Things you need to know –
– It was a quiet day – as expected.
– Today brings 3 more FED heads – will they support the current narrative of patience?
– Bonds down, Oil up on more OPEC speculation and then down on members possibly bailing.
– Mortgage apps down (higher rates) – more eco data at 8:30.
– Futures are lower – Can’t be surprised….?
– Try the Chianti Risotto – a Tuscan Favorite.
Markets remain confused….one day it’s that the FED is cutting rates 3+ times and the next day they may not be cutting rates at all…. Eco data remains mostly mixed, but it is not pointing to an economic slowdown at all…. Earnings have been better than expected and the forecasts remain (for the most part) robust. Bonds continue to come under pressure as bond investors demand ‘extra yield’ to hold the debt. The TLT (20 yr. bond etf) is down 6% ytd with the 20 yr. yield at 4.55% – up 11% off the December low of 4.10% while the 10 yr. is yielding 4.27% up 13% off the December low of 3.7%. Shorter duration 3- & 6-month bills are yielding 5.4% and 5.35% respectively.
But what is interesting – is that the differential between what they are demanding for investment grade corporate debt and US treasuries is at the lowest level since the GFC of 2008-2010. This narrower gap suggests that investors are NOT concerned about the ability of companies to make regular and on time payments of their debt. Which suggests that they are not concerned about an economic slowdown, because if they were – they would be demanding higher yield from investment grade corporate debt. US treasuries always trade at a slightly lower yield because there is NO risk that the US gov’t will default. It’s Econ 101 – Chapter 4 – Risk/Reward. – Lower risk/lower reward, Higher risk/higher reward.
In any event – the markets ended the day mixed – the Dow -96 pts or 0.25%, the S&P +9 pts or 0.2%, the Nasdaq up 60 pts or 0.4%, the Russell gained 30 pts or 1.3%, the Transports lost 45 or 0.3% while the Equal Weight S&P gained 30 pts or 0.4%.
What’s going on with the Magnificent 7?
TSLA is -19% ytd, AAPL – 5% ytd – announcing yesterday that they are abandoning plans for an autonomous car and leaning into focusing on generative AI, GOOG – which was up 11% by late January is now down 1% ytd after some disappointing revenue misses when they announced earnings back on January 30th and then more recently – the news that they have some stunning failures on their Gemini – AI image generation product…..CEO Sundy Pichar blasting staff yesterday on the ‘problematic responses’ from Gemini when asked to generate historic scenes and images of people that run the risk of ‘perpetuating biases’.
When asked for a nurse – it created an image of a woman (are all nurses women?), when asked for a CEO – it created an image of a man (are all CEO’s men?) and when asked for images of historical figures like George Washington, it generated a picture of a black man that looked like George, but clearly wasn’t George. I assume that does not need to be clarified.
And this demonstrates the challenges that tech companies face – bias and misinformation….and a poorly designed and equipped product (reflecting those biases) only amplifies those issues – leaving Sundy to lose his mind and some investors and traders to hit the SELL button – (while other investors and traders clearly hit the BUY button) – because remember – there are always two sides to the trade……
The other 4 names are doing just fine – NVDA + 57% ytd, MSFT + 9%, AMZN +14% & META + 37%.
Eco data yesterday revealed that Durable Goods were weaker than expected, but Cap Orders Shipped was stronger, Housing Prices on the rise, yet Conference Board Consumer Confidence plunged while both the Richmond FED Manufacturing Index and the Dallas’s FED services Activity were both lower.
Fed Governor Mishy Bowman ‘repeated’ her comments that ‘it is too soon to begin to cut rates’ and that follows Kansas City Fed President Jeffrey Schmid comments on Monday…. Now today we will hear from 3 more FED heads – and my sense is that they will all line up on the same side – stressing the need for patience while assuring investors that the next move (when it comes) is down and not up.
Tomorrow brings us the latest PCE reading – the FED’s favored inflation gauge and while it is EXPECTED to be up – it should not catch anyone by surprise – unless of course you’ve been living under a rock…… Now, there are some market pundits that are suggesting that rate cut expectations have been reset and so this should not be a volatility event….to which I say – be careful. Why? Because the idea that the FED was going to cut 6 or 7 times was NEVER realistic, so the idea that the narrative is now 3 cuts – to me – still seems illogical.
I am in the NO cut camp – because the data (which is what they say is important) does not demand any cut at all and the FED heads are making it clear that they favor ‘going slow’….…So, I still think there is some ‘fluff’ that needs to be taken out….Not a lot- but as I have been saying – I think it’s a bit ‘toppy’. Let’s see what Chicago’s Austan Goolsbee, Atlanta’s Raffi Bostic and Boston’s Suzy Collins have to say today. Remembering that Schmid and Bowman have laid the groundwork…. (JJ has also been pushing the idea that rates will remain higher for longer).
