Things you need to know.
– The rally fades – but that should not be a surprise
– Janet to bring $112 billion to the market this week – how will it be received?
– Gold down, Oil down as the War Risk Premium fades
– Shells w/Sweet Sausage, Pancetta and Cannelloni Beans
Hello? Reality Check – Aisle 2……. What happened to that ‘out of control – Risk On’ rally that engulfed the markets last week? What happened to all of that ‘enthusiasm’?
Well, stocks struggled out of the gate on Monday – attempting to hold the line – as bond prices retreated sending yields just a bit higher – this as they suddenly recognized that Janet is bringing a lot of supply to the table and that what JJ says on Thursday – may be different, in fact – will most likely be different than what the market expected last week. Last week it was ‘The FED is done, and rates are going lower’ narrative – yesterday it was ‘hmmmm, maybe not so fast Cowboy’….
At 4 pm – stocks ended the day mixed…. the Dow gained 35 pts, the S&P up 8 pts, the Nasdaq up 40 pts, the Russell lost 23 pts while the Transports lost 10.
Now it was also a reversal (of fortune) that saw bond yields tick up – the 10 yr. rose by 7 bps to yield 4.65% – up from 4.58%, the 2 yr. rose 9 bps and the 30 yr. rose 6 bps, the ….Now this speaks to exactly the point I have been talking about………Janet (Treasury Secretary) Yellen is bringing $112 billion worth of treasuries to the markets …..at a time when the 3 biggest buyers have turned to ‘net sellers’….think China, Japan and he FED…..leaving many to ask – who is gonna stand in line and buy all of this at current prices? And the answer is – probably no one…. I mean – would you stand in front of a moving train?
And all that means is that the buyers just won’t pay last sale prices – why pay 98 cts on the dollar when you can most like pay 95 or 90 cts on the dollar? I mean again, it’s a simple math problem…. Econ 101 – SUPPLY AND DEMAND. In light of all the new supply coming – and there is a lot of it…..$760 billion this qtr. $112 billion of that this week, and then $860 billion in the 1st qtr. of 2024…never mind what she will need to bring in the 2nd and 3rd qtrs. of 2024 to continue funding the ‘larger than anticipated’ gov’t spending packages….(note the plurality). And so, all this does is put pressure on prices and that sends yields up….and so you ask – didn’t these guys know this last week? And the answer is “of course they did” – but the fact was that stocks had become short term oversold, bonds had become short term oversold, the shorts ran to cover and so like anything – the trader types went shopping – scooping up some bargains while they squeezed the shorts into taking action to cover.
Remember – long term investors were buying stocks on the way down, recognizing value as it was being created – it was the algo’s and some of the trader types that couldn’t get out fast enough as well as the guys betting on a decline – causing an even bigger downside reaction…..creating an even bigger longer term opportunity – which is why when they chase them – the long term investor sits back and goes along for the ride….enjoying every tick higher and higher…. – having bought stock on the weakness, allowing the trader types and algo’s to trample over each other and take them higher. It’s a story as old as time….
Now there wasn’t really any eco data to speak of – other than the SLOOS report – which would have garnered zero attn months ago – I mean who has ever heard of this data point? The Senior Loan Officers Opinion Survey….sounds like a real blockbuster of a data point…but the reason it has become so important is because it shows that loan demand is in decline and standards are being tightened even more and that suggests potential tougher times ahead. …and so, that’s why it’s important…but at this point – does it really matter? Is this data point really going to make investors change their minds? Doubtful.
And don’t forget the recent Redfin report yesterday…..sellers are CUTTING prices in order to create interest in their home – as they now appear to be rushing to the market to try and ‘lock in’ the higher values…..and so it begins…..You see, it’s the same story – supply is not the issue – price is the issue and the cost of capital is the issue. 8% mortgage rates makes it more expensive to own that home, pushing some buyers out to the sidelines – so either rates go lower or the price of the house has to drop to offset the higher cost – and rates are not going lower anytime soon.
Janet will have to do the same thing in the bond market…..in order to create demand – for the massive funding that lies ahead – treasuries will have to come to the market ‘at a discount’ causing yields to rise and that will continue to put pressure on stocks, real estate and other assets.
