Don’t Worry, Be Happy or Disco Inferno?; Rate Surge – Try the Pork Cutlets Milanese

Kenny Polcari Uncategorized Leave a Comment

Things you need to know.

  • Treasuries spike again -causing renewed angst.
  • Fed Chair Powell will take center stage – can he calm the tone?
  • The battle remains over the pace of rate increases.
  • Will the song change from ‘Don’t Worry Be Happy’ to ‘Disco Inferno’?
  • Try the Pork Cutlet Milanese

So, I guess…. the markets remain anxious over how treasuries move….

The 10 yr. yield crept higher again yesterday…. rising 10.5 bps to 1.49% giving the trader types a reason to become hysterical (again)and hit the high growth names (again)……Tech led the way lower – as the Nasdaq fell out of favor ….in fact – you could say the Nasdaq got shellacked!  (That is like a saying from last century – not sure I have heard that saying in a long time!)  A good shellacking is how I remember using that adjective….and it means exactly what it sounds like…..they beat ‘em up pretty good….by the end of the day the Nasdaq gave back more than 360 pts or 2.70% – bringing its loss once again to 8.5% off the highs………the Dow  which was higher for most of the day got hit hard in the last 40 min – ending the day down 121 pts –while the broader market – defined as the S&P 500 lost 50 pts or 1.31% and the Russell gave back 23 pts or 1.06% while the Transports only gave up 23 pts or 0.17% – suggesting that the economy is on track – which is good, but also suggesting that rates may rise and that is what’s causing the angst and revaluation.

Eco data in the morning was a bit of a surprise….Not horrific but not the robust numbers that we expected….ADP employment came in at +117k new jobs (that’s ok) – but not near the 200k expected number….Markit Services PMI came in at 59.8 – strong than the 58.9 we expected while ISM Services PMI disappointed – coming in at 55.3 vs. the expected 58.7….Now to be clear – they are both measuring the same thing,…..they are just two different sources of info…..so it is what it is.   Composite PMI – was a solid 59.5….so while none of this was negative per se, the algo’s took their cue from the 10.5 bps rise in treasuries to hit the sell button….and it came in waves….as it usually does – sellers getting more anxious, so the buyers pull away…. leaving a void in prices causing sellers to get more anxious – See how this works?

Once again – we can blame the angst on the advance in the treasury market – especially after the Chinese made that commentary on Monday about their concern that there is a global bubble in equity prices – pointing their fingers at both the US and European market centers as the place to be concerned about and while we haven’t seen that ‘panic’ type of reaction (yet) more of the conversation is centering around extended valuations and what that means if rates spike again or inflation spikes in the coming months.  In fact – inflation expectations for the next 5 yrs. are now hovering around 2.5% – climbing oil prices bearing the brunt for this rise in expectations…

Simmering in the background are a couple of other issues – both positive and negative…… – news that we can have everyone vaccinated by June 1st and that Joey (Biden) is reconsidering parts of the stimulus relief bill to win support – those parts?  Relief checks – in any event – no one is suggesting at all that the $1.9 tril package will not pass the Senate – it will – but the battle now is about interest rates…….

The battle is between the pace at which rates will rise in the open market and the ability of the FED to control rates to avoid market instability – leaving some to think that the FED will attempt to step on the brakes a bit to slow the momentum of the economic rebound…. which I for one think is not possible.  Why?  Because you can feel the pressure building, you can feel how the house is about to blow off the foundation….and this is a real concern…..because – If that happens, the FED will be put in a position to have to act…..and that won’t be pretty…..because it will run contra to the song they have been singing….and if the market suspects that the song is changing from Bobby McFerrin’s ‘Don’t Worry Be Happy’ to the Trammps  ‘Disco Inferno’ (remember how it starts – Burn Baby Burn, Burn Baby Burn…..)  – then its gonna be a (….) show….and a re-pricing will be fast and furious…. causing pain for some and creating opportunities for everyone.

Now to be fair – all the talking heads continue to sing Do not Worry Be Happy – so do not worry!  (or maybe worry just a little bit – that keeps the complacency at bay.)

And those rising yields put the spotlight directly back on Fed Chair Jay Powell…..(not sure why, because he keeps telling the same story wherever he goes) but today again he will get to repeat his commitment to the country and the markets…..He will once again try to convince the markets and investors that the FED will be extremely patient and will not pull support even after the pandemic is over (which feels like June, now).  He is going to have to convince the markets that he is determined to meet the dual mandate by keeping monetary policy looser for longer while also trying to control the instability in the bond market that creates angst for the equity market.

Financials and energy were the only two sectors that bucked the trend yesterday…. with Energy rising by 1.5% and financials rising by 0.8%.   Tech and Consumer Discretionary led the way lower….and Utilities also got slammed as it gets harder to compete for yield investors.

