Things you need to know.

Was there a change of heart?  What felt ugly was pretty again or is that or is that ‘what is old is new again?’  Stocks which got slammed on Tuesday on the idea that JJ was going to remain hawkish, somehow found him to be dovish Wednesday and so the algo’s which were set to sell mode on Tuesday got reprogrammed to buy mode on Wednesday and stocks went up.  The Dow + 75 pts, the S&Ps gained 26 pts, the Nasdaq added 90 pts, the Russell rose by 15 pts, the Transports up 48 pts while the equal weight S&P added 41 pts.

Now the headline says that JJ told Congress that the FED remains on track to cut rates later this year (leaving it totally undefined).  He said that while it might be appropriate to cut rates, he wants more evidence that inflation is slowing and moving ‘sustainably’ towards the 2% goal. 

“We want to see al little bit more data so that we can become confident, we’re not looking for better inflation readings than we’ve had, we’re just looking for more of them.”

So, while I see nothing new in that comment, apparently there is or the algo’s thought there was. In the end – changing policy (cutting rates) too soon or too many risks igniting inflation – which is already on the rise again and they haven’t done anything about rates.  All you have to do is look at the last 3 inflation reports – the latest CPI, PPI and PCE reports all revealed rising inflation.  Now he countered that thought by saying – waiting too long to cut rates could ‘unduly weaken economic activity and employment’.   Yeah, let’s go with that because taking rates to 5.25% has killed the economy.  Look, unemployment has not risen -it has fluctuated between 3.4% and 3.7% – currently 3.7% – which by all accounts remains closer to historical lows than not. The job market – another key indicator of the strength of the economy, remains ‘robust’ (his words not mine) and stocks are kissing ALL-TIME HIGHS…. So, what am I missing? 

Remember – the FED remains focused on achieving a ‘soft landing’ – which means that they have to support conditions that will bring inflation down, while maintaining solid growth and a healthy labor market.

In fact – JJ said that that the FED was focused on a ‘soft landing’ and that ‘we are on a good path to get there’ AND has no reason to think that the US economy faces ‘any immediate risk of falling into a recession’.   Again, so why are we discussing rate cuts?  He said we are on a path to get there and that there is no immediate risk…….

The other bomb he dropped was that the FED was pushing for significant changes to the Basel Endgame plan – a plan introduced in July 2023 that proposed significantly higher capital requirement for US Banks…. and was met with pushback by both parties and of course the lobbyists that line the streets of DC. So, he said that he expects broad and material changes may even cause regulators to issue a new proposal that ‘restarts the clock’ and that would be a major win for industry giants.

And how appropriate is that considering what is going on with NYCB and the potential contagion effect – and I say potential because I think this is a NYCB specific problem, the same way SVB was a specific problem.  But while it might be specific to those individual banks, we have seen how quickly it can infect the whole sector – so now is the time to remain calm….because I don’t see the whole place collapsing….But as expected the KRE – regional bank ETF was down 3% at one point yesterday only to end the day down 0.1%.  The KRE was down more than 12% in February as regional bank loan concerns pressured the sector but has since rallied back by 7% leaving it down 5.5% ytd.  

You can find my appearance on the Big Money Show at Fox Business yesterday where we discussed the FED, NYCB and investing into an election year here. 

https://www.foxbusiness.com/video/6348344764112

Speaking of NYCB – which got halted first because of news pending and then because of increased volatility after that announcement – We learned that they are ‘trying’ to raise more than $1 billion of capital to ‘shore up confidence’ in this large NY regional lender.   OK – look, that’s great, and while the CRE market is a concern, I am not really sure it is the issue here, (in fact – JJ said during his testimony that the CRE issue is ‘manageable’).  I think the weakness we’ve seen in the last week is more about the concerns over ‘internal control weaknesses revealed by the bank that is causing so much more of the angst we’ve seen in the last week.  Alessandro Dinello who became CEO last week is OUT, being replaced by Joey Otting former head of the Office of the Comptroller of the Currency during the Trump administration.  The stock – which was down some 88% off the June 2023 high – rallied 8% by the close and is up another 3.5% this morning on confirmation of that deal trading at $3.50/$3.75. 

In the end it was Utilities – XLU that led the market higher…. up 1%…. followed by Consumer Staples – XLP + 0.84% and then Tech – XLK up 0.79%.  The others lined up rising between 0.15% to 0.7%…The only sector that didn’t participate – Consumer Discretionary -XLY – lost 0.4% on the day.

