Where is the Tipping Point? – Try the Spaghetti Arrabiata

Kenny Polcari Uncategorized Leave a Comment

Things you need to know:

  • Stocks retreat but do not collapse, Bitcoin trades at $31,000
  • Rates and Inflation – dominate the conversation -what is the tipping point? 1.5%?
  • Listed companies join the fight – refusing to accept the tone of the conversation – Could this be a bullish signal for those firms?
  • Expect more talk of how Social Media companies drive the conversation and the responsibility they bear
  • Try the Spaghetti Arrabiata

Stocks ended the day lower!! The Dow lost 90 pts, the S&P gave back 25 pts, the Nasdaq lost 166 pts and the Russell lost 0.65 pts. as investors/traders and algo’s focused on ‘some’ of the negatives yesterday vs. looking through the noise and only seeing roses… In fact, though, the market remains resilient… what looked like a broader selloff in the pre-market yesterday morning never really materialized… and while all of the indexes were lower – they didn’t collapse…

Who would have thought stocks can go down? … and Bitcoin – well, that went down as well causing angst for some while causing others to celebrate… because the weakness offered an opportunity to jump in or add to an existing position… Look, when it shot up from $18,000 (on 12/10) to $42,000 (1/09) a 124% move – many potential investors were left wondering what to do, asking themselves – Does this even make sense? Every day the business channels sang its praises, featuring every big money manager (think Mikey Novogratz) that ‘talked their book’ telling us how this is the ‘new asset’ class was going to change the world and democratize wealth… with all of these guys making 2021 year-end pricing predictions that range from $150,000 to $500,000!

So yesterday when we woke up – we saw that Bitcoin had collapsed (that’s a bit dramatic) over the weekend – falling more than $8,000 from where it was trading on Friday. And while the $8,000 dollar pullback was a wakeup call, it only represents a tiny fraction of the spike higher – (dramatic would be a $15,000+ decline in one day) … so while many welcomed the pullback, others, including myself were rooting for more of a ‘correction’. Whether or not that happens is still yet to be seen… so sit tight. And I say that NOT because I want to see it collapse, I say that because I should have bought more! The same way I want to see Apple and Tesla collapse! A 20% – 40% sale would be nice… As of 7 am- Bitcoin is UP $1600 trading at $35,600.

So what caused stocks to sell off? Really? Are we going to ask that question? Now while we can all point to a range of ‘non-financial’ issues that are causing national angst, we can certainly agree that the spike higher over the last quarter may have gotten a bit ‘long in the tooth’… all of the excitement over the Biden win and the expected massive fiscal stimulus that is planned to be announced this Thursday and expected to be in the ‘trillions of dollars’ – along with continued support from the FED were and have been the drivers…

The rise of inflation – which is now the topic for 2021 – with some talking heads suggesting that a 3% inflation rate is not out of the question and the 10-year treasury spiking up and through 1% only added to the conversation and concern. Talk of treasuries testing 1.3% and even 1.5% dominated the conversation – some saying that they welcome the ‘reflation trade’ while cheering for rates to pierce 2% which would suggest that the economy is healthy so stocks are a good place to be… others warning of tougher days ahead. Jeffrey Gundlach, Doubleline Capital founder – warning us that valuations are ‘extremely high’ vs. historical standards and that we can thank the unprecedented amount of stimulus saying:

“If you go back four decades of stock market data, there are many valuation metrics that are in the top 1 percentile of overvaluation.  So, the thing that’s keeping it going, of course, is the  FED with rates at zero and promises to stay at zero, this allows for valuations to be record-breakingly high.”  

So, where is the tipping point?  What rate on 10 yrs will cause the markets to re-price? As you can imagine the answers span the globe… some warning not to worry until the 10 yr kisses 3%! (Stephen Weiss – CNBC Halftime Report). That, I think, is a bit delusional… 3%? He doesn’t think the market will reprice until we hit 3% on the 10 yr? (he also said he wouldn’t be a seller of the market until that happened… CHALLENGE!). I hope he’s right, but my sense he is not.

