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Stocks surged on Friday and surged some more as the speculation over the state of trade was building. What would we hear?  What would they announce? Was this going to be THE TRADE DEAL that we have been waiting 20 months for? Was there really going to be a breakthrough?  And adding excitement to the day was news that the UK just might be on a path of understanding with Ireland and the EU over a BREXIT deal – that still could happen by Oct 31.  

Algos took the market up from the opening bell — with all indexes opening up strong. The talks are helping elicit a sense of excitement as investors, traders, analysts and strategists were cheering ANY progress at all.  As we have noted many times, market participants wanted something on trade, anything at all to hang their hat on… and as the day wore on, the speculation grew bigger and bigger with the Dow at one point up more than 500 points!

And then at about 3:30 pm the news hit the tape. The US and China had come to an agreement on Phase 1 of the talks (apparently there are at least 3 phases) but the fact that Phase 1 was complete was enough to cause the administration to cancel the upcoming Oct 15 tariff increases. As word of the agreement began to leak out, we saw the market respond in kind. In the final 15 mins of trade, the indexes gave back a bit of the day’s gains to end the day still higher but off their best levels. Lack of clarity on December tariff hikes and other trade restrictions caused the algos to do an about face and take just a little bit of the day’s gains off the table. The Dow gained 319 pts or 1.2%, the S&P raced ahead by 32 pts or 1.09%, the Nasdaq surged by 106 pts or 1.3% and the Russell tacked on 26 pts or 1.7% and these moves now brings us to within 2% of the years highs.  

As you can imagine the positive sentiment in the market caused the industrials (XLI) to end the day 1.88% higher, technology names (XLK) to add 1.38%. Apple breaking out of its old high only to establish a new high up 2.66% to end the day at $236/share. Financials (XLF) added 1.24%, Communications (XLC) +1.18%, and even healthcare (XLV) which have been under siege as the election cycle takes aim at that industry added 0.88%. And this same positive sentiment caused money to shift out of the “safety trade” names. Think Gold down by nearly 1%, Utilities gave back 0.37% and Treasuries saw 10 yr prices fall causing yields to rise to 1.79% (at the beginning of the week 10 yields were hovering around 1.55%) as investors went RISK ON.  And not to be outdone the VIX (fear index) fell by 11% (that is bullish) as the fear of further trade difficulties subsided.  

Understand that the VIX moves in the opposite direction of the mkt. Why? Because it is a FEAR index. So when investors are fearful about the state of the economy or other data points, the market will sell off and the VIX will rise. Conversely, when FEAR subsides, the market typically rises and the VIX falls. In the end, the speed at which the algos took the market higher only shows you how eager everyone is to put this issue to bed. But did we really put it to bed? Or was this more of a show?  

Talk shows on Sunday and news reports over the weekend are a mixed bag — as you would expect — as everyone chimes in to offer up their own opinions of what was right and what was wrong with this Phase 1 agreement.  

First, let it be noted that this “deal” is far from being signed into a formal deal. I mean, was there even really an MOU (memorandum of understanding) or was it just an announcement?  Oh, I forgot — we did get a “goodwill letter” from Xi Xi. There are way too many details left undone and upon further inspection, there are many who are downright disappointed with what they heard.  First, expectations were higher as many were looking for “sweeping structural” changes and the elimination of tariffs. This announcement falls short. But we are assured that future announcements will deal with these issues.  

Second, OK, so the Chinese are going to buy $40 – $50 bill worth of agriculture products. Great!  US Farmers are celebrating as they should, but we must ask: Over what time span? They are already buying nearly $24 billion of “ag” products a year, so is this new tab taking place in 12 months or longer?  And we all know that the quality of “air” over there leaves a lot to be desired. It’s amazing that they can grow anything at all. And pork — considering that is a staple of the Chinese diet and so many of their pigs have swine flu, what would you expect?  

Third – the currency?  According to Treasury Secretary Stevie Mnuchin that was an agreement reached back in February of 2019, which was supposed to prevent any further increases in tariffs. How’d that work out?  So why all the gushing over the currency deal? It’s not new.  

Next – the Chinese have now succeeded in breaking this down into parts – narrowing the scope of discussions at each level while kicking the really difficult conversations down the road as there is no definitive timeline with hard dates (a la BREXIT). Tech Transfer and rules on “safeguarding intellectual property in China” are supposedly all ironed out. This is probably the thorniest of issues and they got it done in two days over lunch and dinner?  

