Things you need to know.
– Stocks taking a breather – closed a bit lower on Friday and are a bit weaker this morning.
– The Big Banks did not disappoint!
– Next up – more big boys and then the small boys!
– Lots of Eco data this week.
– Oil backs off – because a slowing China! OMG.
– Try the Rigatoni w/Sweet Sausage and Tomato Cream
Stocks ended Friday mixed – the Dow up 114 pts while the S&P lost 5 pts, the Nasdaq lost 25 pts, the Russell lost 20 pts and the Transports gave back 88 pts.
And the big banks and asset managers did not disappoint…. helping investors forget that there was any banking crisis or fear of a banking collapse any time in the recent past…. Earnings from JPM, C, WFC, BLK presented a picture of a strong resilient economy…Consumers and businesses not deterred – are apparently spending and borrowing like drunken sailors even as interest rates rise…
In any event – Net Interest Income (NII) was the bright spot – and again I ask – why would you be surprised…. Interest rates have gone UP – did you not expect the big boys to take advantage of that? Net Interest Income – the difference between what they charge vs. what they pay depositors jumped by 44% to $21.9 billion – average loans climbed by 13% and Jamie told us that ‘the US economy continues to be resilient, consumer balance sheets remain healthy, and consumers ARE spending….’ And there you have it…. JPM is the best of breeds, the cream of the crop, Period the end.
In any event – the 3 big banks grew their loan books (even as rates rose) – think larger credit card balances – and that helped to boost their 2023 lending profits – and that suggests that they don’t expect to see a major shift in consumer behavior. Just a side note – all the banks allocated more money to ‘loan loss reserves’ just in case the economy runs into trouble causing consumers and businesses to fail…
Now, some in the media will tell us that rates rose at lightening speeds…. which is a bit curious to me…. while rates are up about 5% since January 2022 – it has been – in my opinion – a slow steady hike (18 months – that is far from ‘lightning speed) that was well BROADCASTED. For anyone to say they were caught off guard that rates were on the rise (think Greg Becker – CEO at SVB) is like saying – Wait, I had NO idea that my bond portfolio was about to get whacked! I mean – it’s ridiculous….It’s not like you didn’t know – JJ and many of the other FOMC members told you, month after month – when rates were 0% and inflation was on its way up (to 9.4% by the summer of 2022) that they were on a mission…to kill inflation and that meant that they were on a mission to raise rates… Period. I mean – Am I wrong? Is that NOT what happened? Did JJ or other FED members play – “I’ve got a secret”? Were investors not aware that the FED was on the move? Hardly.
Now – we are due to get more banking results this week and that also includes the midsize and smaller banks…..and you can expect that investors will be paying attention to what their NII is…..because it is widely believed that smaller banks are more impacted (negatively) at the extra expense of having to pay higher deposit rates…and that has led to a rash of ‘lowered’ 2Q forecasts in the last month ahead of this earning season….
On the economics calendar we hear that the U of Michigan Sentiment surged to 72.6 – up from 64.4 and well ahead of the estimate of 65.5….1 yr. inflation expectations rose to 3.4% – up from 3.3% last month and the 5 – 10 yr. inflation expectation rose to 3.1% up from 3%….
This morning we will hear from BK, PNC, BAC, SCHW, MS, as well as PLD – An owner, operator and developer of industrial real estate as well as LMT – a global security company that research, designs, develops, manufactures and integrates advanced technology products and services – think Aerospace and Defense (ITA). Recall that Joey told us last week that we have sent so much ammo to Ukraine that now we don’t have any left for ourselves – ‘the shelves are bare’…and I suspect that will be a huge boost to the Aerospace and Defense sector in the months/years to come….Which is why I like that industry and have said it all along, and btw – the ITA etf is only up 4% ytd….and that includes names like RTX (-4% ytd), NOC (-17% ytd), LHX (6% ytd), BA (+11% ytd), GD (-1% ytd) TXT (-4% ytd). Just food for thought…. You do you….
Eco data today includes nothing really – the Empire Manufacturing Survey…. expectations of -3.5 – which is a 9 pt reversal from last month’s +6.6. Later in the week – we will get Retail Sales, Industrial Production, Capacity Utilization, Manufacturing Production, Mortgage Apps, Housing Starts, Building Permits, Existing Home Sales and Leading Eco Indexes….
And yes, Investors will continue to handicap the FED’s next move – which by now we know is to hike by 25 bps next week….but there is also now a wrinkle in this story….St Louis Fed President Jimmy Bullard – a huge hawk – unexpectedly resigned on Thursday last week to become Dean of the Mitchell School of business as Purdue University….So – we could see a more dovish fed post the July meeting….so, is that September hike off the table? I guess we’ll have to wait and see….
