Things you need to know.
– Housing Starts better but Building Permits worse.
– We have a 71% beat rate so far….in line with historical averages.
– Market feels toppy and tired, FED talk hints of hikes beyond May?
– UK inflation back above 10% (think REVERSAL!)
– Treasury yields UP, dollar UP, Gold and Oil Down
– Try the Florentine Steak
In yesterday’s note I said:
Eco data today includes Housing Starts – expected to be down 3.5% and Building Permits – also expected to be down 6.5%, but we are entering the spring building and buying season…so we could get a surprise, we could….and guess what?
We did. Housing Starts came in ….-0.8% – significantly better than the estimate while Building Permits came in at -8.8% – significantly worse than expected….so what does that tell you…..Well, it tells me that home builders are busy with STARTING projects but are not going to be applying for more permits right now because of economic uncertainty going forward. Ok – great…. And while that’s interesting, it isn’t necessarily mind blowing…. It should not be a surprise at all.
And the earnings that we got yesterday…. of the 7 reports prior to the opening bell – 6 BEAT the estimates….GS, BAC, BK, LMT, PLD & JNJ…. while 1 – FHN missed…. that’s an 86% beat rate! FHN, GS and JNJ ended the day lower – why? Well, FHN missed the number, saw a bigger loss of deposits, had rallied back 28% over the past month after losing 46% during the SVB crisis, so nothing more to see…just traders acting like traders. Now – Davey Solomon – CEO at Goldman panicked and sold some of the Marcus loans at a $470 million discount and has more out for sale (at what is expected to be a loss) – and investors were not happy about that….(Lloyd would never have done that….) and that sent the stock down 1.7%…. and JNJ – well two things happened there….One was that a KEY cancer drug is taking longer than expected to report the results -so that was taken as a negative and Two was that JNJ could face baby powder lawsuits after a 19 months pause…and that was also taken as a negative…and that sent the stock down 2.8% – after being higher by 1.5%…The others – all ended the day higher….but remember – JNJ and GS are both DOW members so their weakness hurt the Dow’s performance.
After the bell, we had 7 more companies report….NFLX, UAL, IBKR, OMC, MCB, ISRG, WAL – and of the 7 – 3 missed while 4 beat…and that’s a 57% beat rate…so for the day – 10 out of 14 beat – and that’s a 71% beat rate – which falls right along historical lines……but look – it is still way early in the reporting season game…so it’s really hard to make too much of it – YET……
Overall, it was a lackluster day by all accounts – boring really…. At 4 pm – the Dow was down 10 pts, the S&P gained 3 pts, the Nasdaq lost 4 pts, the Russell lost 7pts, while the Transports gave back 10 pts – not one index even moved 1/10 of 1%.
Eco data today…. nothing that is going to be a directional driver at all. At 7 am we will got mortgage apps and they are down 8.8% and at 2 pm we will get the FED Beige Book.
Tuesday comments by Atlanta’s Raffi Bostic helped to keep the lid on any move higher for stocks…. hinting that he now expects the FED to keep hiking rates BEYOND the May meeting…. Now, do you see how they do that? 2 weeks ago – it was all about how the FED didn’t need to raise rates any more….meaning May would be a pause and that sent stocks and the markets higher….then last week, the narrative started to change a bit – suggesting that yes, the FED would move in May by 25 bps….and then would halt…and now, over the last couple of days – the narrative is changing again…..last Friday – FED Governor Chris Waller suggested that he favored more HIKES (plural) and recall that Bullard, Kashkari and Mester have all laid the groundwork for additional hikes (beyond May)… Yesterday – Bullard chiming in reiterating his position of taking rates to the 5.5% – 5.75% range before he is done…..and that means 3 more 25 bps hikes.
And all this does is create uncertainty over what the market was expecting vs what it should now expect…. In the end, I think we raise in May and then pause……Inflation is moving in the right direction and so I think they want to give it a month or two of doing nothing to see what happens…remember – there is a May, June and July meeting…August is an off month and then there is a September, Oct/November and December meetings…. Now, if they raise in May and pause – then realistically it wouldn’t be until September that we see a change in policy…..So now you have to consider what the options are……If they pause and inflation rears her ugly head in July…..and there is no meeting in August – what happens? Capisce? So, while the odds are low that the CPI will tick up (right now) I’m going with the May and pause argument…but you can see that they are trying desperately to keep the hike narrative in play – so that the markets are NOT completely surprised if they hike again in June…. What’s really amazing is that FED Fund futures are pricing in a July rate CUT…… It must be me……That is not happening!
And all this did was send treasury yields higher…. the 2 yr. is now yielding 4.26%, the 10 yr. is yielding 3.6% – up significantly over the past 3 weeks….and if you want short duration bills – the 3 month is yielding 5.2% while the 6 month is yielding 5.1%. Money markets are yielding 5+% and that is also attracting investor money and we saw that in the latest Charlie Schwab earnings statement….so in the end – THERE ARE ALTERNATIVES for investors and all that means is that public companies have to work harder to earn your investment dollars…..they need to ‘clean house’ (which we are seeing), they need to cut expenses (which we are seeing) and they need to stay in their lanes….
And the prospects of higher interest rates are helping the dollar index retake some of its recent losses…. this morning it is trading at 102.15 and this is up off the low of 100.77…. a 1.3% move higher…and that is taking its toll on the commodity complex….
