Things you need to know –
– Stocks churn as they await more FED speeches.
– Joey to address the country tonight in his SOTU speech.
– Artificial Intelligence takes center stage as the big boys fight for the lead
– Alexa, Chat GPT, BARD and now Ernie… Where’s Big Bird?
– Bond fall, Yields rise, Oil rallies and Gold holds steady
– Try the Dover Sole Meuniere
Stocks continue to test a bit lower as investors/traders/ChapGPT and the algo’s try to interpret all the commentary surrounding Friday’s strong NFP report…..by the end of the day – the Dow lost 35 pts, the S&P down 25 pts, the Nasdaq gave up 120 pts, the Russell lost 28 and the Transports gave back 154 pts.
Atlanta Fed President – Raffi Bostic (not a voting member) – telling us yesterday that the strong jobs report ‘raised the possibility that the central bank will need to increase rates to a higher peak than policymakers had previously expected’……which is kind of interesting – since Minneapolis’s Neely Kashkari (also a non-voting policymaker) has been calling for rates as high as 5.5% before the FED can pause….even St Louis’s Jimmy B (a voting policymaker) jumped on that band wagon a month ago as so many were debating the economy and the next move for the FED. Now Bostic reminded us that his base case is for rates to rise to 5.1% and then stay there thru 2024! Which means he sees NO rate cut any time in 2023 or 2024….. He also suggested that we could see rates rise thru June (which means 3 more increases) and did not rule out at least one of those hikes being 50 bps….vs. the expected 25 bps. Bostic said.
“It wouldn’t surprise me if we saw this quarter or the next come in stronger than people expect right now.”
Causing him to say that the committee could consider moving back to a 50 bps hike if needed reminding us that imbalances between supply and demand can lead to higher inflation. Now, on the brighter side – he said that he expects inflation to fall into the low 3’s this year – noting that the last percentage point getting us to 2% can take a long time to be realized…which might mean that the FED changes the narrative at some point – telling us that the target is now 3% vs. the expected 2%.
Fed Fund Futures which had been pointing to a 4.9% terminal rate have now repriced and are in line with Bostic’s view….that rates need to go to 5.1% before anyone can even think of a pause….Now this conflicts with what we heard 2 weeks ago from bond guru Jeffrey Gundlach – who told us that investors need to listen to the bond market- that was suggesting a 4.9% terminal rate and NOT the FED – in fact, I think he said the FED was ‘clueless’….. So? How’s that working for you?
Treasuries also sold off with stocks – sending yields up…the 3 month T-bill now yielding 4.48% (on an annualized basis), the 6 month is yielding 4.65% (again on an annualized basis), while the 2 yr. is yielding 4.42%…and as you know rising yields tend to hurt stocks – especially growth stocks….because rising yields make it more attractive to hold bonds vs. holding some companies whose value depends on economic growth prospects. So, if you are a bit concerned over the direction of the economy in the near term – short duration bonds do offer some shelter in the storm. But as an equity guy – weakness in ‘good’ names and sectors provides interesting and potentially better long term opportunities for the patient investor.
And today – we will hear from JJ Powell – when he takes to the podium at the Economic Club of Washington….. He will get the chance to re-deliver his speech and re-enforce the message that the FED is not pausing (yet), so ‘hold the applause’. Expect many to count the number of times he says the word ‘disinflation’ because that is what lit the fuse last week…..he used that word 15 times during his presser and the algo’s and some traders took that to mean that the pause and eventual pivot was only months away….and BOOM – stocks surged…..so, was that a bit premature? I think so, but all that means is that you can expect us to test a bit lower again which will give you an opportunity to take advantage of another sale. Now that doesn’t mean everything will go on sale, but there will be opportunity….
Now – what happens when we see a bit of nervousness? We see the boring stuff advance while the ‘sexy’ stuff declines……and yesterday after Bostic’s comments we saw 9 of the 11 major sectors of the S&P decline…..only two advanced… Utilities and Staples – both boring sectors, but sectors that offer shelter in the storm.
And what is going on with artificial intelligence???? A lot – have you heard of Chat GPT? If not, get ready, because artificial intelligence has just made a quantum leap into the future….MSFT making a big investment in this open AI platform… is set to make an announcement today about how they are incorporating this chat feature into their BING search engine…..
Google now in the race of its life, has CEO Sunny Pichai calling for ‘all hands on deck’ to test their version of Chat GPT (named BARD) – calling on ‘every googler’ to man their stations……as search engines around the world go ‘all in’ on AI. And don’t discount China’s role in this – BAIDU (Chinese search engine) is testing a chat bot named ‘Ernie’. So, as I have been saying for months now – artificial intelligence should have a place in your portfolio…and you can access it broadly via the BOTZ etf….. Now look, if you own GOOG and MSFT then your participating, but if you want more direct concentrated exposure then consider adding BOTZ as a holding. BOTZ is up 18% ytd….after declining 49% last year….It’s one of those beaten up sectors that is finding love from investors in 2023….
