Things you need to know –
– Swiss National Bank to the rescue…Credit Suisse is SAVED!
– European markets are higher…
– US Futures remain under pressure – First Republic bonds are now JUNK – company considers options.
– Try the Cauliflower Risotto w/Truffle Butter
BREAKING NEWS-
The Swiss National Bank steps up and saves Credit Suisse (offering a $54 billion line of credit) – Did anyone REALLY expect anything else…. Come on! They are Swiss and Credit Suisse is a national treasure……. The Swiss were NEVER gonna let Credit Suisse go down the drain…and as expected Credit Suisse gains 30% in trading this morning….and European banking sector that got smashed yesterday is rebounding…..Markets across Europe all higher…up better than 1%…..Italy in the lead up 1.25% – remember they took a pound of flesh out of the Italians yesterday…
Stocks and bonds have a wild day…. FEAR rises, stocks fall, and bond prices rise…. leaving many to ask what is going on…? Larry Fink (Blackrock CEO) puts out his annual letter and let’s just say it wasn’t bullish…. At 4 pm – the Dow was off by 280 pts or 0.9%, the S&P’s down 28 or 0.7%, the Nasdaq though rose by 6 pts (on the assumption that the FED is pausing), the Russell lost 31 pts or 1.7% and the Transports lost 135 pts or 1%.
Bond yields plunged – the 2 yr. now yielding 4%, the 5 yr. yielding 3.6%, the 10 yr. is now yielding 3.49%….recall that last week – these same bonds were yielding 5.2%, 4.9% and 4.25% respectively. The swift price rise in bonds (as well as the surge in Gold – which traded from $1890 to $1942) was a move to safety as investors panicked over what some think is a banking crisis….
Fear sweeps the globe, confidence in the banking system is challenged…. the crisis that began out in California one week ago has now spun a web enveloping regional banks, super-regional banks, money center banks, Swiss banks, Italian banks, French banks…..you who we didn’t hear from? Greece? Do you remember when Greek banks was at the center of the drama? How great would this be if this was just about the Greek banks? But – alas, it is not….
Look – It’s all about the FEAR that has been created in the global financial / banking system and how fast it can spin out of control….and we all know how that happens– everyone piles on – running for the exits at the same time….Technology allowing for swift executions in equities allows for cancellations of bids and offers in a pico second leaving voids in ‘inline’ demand while raising supply ‘at any price’ – and that is true in the stock market but is now true in the bond market as well in this case it would be the swift execution of buy orders leaving a void in inline supply – causing a surge in prices that sends yields lower……..….And by now, you understand what that means…..it means chaos, confusion and a bit of panic…. It means rising levels of FEAR, falling prices in stocks, rising prices in bonds which sends yields plummeting……causing more panic….
Just to be clear – do you know what a pico second is? It is ‘one-trillionth’ of a second….and yes – that is the measure by which algo’s and technology ‘expect’ the system to work…. because they convinced everyone that speed is more important than execution….and all that speed does is allow them to get into and out of positions faster than a blink of an eye…. that is until EVERYONE of them is trying to do the same thing…..then it gets a bit dicey, clogged and then panicky……
Now let’s be clear – this is NOT 2008, this is not a global financial meltdown, this is not about the collapse/failure of banks, insurance companies, brokers, real estate etc.….No…this is all about the fear created by the collapse of one bank that forced the FED, Treasury and FDIC to backstop depositors (unlimited protection) or risk watching a run on almost every regional, mid-sized bank in the country….Money center banks – which were never in trouble also came under pressure as the fear spread. Do I smell opportunity?
Recall – the panic was ignited by a bunch of VC” s, (who are paid to manage risk) – who all got nervous (and created a run on the bank) when they realized that the risk controls at that bank were anything BUT appropriate – but here is the KEY…. this was THEIR bank…..let’s not forget that….. compounded by the fact that a bunch of people (the bankers) apparently had no clue on how to manage risk, (but they had an ‘A’ rating for their ESG efforts), compounded by California regulators (think San Fran FED) that apparently was unaware of the mismatch of risk at said bank, compounded by an administration that spent money like it was going out of style, paying people to stay home vs getting a job, compounded by years and years of easy money, overstimulation and a failure to recognize the birth of an inflationary cycle by the FED when it hit, causing – what some say was a ‘swift rise’ in interest rates, causing ‘inexperienced’ risk managers and fixed income ‘people’ to completely miss the mark on how to manage the risk of rising rates in an inflationary cycle at a bank that served ONE type of client…(and that is the KEY here as well…..SVB serviced ONE type of client….so their risk was clearly defined yet their risk controls were not so much….). I think I warned of this in many of my notes over the past year…. saying that I was afraid of a ‘repeat’ of the late ‘70’s/early 80’s. Many called me a dinosaur! Can you believe that!!!
So I have just one thing to say about the rising rates swiftly comment….…..It is hard for me to understand how anyone can say that the FED raised rates swiftly……..They began announcing the move in the summer of 2021 – after inflation kicked in but before they ceased stimulating….then then started to raise rates in January 2022 (25 bps when they should have pushed them by 100 bps then) and then pushed them higher at every meeting – spending plenty of time making sure everyone knew…. – as they watched inflation go from 1.4% – to more than 9% by the summer of 22…They were very clear about what they were doing – they made it clear that the terminal rate was going to at least 5% and they gave plenty of time for risk managers to make appropriate decisions, they spent plenty of time holding their hands….This did NOT happen overnight….by any stretch….so the ‘raising swiftly argument’ isn’t working for me….This is about stupid – and I guess you ‘can’t fix stupid’.