My guess is that 1.5% will be the first tipping point, unless we then see the FED swoop in and start buying up everything to control the rate. Remember – the FED has promised us that rates will remain near zero for at least another 24 months… while Goldman suggests they won’t rise until January 2026! So if the 10 yr approaches 1.5% then the FED would be expected to start buying everything in sight – because as prices move higher yields move lower… capisce? So, keep your eyes on the man behind the curtain… If rates move up and through 1.5% in the near term – and the FED sits on the sidelines, then there is no way that stocks will continue to rise… They will have to pull back, period. The end. It’s simple math… I say that because we are in the middle of a pandemic, many parts of the economy are still shut out and economic data is mixed… so a spike higher at this moment would be a challenge…

Now the amazing part of all of this is that even in the face of the DC riots and ‘coup attempt’ and now the introduction of the 2nd articles of impeachment – investors are not deterred.  Social media stocks came under pressure. And now we have American companies – JPM, GS, C, MS, VZ, DOW, ABNB, MAR, HLT, KO, BP, BSX, T, AXP, MA and the list keeps growing, using their muscle to change the tone and direction of the conversation. Companies have drawn a line in the sand and will not participate in this mania and they have made that clear. How will investors react? My sense is that investors will welcome this and companies that show support for common decency will be rewarded.

And US futures are UP!  Investors undeterred… Dow futures are +80 pts, the S&P’s are adding 10 pts, the Nasdaq ahead by 43 pts and the Russell is adding 16 pts. The mood this morning appears to be one of confidence and mildly positive as investors/traders and algo’s attempt to assess what rising rates mean for the US and global economy. And yes, virus infections continue to rise but progress on what is soon to be 4 vaccines is giving hope to the markets while many continue to be concerned over the speculative excess that has taken markets to all-time highs. Earnings as discussed begin on Friday, The Biden Plan to come out on Thursday and the CES ‘Virtual’ TECH conference continues to this week and the JPM Healthcare conference will continue to attract investor interest.

Today – the House will introduce the 2nd articles of impeachment as it appears that Mikey Pence will not invoke the 25thamendment. There is no eco data today.

European markets are lower… The story very much the same… US politics and the virus.  At 7 am we see the FTSE -0.69%, CAC 40 – 0.14%, DAX – 0.09%, EUROSTOXX -0.22%, SPAIN +0.09% and ITALY -0.23%.

OIL is UP by 68 cts at $52.94… Look- demand is alive and well. The 38% surge since the election needs to consolidate so expect to see it digest and churn… We are approaching the February highs and expect to find some resistance. We remain in the $45/$55 range.

The S&P closed at 3799 down 26 pts… As I have been saying – I am waiting for this rally to fade and pullback – it’s called ‘mean reversion’ suggesting that what goes up must come down… This could be that week of consolidation and pullback – that alone is not a reason to panic, in fact it would be a benefit. So stick to the plan, create a well balance and defined portfolio… trim and rebalance where necessary and focus forward…

Take good care

Kenneth Polcari
Consultant, Market Strategist
kpolcari@slatestone.com

 

Spaghetti Arrabiata

Spaghetti Arrabiata

I thought this appropriate – Arrabiata is an ‘angry’ sauce – need I say more?

Created in Rome – this sauce is simple to make and gets it anger from the red chili pepper… You can serve this with any type of pasta you want – but spaghetti or linguine is best.

You will need: olive oil, onion, garlic, red wine, sugar, crushed red pepper (or chili peppers if you want hot, hot, hot), lemon juice, oregano, s&p, crushed tomatoes, tomato paste and chopped parsley…

Bring a pot of salted water to a rolling boil.

In a large pot (or deep sauté pan) on med-hi – heat up olive oil and garlic… sauté a bit – but do not burn – 3 mins or so… now add sliced onion and sauté until soft – like 5 mins more. Next – add 1/2 cup of red wine, 1/2 tblspn of sugar, fresh squeezed lemon juice (about 1 tblspn), oregano, bit of tomato paste and a 28 oz can of kitchen ready crushed tomatoes (not in puree – just crushed tomatoes), crushed red pepper (or crushed chili pepper if you prefer) – bring to a boil and then reduce to simmer and cook for 15/20 mins…

Add 1/2 lb of spaghetti to boiling water and cook for 8 mins or until aldente – strain – reserving a mugful of the pasta water.  Return pasta to pot and add back about 1/4 cup of the pasta water to re-moisten. Stir… Now add pasta directly into the sauté pan with the sauce – toss well – add a handful or two of grated parmegiana cheese and serve immediately in warmed bowls.  Enjoy with a nice bottle of Brunello di Montalcino. Always have extra cheese on the table for your guests

Buon Appetito