Gold traded down $10 to end the day at $1988….and this morning it is trading even lower…down another $16 at $1972/oz as the ‘risk premium’ over the Israeli/Hamas war fades, the idea that the FED might be done and as the dollar bounces off its recent weakness. What the market is telling you is that the Middle East war will not escalate, it will not draw other nations into the fight. It has now broken down and thru support at $1983 leaving $1955 as the next level of support. I suspect that it will test their barring any escalation in the war.
Oil is under pressure….for many of the same reasons….the fading of a war ‘risk premium’ that took it closer to $90/barrel. This morning oil is down $1.80 at $79.20/barrel and is now below it’s intermediate term trendline….leaving it in the $74.70/$80.60 trading range. Nothing has really changed from a demand perspective and the Saudi’s have pledged to stay the course on their output cuts. China released their import and export figures for October…. Imports grew by 3% but Exports fell by 6.4%….and from that you are supposed to assume that China is struggling….but remember – you first have to believe the data that comes out of China – something I remain suspect of.
The VIX – continued to move lower as discussed yesterday…. we are now below all 3 trendlines and are looking for the VIX to test the mid-September lows of 13.50/14.
This morning US futures are taking a breather…. Dow futures -62, S&P’s down 8, the Nasdaq down 30 and the Russell is down 3 pts. There is not any real eco data to drive the markets – so the focus will remain on earnings and FED speculation.
European markets are lower…nothing special driving that action today….again, it appears to be more of a breather after the rally last week.
The S&P closed at 4365 – up 8 pts – remaining just on the north side of the trendline…. leaving us in a very tight range – 4340/4404. The action this morning suggests weakness that is sure to test 4340 to see if it holds…if it does not – then expect the algo’s to send a wave of sell orders signalling a technical break (again). My sense is that a test lower (4250) is in the cards….until we get closer to Thanksgiving….and then I suspect it stabilizes and moves back into the 4350/4400 by year end….
Which is why I keep saying – make a plan and stick to it….do not try to pick tops and bottoms, own the biggest names in the sectors you like and ‘invest’ – don’t trade your investment account. Sign up for divy reinvestment as a way to build your portfolio and use the chaos to tweak when necessary.
Take good care.
kpolcari@slatestone.com
Sources: Bloomberg, CNBC, Reuters, Wall Street Journal
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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, which may not necessarily align with our firm’s standpoint.
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Medium Shells w/ Sweet Sausage, Pancetta and Canelloni Beans
This is a great dish for a cold night…Light the fire, curl up on the couch……
For this you need: 2 cans of cannelloni beans, garlic, thick-cut pancetta, cut into small cubes, sweet Italian sausage, removed from casing, large, sliced onion, olive oil, chicken broth, water, s&p, finely chopped parsley, fresh grated Parmegiana, and a box of medium shells.
In a saucepan over med hi heat – add some olive oil and the sliced garlic – sauté for 3 or 4 mins…now add the sliced onions and sauté until soft and translucent – careful not to burn the onion…. When ready…add in the pancetta and sausage and allow to brown up nicely. Using your wooden spoon – break up the sausage as it cooks.
Now add in the 2 cans of Cannelloni beans – juice and all and mix, allowing the beans to marry the other ingredients. Next add the broth and the water at a 2:1 ratio…. (2 c broth, 1 c water or 4 c broth, 2 c water…see the pattern?). Add enough so that the sausage and bean mixture is covered with water…. Let this simmer on the stove for 15 mins…. stirring occasionally. Now bring it to a boil (adding more water if you need to remembering that the pasta grows and sucks up the liquid) – toss in the shells – you don’t need a whole pound here….the pasta grows and sucks up the broth – so maybe like a half pound max – but it depends on how much you are making….but let’s assume you are using 6 sweet sausage links… – cook until al dente – maybe 8 mins or so – adjust for taste and serve in warmed bowls – adorn with the parsley and if you like a drizzle of olive oil. Have plenty of fresh grated parmegiana cheese on the table for your guests.
*If it sucks up all the sauce – then feel free to add more chicken broth to keep it moist…. you don’t want soup, but you do want moist.
You can serve this with toasted garlic bread –
Buon Appetito