This morning – US futures are down…. Dow off 106 pts, the S&P’s off 20, the Nasdaq down 82 pts and the Russell is off by 18 pts.  Investors continue to put pressure on tech as fears of higher rates continue to permeate the psyche. This morning the 10 yr. is trading with a yield of 1.467%.   Again, Powell is expected to push back hard on this thought….and the market awaits….so if we remain weak going into the WSJ Webinar today – he will have a tougher job – and if investors/traders think he is losing control of interest rates – they will hit the market even harder but if they feel like he is in control then we could once again see a complete turnaround and a surge in prices…. I do not see that today….

It’s Thursday -and we have a host of eco data points to get through….Challenger Job Cuts, Unit Labor Costs, Nonfarm Productivity, Initial Jobless Claims, Continuing Claims, Durable goods, Factory Orders, Cap Goods Order and Cap Goods Shipped….But look – the focus today is squarely Jay Powell again and then the discussion about what he said, what he means, what words he used, what his body language was saying vs what his mouth was saying….Capisce?

Asian markets tumble overnight with China falling over 3%, Japan -2.1%, Hong Kong down 2.1% and the Aussie’s off by 0.8%.

European markets are falling in line – all down 1% or more in early trading…as they talk about the rise in US 10 yr. yields in what they are calling a ‘flash spike’ and what that means for the markets.  UK construction rose to 53.3 up from 49.2 – bolstering the recovery story. Eurozone retail spending fell by a whopping 5.9% m/m well above the expectation of -1.1%.  At 7 am – the FTSE -1.1%, CAC 40 -0.46%, DAX -0.50%, EUROSTOXX -0.70%, SPAIN -0.23% and ITALY -0.60%.

The dollar index (DXY) kissed resistance again today at 91.27 and stalled.  At 7 am it is trading at 91.17 after testing a low of 90.97.   All eyes remain on Fed Chair Powell as he prepares for his appearance….

Oil is up today on the expectation that maybe OPEC + will not increase production and will watch as oil prices surge…In addition – US shale producers are not responding to higher prices by increasing output which is interesting and unexplainable.  I mean oil is up some 80% since October and the shale producers are slow to move?  What is up with that?    I am not deterred we remain in the $55/$65 range.

Bitcoin – is down $1500 at $49,300.

The S&P closed at 3819 – directly on the day’s low….no bounce, just the low…. leaving us sitting directly on trendline support….(3917)….and with futures pointing lower this morning we will not only test the lows of last week at 3811, but may most likely test the century mark at 3800…and if we break that – then look for the algo’s – that react to technical breaks – to heat up and push lower – while buyers step back and let it shake out…..….3730/3750 would be the next support level….And even at 3750 – the S&P would only have corrected by 5% – which is till nothing to get anxious about – that is well within what is considered normal…..We’d have to get to 3550 before the conversation changes…(that would represent a 10% move off the highs).

But like I said yesterday – the concerns from last week have not really gone away….an improving economy will cause rates to rise and at some point, that will cause a re-pricing for stocks…. understanding that there is a floor underneath to prevent a complete fallout….

Again, we are back in the channel of 3770/4040.  Pay attention to Jay….

As always, I would advise you to stick to the plan, trim where necessary and put money to work in some of the underperformers….

Text INVEST to 21000 to get my digital business card – give me a call if you want to discuss what I can do for you.  You can now get a video version of this note on my IG (Instagram) feed – my handle is Kennyp1961 (https://www.instagram.com/kennyp1961/)
Take Good Care,

Chief Market Strategist, Consultant
kpolcari@slatestone.com

Pork Cutlets Milanese

This is a simple recipe, and you can dress it up several ways.
For this you need 6 pounded pork cutlets, seasoned breadcrumbs, eggs, flour, olive oil, butter.

Get the pounded pork cutlets from you butcher –

Now make a production line…. a plate of unseasoned flour, then a bowl with 6 beaten eggs, and then a plate with the seasoned breadcrumbs.

Rinse the cutlets and pat dry with paper towels.  Now dredge in the flour – dip in the egg and then place in the breadcrumbs – making sure to press down on the cutlet to make the breadcrumbs stick.

Once you have breaded all the cutlets – set aside.

Turn the oven to broil – and get out a roasting pan.  Add enough oil to the pan to cover the bottom.  Add in a dollop of butter and place in the oven on the rack that is on the second level from the top.  Heat the oil – now gently – using a fork – place one of the cutlets in the oil and them flip to coat the other side.  Place enough cutlets in the pan so that you are not crowding the pan.

Close oven door and broil the cutlets.  Flip when they are nice and golden brown and broil the other side. Total per side might be 5 mins?

Remove and place on a platter and repeat until you have cooked all the cutlets.
Now – you can serve this with a slice of fresh warmed mozzarella, and then top with a chopped salad – of arugula, romaine, cherry tomatoes and sliced red onions.   Dress in a simple olive oil and lemon juice dressing. Season with s&p and dried oregano.  Place the cutlet on your plate, add the slice of mozz and then top with the salad and serve.  You do not need anything else other than a nice glass of red wine.

You can also serve this with roasted sweet peppers on top and sliced roasted potatoes on the side.  It is really your dish to create. What do you like?  Go for it.

Buon Appetito.