Today – brings us Mortgage Apps – which were down another 5.6% – this on top of the -10.6% last week (higher mortgage rates being cited), 2nd revision to 4th qtr. GDP and that is expected to remain unchanged at 3.3%, Personal Consumption of +2.7%, and Retail and Wholesale Inventories.
Oil was up $1.30 yesterday to end the day at $78.87/barrel – rumors that OPEC is considering extending production cuts thru 2024 to help support $80 oil is being cited as the reason…. but today – oil is down 80 cts at $78.10 – as some of the smaller OPEC members reconsider their membership and consider leaving the cartel – as Angola did in December. And this will create an issue for the Kingdom as they won’t be able to control production among those ‘rogue’ nations…. think more supply and lower prices – again did you skip Econ 101? Supply & Demand?
In any event – we remain in the $75/$85 trading range……
Gold – continues to trade in the range…. $2030/$2050. Bouncing off of support and running into resistance and then bouncing off support once again. Yesterday it traded $2033/$2050 and today it is trading $2033/$2042. Again, until the market gets clarity on what the FED is thinking (timing of rate cuts) it will remain stuck in this range. If they suggest a May cut (unlikely) then watch gold advance, if they leave it undefined – then watch gold continue to struggle.
And the Dollar Index – DXY – which came under pressure yesterday – causing gold to advance, is up today – thus the weakness in gold today. This morning the DXY is up 25 cts at $104.07 – now above trendline resistance at $104.06 – leaving the possibility of the dollar to re-challenge the most recent high of $105….and if they leave policy undefined – I suspect the dollar will advance (think higher for longer and that is good for the dollar bad for gold).
US futures are down. Dow futures -120, S&P’s -15, Nasdaq -75, and Russell -16. I expected the action to be subdued yesterday and it was, and I suspect today might see an uptick in lower prices IF the FED heads all sing the same song…. Remember investors/traders and even the algo’s are reluctant to make any big bets ahead of all the FED speak and eco data later in the week….
Do not be surprised to see some of the tech names come under pressure as investors look for opportunities in other sectors…. As a long-term investor, you need to think like a portfolio manager and NOT like a day trader…. I expect stocks to retreat (a bit). In fact, I hope they retreat, until then keeping some cash in your money mkt fund is never a bad idea – it’s earning 5%!
European markets are lower this morning…. Euro Stoxx, France, Germany, and Italy are all higher on the year while the UK and Spain are lower. Eurozone Eco activity and consumer confidence is due out today. France, Germany, and Spain CPI’s due out on Thursday, Eurozone CPI due out on Friday.
The S&P closed at 5078 – up 9 pts. The focus will be on what the FED heads have to say today…and more speculation about tomorrow’s PCE. Will their comments suggest that they ‘know something’ we don’t? Thursday is the end of the month, and it was an exciting month…. we started at 4850 – and ran to a high of 5111- a 5% move and a new millennium (5000) as well as a new century (5100) in that millennium. Many analysts had 5100/5200 as a yearend target – and its only February 28th….so either they are wrong or the market is gonna back off, regroup, and then surge again…Which is why – it’s time in the market and not timing the market.
I am looking for some more churn and expect the broader market to back off a bit going into the end of quarter. Call me to discuss.
Take good care.
kpolcari@slatestone.com
Sources: Bloomberg, CNBC, Reuters, Wall Street Journal
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Chianti Risotto
A Tuscan favorite. This works great as a first dish or it works great as a side dish with a grilled steak, veal chop or pork chop.
For this you need the basics: Chicken Broth – heated, Butter, 1 Finely Chopped Onion, 2 Cups Arborio Rice, 3 Cups Chianti Wine, Grated Pecorino Toscano Cheese*
Heat the butter in a heavy saucepan, then add the onions and cook until they are translucent. Add the rice and stir until it is well coated with the butter. Add 1 cup of the wine and stir continually over medium heat until it is absorbed.
Now add ½ cup of hot broth stir – now add ½ cup more of the wine alternately, stirring as it is absorbed until you have used it up. (Do not add more than 2 cups of Chianti). Continue doing this for about 20-25 minutes or until the rice is cooked but remains slightly firm to the bite.
Remove from the heat, add a dollop of butter and a handful of cheese. Stir.
Serve in a warmed bowl and always have more grated Pecorino Toscano cheese at the table for your guests.
(*Pecorino Toscano cheese is a firm textured cheese that is produced in Tuscany – thus adding to the allure of the dish.)
Buon Appetito.