US futures are lower this morning – not dramatically…. but lower…. Which means that they are not higher! Dow futures -78, S&P’s down 6, the Nasdaq -3 and the Russell -4. I would say that they are unchanged……remember – stocks are coming off not only a winning but a winning 6 weeks (and honestly a winning year)…when the S&P broke out of what had been its upper trading range at 4100…..surging 400 pts or 10% to 4505 ahead of the 2Q earnings season…and this is on analysts calls for a 7% decline in 2Q earnings while remaining unsure of what the 3rd and 4th qtrs. would bring, never mind what the FED was doing, or whether we were about to enter into a recession, or the toll that the commercial real estate market was about to exact on us….In the end – investors continue to climb the ‘wall of worry’ – surmounting the hosts of negative factors that have worried us….
Key earnings this week besides the banks include NFLX, TSLA, UAL, LVS, AA. IBM, JNJ, TRV, CSX, PPG, AXP & SLB. Industries that span the economy….and will begin to give us a broader idea of what to expect in the weeks to come….
European markets are also all lower and they are lower by a bigger percentage…. France down 1.25%, Eurostoxx – 1.1%, Germany -0.5%, UK and Italy down 0.3% with Spain the best performer only down 0.2%. The weakness in Europe being blamed on the latest China GDP news…. which came in at 6.3% – well below the expectation of 7.3% – to which I would say – do we even believe that number out of China? I for one do not which is why I do not invest directly in China…. you can’t trust them; they can change the rules at any time, and they don’t play by the rules…There are too many other places to invest your money…. across Europe and the Asia Pacific Region….
Earnings season is now in high gear across the zone…. – In addition – Investors across Europe are handicapped by what the ECB and other central banks are going to do next. All indications are for higher rates – which should surprise NOBODY.
The 10 yr. treasury is yielding 3.78%, while the 2 yr. is yielding 4.72%. Shorter duration 3 month and 6-month bills are yielding 5.4% and 5.49%.
Oil is taking a breather – down $1.10 at $74.31/barrel after the 15% spike higher in the last 2 weeks. The focus today? Yup, that Chinese GDP news – suggesting that the 2nd largest economy in the world is slowing and that means that what? Oh right – demand destruction! Oh boy…. come on – stop already! The Saudi’s are holding current production cuts thru December 2024 and if they sense that demand is declining all they will do is cut more…. This isn’t rocketing science. Oil, which had traded up and through all 3 trendlines has now breached the long term at $75.57 and is testing intermediate support at $73.50. I wouldn’t panic…because tomorrow we’ll get a different story out of China…
The dollar index remains sub 100 at 99.89…. and if the Jimmy Bullard resignation means anything – and if we see a more dovish fed – then expect the dollar index to continue to move lower….and a weaker dollar will benefit the commodity complex.
The S&P ended the day at 4505 – down 5 pts…. It’s about the good macro data reports, it’s about future FED policy, it’s about earnings season and yes, it is about the momentum….and until we get a really negative catalyst that derails the market – then expect any pullback to be met with plenty of buyers. The push up and thru 4480 did exactly what the mo-mo guys wanted….it ignited the algo’s (as it was a technical buy signal) and that helped to send stocks higher. While I love the action, I think it is a bit of a disconnect with reality… but like I said, I suspect that any pullback will be met with plenty of buyer interest…. which is why I keep saying – have a plan and stick to it. Do not chase the names that are already stretched, put new money into those sectors that have underperformed and may be boring but have strong fundamentals….
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.”
Rigatoni w/Sweet Sausage and Tomato Cream Sauce
For this you need: Rigatoni Pasta, Garlic, Onions, Sweet Sausage, White Wine, Heavy Cream and Crushed Tomatoes
Heat a pot of salted water on low – so that you get it ready for when you need it in about 40 mins.
Heat olive oil in a pot…add crushed garlic and one diced onion (Vidalia if you can get it). Sauté until soft and sweet, next add the sausage meat – which you have removed from the casing – until brown. Next add 2 cups of dry white wine and let the alcohol burn off…. open 28 oz can of plum tomatoes and rough crush – so that it is a bit lumpy. You can use your hand or quickly pulse them in a food processor. Add to the pot. Bring to a boil and then immediately turn to simmer and let it cook for 30 mins. Stir – Don’t go too far because you will need to stir again and again.
After 30 mins – Turn off the heat and let it cool for 5 mins. Now add 1 cup + a little more of heavy cream (you can use lite cream if you prefer – but heavy cream gives it a richer taste). Stir well.
Now – turn the water up to high and add the Rigatoni’s.
Cook until aldente – 8 / 10 mins…strain – reserving a mugful of the pasta water…. Add the pasta directly into the sauce and stir – making sure to coat well. Add a handful or two of parmigiana cheese and mix. If it looks like it needs some more liquid -add a bit of the pasta water to moisten. Serve immediately – offering more grated cheese to your guests. –
Buon Appetito
