Things you need to know.
– Earnings season kicks off with the banks…. It’s both good AND bad.
– This week is about the regionals…. along with NFLX & TSLA
– Gold and Oil surged last week, both are retreating a bit this morning.
– The war in Israel continues to heat up, Palestinians on the move.
– More FED speak suggests another pause.
– Try the Bucatini in Butternut Squash
It was a hell of a week…. Confidence is taking it on the chin, inflation is heating up (again – although they tell us not to worry), The fear index – VIX – shot up 34% as the ongoing threat of an erupting broader conflict in the middle-east unfolds – Israel telling the Palestinians to move south to avoid the war and the anticipated ground invasion and so far about 600k have left, but Hamas wants them to stay in place potentially raising the human cost exponentially – forcing them to become human shields (sacrificed) – it is a barbaric display of the worst of humanity…..and has divided the world along lines that I for one never thought I would see…..And just to get this off my chest – what is happening at institutions like Harvard, UPenn, & UWisconsin, and a host of others is beyond comprehension…..and begs the question – What are we teaching our kids? Where is all of this hate coming from? But let’s not go there right now.
And it was ALL of that that drove investors, traders and algo’s into the safe haven assets……treasuries, gold and utility stocks….all saw significant gains – Oil saw gains as well as the idea of supply disruptions gathered steam – you see if this war escalates and draws Iran into the fold, we can expect stricter sanctions on Iranian oil exports – which will reduce supply (as the Saudi’s/OPEC+ have not offered to raise production) and that will see prices rise….and a sustained rise in oil prices – on top of what we already got, will hurt the global economy even more and ultimately take its toll on the stock market as it continues to stoke the flames of inflation.
At the end of the week – we saw the 10 yr. treasury yielding 4.61% -representing a 5% drop from earlier in the week and that makes sense because the TLT – the 20 yr. bond ETF rose nearly 5% – leaving it still down 12% ytd -but up off of the -17% at the start of the week. The 2 yr. treasury ended the week yielding 5.05%. Gold – is on fire…. rising $63 alone on Friday for a gain of $122 or nearly 7% on the week…. (think the ultimate safe haven asset)
Utilities – XLU was up 1.15% Friday -and has gained 8.5% since October 6th – the Monday after the invasion of Israel. And Oil – UP $4.80 or 5.8% on Friday – bringing its weekly gain to 7.6%…. leaving it cuddling up to $88/barrel….
We saw weakness in Tech, Consumer Discretionary, Communications and the Semi’s as the week came to a close and this makes perfect sense – right? They are some of this year’s best performing sectors ….so yes, as the level of angst heats up – then you can expect that investors and portfolio managers will ring the cash register and take some money out of these sectors that are up 30+% ytd. Now that money can go a bunch of places – and depending on your risk tolerance and outlook you do have choices – there are alternatives.
Financials +0.2%, Consumer Staples +0.9%, Energy +2.2%, Healthcare +0.6%, Basic Materials – 0.4% and Real Estate was flat. The contra trades gained and the VIXY – fear index ETF surged by 12% on Friday….as we moved into the weekend – leaving many to wonder what was next.
At the end of the day the Dow was up 40 pts, the S&P lost 22 pts, the Nasdaq down 167 pts, the Russell off 15 pts and the Transports lost 263 pts… (think higher gas/diesel prices)
Now it was also the start of earnings season -and we saw strong earnings from the big boys…JPM +1.5%, WFC +3% and C -0.25% as well as BLK-1.3%, UNH +2.6%, PGR +8% and PNC -2.6%. But before you get all giddy about those bank earnings – sit back….because while they beat on all levels, they are warning of tougher times…Recall, I told you to pay attention to the Loan Loss Reserve Account….Well, if you did, you would see that they are all allocating larger chunks of money to this line item because more loans are going bad, (think HELOC’s Auto loans, Mortgages, revolving credit and Commercial loans) American’s spent money like drunken sailors – depleting the piggy bank leaving some to make hard choices about which bills to pay and rising rates are slamming the commercial real estate market….and that is raising alarm bells all over the street. Add in the fighting in Ukraine and now Israel/Gaza (with ongoing threats by China to take Taiwan) along with surging gov’t deficits in DC and you have a recipe for disaster….
JPM CEO Jamie Dimon – laying it out so that no one would misunderstand, saying.
“This may be the most dangerous time the world has seen in decades…” although at the same time he revealed that they changed their base rate forecast from a ‘mild recession’ to a ‘soft landing’…. Dude??? Are you kidding me?
Citi CEO Janey Fraser – saying that “All of these macro dynamics have clearly impacted client sentiment…” and that is causing CEOs of listed companies to be increasingly less optimistic about the future than they were 3 months ago. Do you think?