There is no economic data today to speak of, so expect the conversation to continue around earnings, JJ’s speech today, Biden’s SOTU speech tonight and about the remnants of that Chinese weather balloon that NORAD suspects was loaded with explosives – curious no?
So far we have just over half of the S&P reporting and 69% of those are beating the number and this down from the usual 75% beat rate. JJ will take to the podium at noon and most likely speak for 45 mins to an hour….so expect the tape to reflect everything he says… We’re up, then down, then up again….all this as some investors try to handicap the next move. You see, this is where it gets easier for me….instead of trying to handicap the next move – set yourself up to benefit no matter how it moves….Capisce?
We will hear from FISV, DD, KKR, RCL, HTZ, CCK, VOYA, and PAYC to name a few…..Now when I look at those names, I don’t see anything that is going too trump JJ’s speech or Joey’s SOTU speech either. Now the Chinese balloon? That will fall into the Hunter Biden category of the newsfeed….hot, then cold then hot again…but in the end – means nothing for stocks broadly, but could be an interesting play for Aerospace and Defense names….a sector that is up 24% off the November lows and up 4% this year.
Oil – which traded down to a low $72.25 yesterday is now trading at $75.60 after trading as high at $76 overnight….why? The China demand story, production declines in Russian oil and the idea that OPEC+ is not raising production and is still considering cutting production….. What did I tell you? They talk it down, get long and then they talk it up…..Trendline resistance is at $77.30…..
The dollar index – DXY which surged on Friday – on the back of the strong NFP report….was up yesterday and is up again today…..having bounced off of the lows of $101……A level that it tested in May/June and one that I suggested would hold. The index has now pierced the trendline (resistance) and it will be important to see if it holds….if it fails – I would expect it to test the 101ish support zone again. A push higher will see it test longer term resistance at $107.10.
Gold is churning at $1,880 just a hair above the short term 50 moving average. My guess is that the dramatic move lower was a knee jerk reaction – since nothing has really changed….the economy remains stronger than what the FED wants so expect rates to continue to move up, yet I am still in the camp that Gold will be a beneficiary as inflation remains stubborn.
US futures are churning as we await JJ’s speech and Joey’s SOTU speech tonight. Dow futures down 20 pts, the S&P up 2 pts, the Nasdaq up 22 pts and the Russell up 1. Tomorrow we will hear from NY FED Pres – Johnny Williams, Thursday brings us ECB President Christine Lagarde and BoE Governor Andy Bailey. Friday will feature Fed Heads – Chris Waller and Patty Harker.
A 6:45 am headline hits the tape as Neely is interviewed on Squawk Box…
“Fed’s Neely Kashkari says Central bank has NOT made enough progress”
reiterating his view that there are more hikes coming….now, he was not expected to make any comments today, but he can’t help himself…..JJ is speaking, Joey is speaking and he wants to make sure that everyone knows that he is important too….so he calls up Andy (Sorkin) and begs to be featured on TV to give his position on what the FED should do…..He didn’t say anything new, so my guess is that it’s a non-event….the market knows what he thinks.
European markets are up across the continent. They are digesting more earnings results as they await all the speeches today and tonight. There is no eco data in Europe today to drive the action……Markets there are up about 0.4%.
The S&P closed the day at 4111 – down 25 pts……after piercing 4100 to trade as low as 4093 before finding any support. We are still holding well above the trendline at 4000, but as I said – do not be surprised to see stocks consolidate and test that trendline as they digest all of the data –macro- economic as well as micro-economic.
Remember – build a strong foundation…. dollar cost average into it and keep reinvesting all the divvy’s is the plan…. Buy names on weakness (as long as the weakness is not a fundamental shift in the sector or the name).
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
Dover Sole Meuniere
Still feels a bit ‘fishy’ to me so try the –
Sole Meunière – easy to make and can be varied according to your own tastes:
You will need: Dover sole (or lemon sole) flour, s&p, butter/oil, lemon, parsley and capers (optional).
Rinse and pat dry the filets – Combine flour, salt and pepper – dredge the filets and set aside.
In a skillet over medium-low heat, melt the butter and add a splash of Olive oil to prevent the butter from burning. As soon as the butter stops foaming place the filets in the pan – being sure not to overcrowd the pan (maybe 3 fillets at a time). Cook for 2 – 3 mins then turn and cook for an additional 2 – 3 mins depending on thickness of the filet. Only turn once during cooking.
Place the filet on a warmed platter and melt a bit more butter in the skillet – turn off the heat so that you do not burn the butter….squeeze the fresh lemon into the butter – add capers and stir together.
When completed – pour this sauce over the filets – sprinkle with fresh parsley and serve immediately. Serve this dish with French cut green beans – that are first blanched in salted water, then shocked in a cold bath then quickly sautéed in a bit of butter and s&p. Easy, quick, and good for you.