So while I am not trying to negate any of the work, I must ask, was it worth the extended rally that added better than 3-3.5% to the indexes? Or did the algos once again overreact to the headlines.  

Eswar Prasad, a China Expert and Economist at Cornell University had this to say:

This an­nounce­ment of an im­pend­ing deal hardly re­solves any of the ma­jor un­der­ly­ing sources of trade and eco­nomic fric­tions be­tween the two coun­tries, And from the per­spec­tive of busi­nesses, it does not mit­i­gate un­cer­tainty about the fu­ture of the bi­lat­eral eco­nomic re­la­tion­ship.”

This week brings us earnings… and expectations are for a down quarter. And while they may be lower, my sense is that they won’t be as bad as expected. Tomorrow kicks off with JPM followed by WFC, GS, C, MS and BAC.  And while these firms may beat their forecasts, it’s old news. The 3rd quarter is history now. The meat will be all about the guidance going forward. And with trade still uncertain, no matter that we “have a deal” — it ain’t over ‘til the fat lady sings. And she isn’t singing yet…

This morning, US futures are now flat. They had been weaker overnight but have rallied back to the unchanged line as of 5:30 am. Today is Columbus Day in America, so banks and the bond markets are closed. US equities will trade as usual, but expect much lower volumes, which can create more volatility. None of which I expect today at all. As the week gets started, expect the focus to shift to earnings. Trade will take a back seat for now. Any sense that the deal is NOT the deal that it is being sold to us will cause the tone to shift dramatically. Considering the recent rally did get a bit ahead of itself and the truth is the “deal” (part 1) is not the groundbreaking deal it is being sold as and the markets will come to recognize that as we move forward.  

The S&P remains in the 2950/3025 trading range now. My sense is that earnings will cause the markets to churn. Trade will still help to drive the direction of the market, but more so when the details become clearer. And when that happens, I suspect the algos will force a re-pricing lower.  

European markets are a bit lower. Weaker Asian economic data and continued concerns over BREXIT being cited as the culprits. With only 17 days to go, the pressure is on. Last week, it appeared that it was all a go. But this morning, that story may have changed. (Details still being clarified). The Queen will address Parliament today at noon (7 am EST). In it, she will lay out the plans for the BoJo administration.    

Take good care,


Pork Chops ‘Benevento Style’

Pork chops all over the news — Give this one a try.  

Benevento is a city in the region of Campania in the South Eastern region of Italy. Benevento is 50 km northeast of Naples and sits atop a hill with a beautiful view of the valley below and is at the cross section of the Sabato and Calore Irpino rivers. It borders Molise and Puglia and is fairly mountainous, providing some unbelievable photo opportunities. It is also a region of that country where so many Italian Americans can trace their heritage. It is off the beaten path but well worth the visit if you happen to be in the area.  

Fennel is the key ingredient in this dish, and it grows like wildfire in Campania and so you will find so many of their cooking to reflect that.

For this you will need:

1 in thick pork chops, S&P, flour, olive oil, fennel seeds (about 1 tblsp), garlic, dry white wine, water and a beef bouillon cube.

Preheat the oven to 300 degrees.

Season the chops with S&P and then dredge in flour.  

Now in a large sauté pan and one that can go in the oven – heat up the olive oil – when hot – add the chops browning on both side – maybe like 1 min per side. Next – remove the pan from the heat and sprinkle the fennel seeds on one side of each chop then turn and repeat. – now place the chops and the pan in the oven for about 12-15 mins.  

When done – remove the pan from the oven and place the chops on a large serving platter.  Cover with foil to keep warm.  

Now place the sauté pan back on the stove over med heat – add 2 crushed garlic cloves and cook until just brown.  Now add in ½ cup of the white wine and ½ cup of water- being sure to deglaze the pan and scrape up any of the browned bits on the bottom. Now crumble the bouillon cube into the pan and stir – until the sauce has reduced by ½.  Remove the garlic and spoon the sauce over the chops and serve immediately.  

Enjoy this with a large cold mixed green salad with red onion, tomatoes.  Dress with S&S, oregano, fresh lemon juice and olive oil. Toss and serve.