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“You know that it would be untrue, you know that I would be a liar, If I was to say to you, Girl, we couldn’t get much higher… Come on baby, light my fire, come on baby light my fire. Try to set the night on fire!!! The time to hesitate is through, no time to wallow in the mire, try now we can only lose and our love becomes a funeral pyre…”

The Doors – Light my Fire, 1967

And it would be untrue and I would be a liar if I said we couldn’t go much higher. Because it appears that there is no stopping this freight train. Nothing seems to slow it down, no matter what hits the tape. Tuesday it was the fact that Apple warned about missing its guidance, but the biggest part of that is that they didn’t offer new guidance. They said they couldn’t quantify it, yet the market didn’t seem to care. Oh yes, Apple sold off and many of the suppliers did as well and the market did come under “some” pressure on Tuesday BUT yesterday the S&P and Nasdaq did what? They made new highs! Apple and the suppliers took it all back and then some. And Apple is but the first company to warn. What happens when more of them come to the confessional booth unable to quantify the impact?

Then yesterday morning, we got more robust US economic data. Housing Starts LESS negative than expected, Building Permits soaring much more than expected and PPI surging well beyond the expectation (now this could be an issue?). Why? Because the PPI measures the cost of producing a product over time from the seller’s perspective. As it becomes more expensive to produce then prices “most likely” would go up and that will make its way into the CPI (Consumer Price Index) (think inflationary). And if it ignites inflation, then guess what the FED has to reconsider? Rate decisions. Now, I am not saying that this one report will change the narrative, but you have to be aware of the underlying trend.

Speaking of the FED

Then the FED released their December minutes and we found out nothing new. It was just as we expected, they are holding rates steady until they aren’t. That means that until they get a clue that something has changed they have zero intention of moving rates, and clearly the impression is that they are concerned over COVID19. So the path of least resistance might be down, but if COVID19 does not create the slowdown many expect, then the path of least resistance is “neutral” and THAT is where the disconnect is. Because the FED Fund Futures market has traders betting on a rate CUT in June (and another one in December). So what gives? Are the trader types about ready to stamp their feet if they don’t get the rate cut? Oh yes they are, and that is the risk to the markets.

Mark His Words

It’s “irrational exuberance” right now (think TSLA). For those of you not alive in the last century it was December 5, 1996 when then Fed Chair Alan Greenspan said those words. While 1996 was not exactly like today, rates were low by those standards and they were kept low by Greenspan. In December 1996, GDP was 3.8%, Unemployment was 5.4% and Inflation was running at 3.3% and FED funds were 5.5%. Compare that to today, GDP is running at 2%, Unemployment is 3.6% and inflation is 1.6% and FED funds are at 1.5%. Here is what he said then that set the market on a course to move lower.

“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?”

The market fell by 5% over the course of three weeks. That was before algos, ETFs and computer driven trading. That was a big move, we did it all by hand, pen to paper, 1/8th of a dollar. It was fantastic really. It was exciting, it was exhilarating. The S&P went from 757 to 724, and the Dow went from 6,554 to 6,231 and that was a BIG move in that short of a time frame… Capisce? (Today that same move could happen in minutes) My concern is that today’s market, being driven by algos and computers, as well as being very fragmented, will melt down faster when everyone tries to run for the door. ETFs levered ETFs and complex derivative strategies all contributing to today’s Irrationality… just sayin’. I am not calling for a crash. I am just saying when buyers pullback, it leaves a void in prices which causes the swift and sometimes painful pullbacks. But let’s be serious, a 5% to 7% pullback is nothing to panic over… just sayin’. (Dow would go to 27,800, the S&P 3,200 while the Nasdaq would go to 9,326)

And the really scary part of that speech given 24 years is how apropos it is for today. Read the words, listen to the words. Sustained low inflation implies less uncertainty (check), Lower risk premiums imply higher prices of stocks and other earning assets (double check). And since the market is expecting another rate cut, it will react swiftly if one does not come…

Overnight in Asia, China stocks surged because the government is coming out and pumping up the system. They announced that they are cutting the loan prime rate (more stimulus) to deal with the economic impact of the “virus.” This on top of the all the stimulus they added only days ago when they told the world they had “control” of the virus. Clearly they do not. Japan is confirming two more deaths while South Korea reports its first death. China reports a total of 2,118 deaths, but with rates being pushed lower, the burn higher continues.

European markets are a bit mixed. This morning it’s about the coronavirus once again, as well as some less than exciting earnings. Shipping company Maersk is the next one to suggest that 2020 will be “marred” by “considerable uncertainties” due to the virus. Notice they did not quantify it, they just suggested that it will be marred. Air France then jumping in and warning of lower guidance. And so it begins… Now none of this should be unexpected, but as we hear more companies sing that song. The market will re-assess valuations.

FTSE +0.05%, CAC 40 -0.20%, DAX -0.13%, EUROSTOXX -0.35%, SPAIN -0.90% and ITALY -0.61%.  

US futures are pointing lower at 7 am, in line with European markets, nothing dramatic. Dow -65 pts, the S&P -8pts, the Nasdaq lower by 26 pts and the Russell is -5 pts. The record highs yesterday are causing some to take a breath today. Economic data today includes the Philly Fed Survey – exp of 11, Init Jobless claims of 210k and Cont Claims of 1.717 mil.

The S&P tested 3393, right where I identified it as a point of resistance two weeks ago. It closed at 3386, and feels like it has to take a breath. And with no real negative headlines, other than the results of the debate that has Bernie still in the lead. The markets will churn in the 3370/3400 range…

Speaking of the debate, did you watch it? Shameful really. But that is the way it has to be from here on in. They will now attack each other in order to eliminate the competition. Bloomberg clearly in the line of fire as the group tries to destroy him before he gets started. And if it goes to a brokered convention (highly likely) Bernie was the only one to say that he supports the candidate with the most delegates at that point versus letting the rules regulate it. Nevada votes on Saturday, so this weekend will be very exciting to see what happens.

Take good care.  


Chilean Sea Bass in a Sherry Cream Sauce

Preheat oven to 425 degrees.

Rinse the fish and pat dry. Marinate in a bit of olive oil, fresh lemon juice and s&p. (if you have a favorite additional seasoning – feel free) Coat the baking pan with olive oil and place fish in oven – bake for about 15 or 20 mins.

While this is baking – prepare the sherry sauce. You will need: Butter, garlic, minced shallot, clam juice, heavy cream, sherry, s&p.

Melt the butter (3 tbsp.) on low heat… smash and then mince 1 clove of garlic – add to butter.  Sauté…now add the minced shallot and about 1 tbsp. of clam juice.  Stir.  Next add sherry – like 2 tbsp. and 1 cup of heavy cream. Simmer for 5 mins – sauce should reduce by ¼. Taste. Season with s&p… taste again. Good?

Now remove fish from oven and present on a warmed plate on a bed of wild grain rice. Spoon the sherry cream sauce on top and serve immediately. You can complement this dish with steamed string beans and a large mixed salad. Total time to table – 35 mins. Enjoy with your favorite chilled white wine – nothing fruity.

Buon Appetito.