Oil which surged higher by 13% after the Saudi’s and OPEC announced production cuts 2 weeks ago and an industry report revealed falling crude inventories – has now fallen by about 5% as the dollar strengthens….we are sitting right on the trendline, but would not be surprised to see oil fill the gap created two weeks ago on the back of the OPEC announcement. That ‘gap’ was on April 3rd – when oil opened up $5 vs. the prior close….leaving a ‘gap’ between $75.67 and $80.10 – typically – the market will close those gaps before making a new trend…..so, it is possible that we see oil trade back to $75.67 over the next couple of days….before it resumes its ascent…..But if the FED continues to raise and does not pause – then the story changes…the dollar will get stronger and commodities will come under pressure…..Today – all eyes are on the trendline….leaving many to ask – will it hold or will it fail?
Gold – is having the same issue…. this morning it is down $32 – breaking the $2000 support line….to trade at $1,987/oz…. gold bugs now trying to decide what the FED will do…. higher rates and a stronger dollar would not help gold…but pausing rates or cutting rates will. Remember – gold rallied 13% off the March lows on the idea that the FED was going to pause and then CUT rates….so if that narrative is changing – then expect gold traders to take money off the table and ring the register – (there’s that creating alpha conversation again). In any event – the official trendline is at $1,940….and if the FED heads continue to push for hikes beyond May, then yes…. Gold will trade lower…. The meeting is 13 days away….
Earnings today include …. SYF (they missed), USB, CFG, ABT, BKR, NDAQ, ALLY and MS…. all before the open. After the bell – look for STLD, IBM, LRCX, ZION, SLG, AA, LVS and TSLA.
US futures are down – Dow futures -170, S&P’s -25, Nasdaq -115 and the Russell is – 10. After the bell last night we heard from NFLX and traders did not like what they heard…..taking the stock down 10% … Honestly, there was nothing really dramatic about their report – they beat EPS, Revenues were up 3.7% streaming paid memberships up 5%, Operating margin was 21% vs, the 20% estimate but BELOW last year’s 25%, Operating Income – 13% while Free Cash Flow was up significantly….in the end – the stock is up 18% ytd….and with rates on the rise and a mixed report – of course traders are going to take some money off the table. I wouldn’t make too much of this report…. The action will continue to be driven by earnings and the latest FED speak ahead of the coming quiet period.
European markets are DOWN….UK CPI came in at +10.1% vs. the 9.8% estimate….and that is causing traders to ramp up their bets that the BOE will continue raising rates…. On top of that – ECB Chief Economist – Phil Lane said that another increase in rates ‘would be appropriate in May’. Now, none of this is really new…. the risk was always that central banks around the world would continue to raise rates….and that seems to be the latest narrative. This morning markets across the region are all down about 0.3%…. not so dramatic, but if the conversation continues to suggest ongoing rising rates – beyond May, then expect those moves to become more dramatic as investors re-price risk.
The S&P closed at 4154 – up 4 pts…. While earnings got off to a good start, it’s still early days….we have 3 weeks to go and now we are getting into the meat and potatoes (see today’s recipe)….…so sit tight….We’ve got healthcare, tech, staples, more industrials, utilities, energy and discretionary reports all ahead….and we haven’t finished with the regional banks yet either……If the market comes under pressure – which I think it will, look for selling to hit the best performers….TECH +20% YTD, COMMUNICATIONS + 22% YTD, CONSUMER DISCRETIONARY +15% YTD, SEMI’S + 25% YTD, DISRUPTIVE TECH + 25% YTD, while money finds safety in Treasuries, and mega cap names in the more traditional defensive sectors – energy, staples, healthcare, while keeping your toes in mega cap tech, aerospace, and financials. Remember – there are some out there that are calling for 15% – 25% reversal…. think Mikey Wilson (MS) and Marko Kolonovich (JPM).
Either way – it’s an exciting time. We remain at a crossroads…. Stick to the plan….
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
“The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kace Capital Advisors.”
Steak Florentine
Here’s the Beef! Steak…for meat lovers – this is a great dish…. Start with a nice cut T-Bone or Rib Eye – always on the bone as the bone provides so much more flavor and makes a nicer presentation for your dinner guests.
You will need: The steaks, Garlic cloves, Pork fatback, dried rosemary, coarse salt (kosher salt works nicely) and pepper. Remove steaks from fridge – rinse under cold water and pat dry with a paper towel. Leave on a platter for about 20 mins so that they get to room temp.
In a food processor blend the pork fatback, garlic, rosemary to a paste like consistency. Next – wash your hands and massage this mixture into the steaks – taking time to make sure that you have worked the meat and the mixture well. Now it is season with S&P. Set it aside.
Light the grill and turn the heat to high and allow the grill time to heat up – it must be nice and hot. Place the steaks on the grill and cook for about 5 min/side – depending on thickness – This will result in a med rare steak…so if you add a couple more mins on each side you will get a more cooked center.
Remember though – when you remove the steaks from the grill – you will cover and let them rest for 4 mins allowing them time to continue cooking and allowing for the juice to flow. Once ready serve immediately on warmed plates. Mashed potatoes and peas always works well with this dish along with a mixed green salad with red wine vinaigrette dressing.
This meal deserves a robust red wine – my favorite is Brunello di Montalcino – it’s like velvet.
Buon Appetito