Bonds rose – the TLT up 0.6% and the TLH +0.55% – leaving the 2 yr. yielding 4.55% while the 10 yr. is yielding 4.10% the 3 month is at 5.22% and the 6 month is yielding 5.06%.  Mortgage rates are still hovering around 7.25% while 12-month CDs are paying you 5.4% but will hit you hard if you pull the money out prior to the maturity date.

Oil traded as high as $80.20 yesterday before closing at $79.15…It remains stuck in this trading range – shaped by a number of factors….including US production and inventory levels, OPEC+ pricing and production policy and of course – don’t forget China and what they are or are not importing and using (be careful about putting too much weight in that argument)….Leaving us to wonder are we consolidating getting ready to surge or are we consolidating getting ready to plunge. We are above all 3 trendlines – which are all converging around $76 which is a place I will expect oil to find support IF we test lower.  My gut says we are going to see $85 before $75.

Gold shot higher yesterday on the back of the JJ comments…. remember – any hint that rates are headed lower was going to power gold higher and BANG…that is exactly what happened. Look at the chart – it is up $110 in 5 trading sessions going from $2054 to $2162 a 6% move up…. this as gold traders convinced themselves that JJ was going to do exactly that…. We are in (almost) unchartered territory…. $2171 was the December high (and I’m not sure that was anything other than a fat finger trade) but it is what it is, so stay tuned….

This morning US futures are up…… Dow futures + 45, S&P’s up 13, The Nasdaq up 80 pts while the Russell is up 1.  OK – so we’ve had 24 hrs. to consider and reconsider JJ”s comments – Minneapolis FED President Neely Kashkari throwing a bit of cold water on the comments saying that if we see ANY cuts – don’t go planning on more than one while not defining any specific date…..I’m still in the camp that they should not cut rates at all, but if they succumb to the pressure – it needs to be AFTER the election and not before….Otherwise they will have to come up with a ‘believable’ story on why they are cutting rates within the 6 month election window – and it better be because the economic data suddenly suggests cracks in the foundation…..anything less will be viewed as political….

European stocks are flat – the Eurostoxx index is up 0.35% while the UK is down 0.15%.   The ECB monetary policy decision is due out today…. They are expected to do nothing, but investors (and algo’s) want to know what they will do next month and the month after that? Just like here – WHEN will they CUT rates? Unlike the US economy, economies across the continent are struggling…. both Germany and the UK under pressure and in ‘technical’ recessions…. the others are on the brink (or maybe not so much).  In any event – the ECB decision affects only countries IN the zone, the BoE determines policy for the UK.    

The S&P closed at 5104 – up 26 pts…. As the re-pricing continues…. Futures this morning are suggesting a bounce, but I think it’s just a bounce, I do not think the pullback is quite over yet.  The frothiness that existed yesterday exists today…. and all that means is that risks are rising, and this is NOT the time to become complacent. And that frothiness argument only risks getting worse with hints of a premature rate cut unless of course the narrative becomes ‘we need to cut rates because the economy is going down the drain’ and if that is the case then watch out how fast that ‘frothiness’ disappears.

And all this does is reiterate the need for a plan and a diverse portfolio that will weather a storm.  Always happy to discuss.  Call me on 212-381-6194. 

Take good care.

kpolcari@slatestone.com

Sources:  Bloomberg, CNBC, Reuters, Wall Street Journal

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Potato Crust Quiche

Ok, so this is fun and interesting to make. 

For this you need:  Russet potatoes, butter, s&p, veggies (I use broccolini, and zucchini and mushrooms) you use whatever you like.  Goat cheese, eggs, fresh shredded parmegiana cheese.

Preheat your oven to 375 degrees.

Start by slicing the potatoes in your mandolin so that all the slices are the same thickness.  Place them in a bowl, season with s&p and a splash of olive oil. Now take you pie dish…. layer the potatoes on the bottom of the plate and then around the sides. Place in the oven and cook for 25 mins.  Remove.

While this is happening…scramble your eggs – add in the crumbled goat cheese – set aside. 

In a sauté pan, sauté the veggies of our choice in a bit of butter and season with s&p.  Let cool and then mix the veggies with your scrambled eggs and pour the whole thing into the potato crust.  Top with the shredded Parmegiana cheese and place back in the oven for 30 mins or so.  Remove and let cool for 10 mins before cutting and serving. 

Buon Appetito