Now – the banks have been able to raise the rates on loans faster than they chose to raise the rates on deposits. In fact – JPM Chase revealed that they are paying a paltry 2.53% on interest bearing deposits -which IS up from 0.75% last year, but well below what you can earn on your gov’t money market fund at Fidelity – that is paying you 5.1% and leaves you completely liquid….And if they are forced to up the ante, it won’t kill them but it will impact their earnings going forward….Which only means – pay attention to what you hear this week form the smaller, regional less diversified banks…. PNC – not tiny, but not one of the big boys, was the first ‘bigger’ regional to report and while they beat on the bottom line, profit ‘slipped y/y and top line revenues fell short…..so they announced that they are cutting 4% of their workforce as they try to control costs…..
There are no earnings today to speak of, but we will get SCHW – tomorrow, then BAC, BK, GS, JNJ, PLD & LMT on Wednesday. Later in the week – we will hear from NFLX, TSLA, NDAQ, USB, PG, MS, STT and more…
US Futures are struggling to move up. At 4:30 am Dow futures +50, S&P’s +2, Nasdaq -20 and the Russell is up 5. (I know it’s early, but I have an early morning appt in FLL, so I had to get them out). I realize so much can change in the next 5 hours – so just pay attention to the headlines as the sun rises over the Atlantic. News that the US is ramping up efforts to tighten the screws on China – further restricting their access to advanced semiconductors and chips is causing the tech sector to come under a bit more pressure this morning. The US said to be doing this to prevent China from gaining a ‘military edge’ – again think Taiwan.
Now, despite what appears to be a decent start to the earnings season – it was only day 1 – street analysts/strategists are bracing for more volatility over the coming weeks as inflation takes root again becoming even stickier, oil prices climb and the conflict in the Middle East continues.
Which confirms what I have been telling you all along….If you are in the 20 – 40 age group – you should be all in…..You’ve got plenty of time….If you are in the 40 – 55 age group – you might need to adjust your risk level a bit and if you are in the +55 category – you need to have a well-diversified and balanced portfolio that has a decent dividend yield and reflects good upside returns, favors a more defensive posture in order to justify the risk of remaining in stocks. It could continue to get rough over the coming weeks – but remember – geo-political issues create short term chaos and long-term opportunities – you need a strong stomach.
Oil is trading down 50 cts at $87.15, Gold is down $8 at $1922 and the dollar index – which had retreated to a low of 105.70 last week – shot higher on Thursday and Friday is holding its own at 106.55. It appears to be in the 105.70/107.20 trading range – and much of that will depend on FED policy statements over the next two weeks.
On Friday – Philly’s Patty Harker told us that ‘disinflation’ is happening and that he favors doing nothing at the next meeting (unless of course the data changes!). Disinflation is not Deflation…. Disinflation happens when the rate of inflation slows but remains positive causing prices to still rise, vs. Deflation that sees the inflation rate go negative, actually causing prices to fall. And THAT ain’t happening!
European markets are all a bit lower as investors there assess the latest news coming out of the middle east. Markets across the region are down about 0.4% across the board. There is no economic news to drive the action – so it’s all about the geo-political issues and the start of earnings season.
The S&P closed at 4327 – down 22 pts….the short term trendline is about to slice down thru the intermediate term trendline which has moved up from 4385 to 4402 over the past week – and this will suggest that we could see further weakness in the days ahead….Now this is not the death cross – when the short term trendline slices thru the long term trendline, but it is a warning shot – leaving us in the 4220/4402 trading range….Expect the regional bank earnings to be the next big thing…..
On a side note – Secretary of State Blinken has returned to Tel Aviv after spending time with the region’s Arab leaders in a bid to help the US provide humanitarian assistance to the Palestinians. Biden and German Chancellor Olaf Scholz considering trips to Israel to try and prevent this war from escalating. And the clock ticks.
Take good care.
kpolcari@slatestone.com
Sources: Bloomberg, CNBC, Reuters, Wall Street Journal
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Bucatini W/Butternut Squash Sauce
This is a great fall dish. You could use it as a pasta course on Thanksgiving.
You need: Cubed butternut squash, chicken stock, garlic, butter, fresh grated Parmegiana and a bit of heavy cream.
Bring a pot of salted water to a rolling boil. Then turn to simmer until you need it.
In another pot — start with cubed butternut squash – place 2/3 of it in a pot of chicken stock, 3 cloves of crushed garlic, & a stick of butter – season with s&p. Add enough stock to just cover the squash (as this becomes the sauce for the pasta). You want the squash bathing in the liquid.
Boil until the squash is soft – when done – use a masher to mash the squash….once done it should be nice and thick – add the remaining 1/3 of squash and simmer for 15/20 mins…making sure that the new cubed pieces have time to cook and soften….this way – you get a thick sauce with chunks of squash for the pasta……Turn the heat off and add a handful or two of shredded parmegiana cheese and about ¼ cup of the heavy cream and mix well.
Add the pasta to the pot of water and cook for 8 /10 mins or until aldente. Strain pasta – always reserving a mugful of the pasta water to re-moisten the pasta…. return to pot – add back a bit of the water and stir….do not make it watery – just a bit moist…. Now mix with the butternut squash – Serve immediately in warmed bowls and garnish with a bit more of the Parmegiana. always supplying additional cheese for your guests if they so desire.
Buon Appetito
