2.5% /yr. Again – Big and Boring right? Do you see the trend yet? What have I been telling you?
OK – this morning US futures are lower, but not falling out of bed (yet)…Dow futures are down 35, S&P’s down 18, the Nasdaq down 100 and the Russell down 5.
Oil which has come under pressure over the last couple of days as they tried to sell us the demand destruction/over supply story is UP today…. Even as Joey announced the release of another 15 million barrels from the SPR (Strategic Petroleum Reserve) in his effort to try and cool ‘hot’ energy prices ahead of the mid-term elections (telling us ‘This isn’t political….) – leaving that ‘strategic reserve’ at just over 400 million barrels – the lowest since 1984! And those reports that US crude stockpiles may rise – not happening….
Crude stockpiles ‘unexpectedly FELL’ last week…. And Joey announced that he is ready to buy oil to replace the reserves when the price of oil falls to $67/barrel…! Are you kidding me???? That’s like Uncle Warren (Buffet) telling you that he is going to buy OXY BEFORE he buys it….NO, no, no…he tells you AFTER he bought his stake and watches as the lemmings jump on board!
Wake up – Oil isn’t going to $67/barrel anytime soon! (Especially now) Remember that European Union ban that starts on December 5th? That is expected to take a million barrels/day off the market – on top of the 2 million barrels/day that the Saudi’s announced last week. This morning oil is trading up $1.70 or 2% taking it to $87.24/barrel – a full 23% higher than Joey’s announced purchase price! Remember – the Kingdom wants oil to be north of $90/barrel…and they will continue to cut production in order to keep it there!
The dollar index remains at 112.80/113. And Gold is trading at $1638/oz.
We are going to get 20 more company reports today – they include: T, KEY, SNAP, AAL, TSCO, BX, FCX, DOW, UNP, WHR, THC and SAM.
Remember how I told you on Monday that while some are calling this latest rally ‘the bottom’ I was not in that camp just yet…. there is still too much uncertainty I think that necessitates caution – which doesn’t mean stay away – it just means be cautious on how you allocate capital. I do think that we are in the ‘bottoming process’ – but that is not calling it ‘the bottom’
European stocks are mostly lower –as investors there worry about ‘scorching inflation,’ the coming recession and the latest departure from the Truss administration. Word is that ‘Truss is toast.’ This morning we learned that another cabinet member bit the dust…UK Interior Minister Suella Braverman resigns after only 43 days…. putting even more pressure on Truss…. I mean she managed to destroy her own party in 6 weeks…Even DJT didn’t do that!
The S&P closed at 3695 down 24 pts…. As it continues to try and bottom out…. Challenges remain for investors…consensus estimates remain subject to revision (down not up) while inflationary trends, hawkish central banks and a slowing economy will keep investors on the edge of their seat thru year end and into 2023.
Sit tight as a long-term investor – stick to the plan…. take advantage of dollar cost averaging (DCA) and dividend reinvestment programs. Overweight the big boring names and buy the stuff that people need (STPN). Consumer Staples, Utilities, Healthcare, Energy…. while underweighting (not eliminating) Tech, Basic Materials, and Communications right now.
Take Good care
Chief Market Strategist
kpolcari@slatestone.com
Campenelle w/Spinach, Sundried Tomatoes and Mascarpone Cheese
This is a simple 20 min recipe. It also uses mascarpone cheese – I am a fan of mascarpone cheese….…. it is very versatile and can be used in a number of ways in pasta dishes….and here is one for you…
You will need: Campanelle pasta (Italian for “little bells”), Mascarpone cheese (room temp), zest & juice of a Lemon, s&p, olive oil, minced garlic, chopped sun-dried tomatoes, 1 bag baby spinach, toasted breadcrumbs and of course fresh grated Parmegiana or Pecorino Romano Cheese.
Begin by combining the zest, lemon juice, mascarpone, and s&p in a bowl, whisk to combine.
Bring a pot of salted water to boil – add pasta.
While this is happening (you have like 8 mins) heat the oil in a skillet, add the garlic and cook for a couple of mins.
Cook the pasta until al dente, like 8 mins… Strain reserving a mugful of the pasta water.
Return the pasta to the pot and set over medium low heat. Stir in the mascarpone and lemon mixture, sun-dried tomatoes, and spinach. Add back about ¼ c of the pasta water and toss together until the spinach has wilted and everything is piping hot, adding a little additional pasta water if needed.
Serve immediately in warmed bowls topping each bowl with grated cheese and some toasted breadcrumbs – do not overdo.
**you can add some texture to this dish by sautéing some crumbled sweet sausage in a bit of olive oil and diced onions. Add the sausage when you are putting the whole dish together in the pot. Yum!
Buon Appetito.