As a result of the SVB drama – Frist Republic Bank is the next bank to face the music….now set to consider what their choices are after their bonds were reclassified as ‘junk’ -sending that stock spinning out of control again…….headlines this morning suggest that First Republic is weighing all options including a sale……First Republic which was NOT in the same space came under pressure when those same VC’s started telling their portfolio companies and anyone else who would listen to ‘take their money out of that bank’ as well….pictures of people lining up at the branches over the weekend – sealed their fate…destroying confidence….….Again – causing another round of panic in the US banking industry… I think the problem here are the VC’s that all got nervous the minute it gets hot in the kitchen…Stamping their feet and creating hysteria -where there wasn’t any…or wasn’t’ any until they created it….
In any event – I have heard from many clients over the past week – people clearly concerned about what is happening…many asking if they should take their money out of the bank or how do they protect themselves…. Taking your money out of your bank is NOT the answer…first because you are now completely protected. But spreading money between a couple of banks might make you feel better if you have a lot of it….One being a money center bank for sure – if you are that nervous. Putting excess cash into short duration treasuries (3 month/6 month) would be another option….those are completely protected….but in the end – the answer is don’t panic. Talk to your advisor, make sure you understand what’s going on vs. what the chatter is…Remember – this is not a BS/LEH moment at all…..
Then they ask – what will the FED do now? I say they should raise rates by 25 bps…and stick to the narrative they have been telling everyone….a failure to raise rates now would send the message that the system can’t handle it….something I think would be a mistake…but the odds are now 50/50 over ‘do nothing or make a move’ and traders are now betting that interest rates will be 1% lower by Christmas! Oh – boy….
We are now in the quiet period -the FED is in lockdown ahead of next week – so don’t expect to hear from JJ. You may though, hear from Goldman (who acts as the FED’s mouthpiece when the FED can’t talk) and they say that the FED will do nothing next week….so let’s see…. the bets are on…. In any event – the crisis does create a conundrum for the FED….because they have to consider the fight to kill inflation but also the need to maintain financial stability.
Eco data today includes the usual suspects – Initial Jobless Claims and Continuing Claims – but also includes Housing Starts exp of +0.1% and Building Permits of +0.3%. The Philly FED is expected to show a decline of 15 vs. last month’s decline of 24.3.
US futures are down again……..Dow down 50 pts, S&P’s -5, the Nasdaq is up 22 and the Russell down 5. Expect the action to continue to revolve around the banking question…..the move by the Swiss is halting the panic there, but you can still feel the nervousness in the markets as a result of the coming FED and ECB decisions….
European markets are all higher…up about 0.5% – 1%….the Credit Suisse drama is top of mind….while ECB President Christine Lagarde is due to make her policy announcement at any moment….she is expected to raise by 50 bps – she has been very clear about that….…..the question now is – will she cave? Will she pause? We are about to find out.
Oil crashed yesterday…falling 4.3% or $3.10/barrel to end the day at $67.60. as the panic swept the globe…. chaos in the stock and bond markets suggesting that a global recession is coming and that is going to kill demand….add in the new supply that Joey has authorized and boom….down we go….. This morning oil is up 50 cts at $68.10. When will the Saudi’s chime in?
The S&P closed at 3891 – 28 pts…. after testing 3838 earlier in the day…. Futures suggest a lower open – but not a rout….I still think we could and will test 3800 once again…..Recall that Monday’s sell off took us right down to 3800 – we tested it and held…Expect to test it a couple more time just to see if it holds…. ….If we fail to hold 3800 – that then opens the door to test the October lows of 3600….so – stay awake.
Prepare yourself for more volatility – remember that the chaos creates opportunity……Stick with quality (as if I need to tell you that)….Put money into short duration treasuries if you want to wait a bit….. Make sure you do your homework, know what own and why you own it..…… In the end –allocate capital accordingly…..
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
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Cauliflower Risotto with Truffle Butter
This is another great risotto dish that is easy to make and easy to present. For this you need:
Diced Spanish onion, olive oil, butter, 2 Cups Arborio rice, 1/2 Cup dry white wine, Cauliflower Florets Cut Into bite size pieces, warm chicken broth, s & p, truffle oil or truffle butter and shaved Parmegiana cheese.
Heat the olive oil and butter in a heavy saucepan over medium heat.
Add the onions and cook until tender – maybe 10 mins…then add the risotto and stir until well coated with the oil mixture. Add the wine and continue to cook until it is almost completely absorbed.
Next – begin by adding one ladle of the hot chicken broth, stirring frequently until it has been almost completely absorbed before adding more. Continue to cook the risotto in this manner adding the broth one ladle at a time until the rice cooks.
While the risotto is cooking, heat some more olive oil in a frying pan and add the cauliflower. Cook over medium low heat adding a tablespoon or two of broth until the cauliflower is tender and just beginning to turn a golden brown. Remove from the heat.
After cooking the risotto for about 25 mins, should be tender to the bite, stir in the cauliflower and butter. Season with s &p to taste.
Once it is well mixed – serve the risotto into individual bowls, drizzling the top with the truffle oil or a spoonful of truffle butter. Garnish with shaved cheese and serve immediately.
Buon Appetito.
