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Things you need to know.

  • Biden Administration LEAKS the capital gains plan and investors vote NO
  • Algo’s go into reverse in an Sell First Ask Questions later mode
  • Existing Home Sales and PMI’s are expected to show more strength bolstering the recovery argument
  • Bitcoin and other cryptos collapsing under their own weight
  • Oil trades up as the focus turns to a recovery in Europe
  • Try the Baked Pasta

The shopping spree on Wednesday  turned into a garage sale on Thursday…as stocks fell under the weight of a potentially disastrous tax increase proposal – that was floated by Joey…..well, Joey didn’t actually say it himself,  he chose to remain behind the curtain waiting to see what the reaction would be…..….In any event – when the 43.4% capital gains tax rate hit the newswires is when the buy algo’s slammed on the brakes…..and went into reverse…and it’s when the sell algo’s turned up the heat and lunged forward….trying to hit any bid that was anywhere in sight…..by the end of the day the Dow gave up 321 pts or 0.9% , the S&P lost 38 pts or 0.9%, the Nasdaq gave back 131 pts or 0.9%, the Russell lost 7 pts or 0.3% and the Dow Transports gave back 120 pts or 0.8%.

So – here is how it happens………Someone from the Biden WH – leaked the story…. (because this is the way they do it in DC…. they leak it to see what the reaction is…), the FED does it too, but they use one of the regional FED Presidents either on air or at some conference to ‘float that balloon’.  In this case – the administration didn’t send out a ‘warm body’ – they used a ‘deep throat’  type of release (that’s a 1972 reference to the Watergate scandal that brought down Richard Nixon) ……sending the message out through the media (in this case Bloomberg) via a ‘non-identified’ source so that they can’t point a finger at anyone…….Stocks did an immediate about face…going from 4179 on the S&P to 4123 in a matter of 60 mins…..before bouncing back a bit when all of the talking heads started to discuss and analyze not only the headline but then what the intent was…… Because the intent is what is important….

  1.  They dragged out all the supporters so that they could argue that this is NOT a new proposal, that the markets are overreacting and that everyone knew this…. Recall – Joey’s campaign slogan – “I am going to RAISE your taxes”.   (sounds clear to me…. not sure how you can misunderstand that)
  2. In March – he did an interview with ABC and said that “anybody making more than $400k a year will see a small to a significant tax increase”.  In that same statement he also said that “Individuals who make LESS than $400k will NOT see one single penny in additional Federal tax”. (which we now know is NOT TRUE.)  Now it is a family unit that is making $400k vs. individuals making $400k…. but hey, this is known as ‘poetic license’ – which is the ‘freedom to depart from the facts or from conventional rules of language when speaking or writing in order to create an effect’.

And then they started to say that it is just called negotiations…one side starts high, the other side starts low and then they haggle back and forth for months only to settle somewhere in the middle so that both sides can claim some level of victory….so my guess is that they will settle on 32%.   (28.2% + the 3.8% Obamacare).  Just a side note – Capital gains taxes have never been that high, ever and estimates overnight suggest that a rate that high could easily take 7% – 10% out of the broader market.
In any event – my guess also is that the SELL first ask questions later reaction is  an overreaction….while that may be his proposal – it is most likely not the end result – The inside scoop is that the DEMS do not even have the support to pass any of the increasing tax proposals that they are floating….….Joey Manchin does not want to play nice in the sand box with Bernie or Lizzy and that is surely not making them happy, but it is what it is….the night, as they say, is still young….

So – Is this the beginning of the end? Is this the news that will ignite the match that will set the markets on fire?  Well, we are about to find out in the days ahead….as the chatter heats up…. My sense is – no, this is not it…. but it will continue to cause angst in the months ahead as investors revise their own analysis as they come to terms with eventual higher rates.

As discussed, – the macro data continues to be strong…. Initial jobless claims falling more than expected again…. Leading economic indicators blowing past the expected 1% to come in at 1.3%. while Existing Home Sales fell more than expected – coming in at -3.7% vs. the expected -1.8%.  Now the chatter is that there are no houses for sale, thus the decline, I’d say that prices have rocketed higher so that many are now priced out of the existing home market thus the drop….Remember existing homes require work, renovation etc. and you can’t put that into a mortgage, so not only are you paying top dollar but then you have to invest another $2 – $3 hundred thousand to renovate it (out of pocket) Expenses that you cannot put in the mortgage…..BUT today we are going to get New Home Sales and those are expected to explode higher coming it at +14.2% why?  Because the house is NEW, and the banks will lend on it and the buyer can just buy new and put it all in the monthly mortgage payment…and with rates still relatively low – that appears to be the way out…. but let us see.

In addition – we are due to get Markit Manufacturing PMI and Markit Services PMI – both very important numbers….and both are expected to have a 61 handle on it…. that is right 61…. significantly better than last month’s 60 handles….and well above the neutral line of 50.  Just fyi – all time high of 69.9 was reached in the December 1983 during the Reagan Presidency and the then massive economic recovery that also marked the beginning of the greatest bull market this world has ever known.

And yes – earnings continue to surprise to the upside…while crypto currencies are getting trashed…. Bitcoin is down another $3k overnight and it is down $17,000 since last Wednesday (26% drop) and the other cryptos are getting dragged lower as well (the latest collapse being credited to yesterday’s capital gains tax proposal) …and Doggey Coin?  That is down another 18% and likely going lower as well……but remember it is called Doggey Coin…. need I say more? I wonder what the Reddit guys/gals are saying now…. Double down anyone?

This morning US futures are up – just a bit as the media attempts to temper the conversation and temper the tone of this latest proposal….in what is a small reversal of that Sell first ask questions later reaction…. While the headline caused that immediate reaction – reality says it will be difficult to impose and it will not produce the tax revenues they suggest it will. In addition, the media is also trying to divert the conversation away from taxes to the benefits of all the infrastructure spending and how that spending will produce jobs, incomes, massive social programs, and better quality of life for Americans and anyone else who happens to be here.   Currently Dow futures are up 56 pts, S&P’s +8 pts, the Nasdaq +18 pts, and the Russell up 12 pts.

European markets are all lower…. Christy Lagarde (ECB President) confirmed that she and the ECB are not planning any changes in policy and will most likely not do anything until the US makes the first move….and we know that is not until January 2024.  IHS Markit’s Eurozone flash PMI coming in at 53.7 vs. last month’s 53.2 – so it is moving in the right direction.  UK’s composite PMI rose to 60 up from 56.4 as this country emerges from its most recent lockdown.  UK retail sales surging to 5.4% well above expectations – again no one should be surprised as that country wakes up.  At 6 am the FTSE -0.42%, CAC 40 – 0.19%, DAX – 0.18%, EUROSTOXX -0.22%, SPAIN -0.44% and ITALY -0.25%.

DXY – holding trendline at $91.02.  Remember– a failure there could take the dollar down to the 89.90/90 level.

Oil is up – trading at $61.42 as the conversation moved off the crisis in India to expected increase in demand out of Europe and the US…. see how that do that….?  The surprise build in crude this week – is suddenly a non-issue.   Oil remains in the $60/$65 range.

The S&P closed at 4134…. After trading as low at 4123 before finding some support – It appears that we are in the 4120/4175 tight trading range. and while I do not believe that we will break higher, I do believe that we will break lower….and that is ok….it needs to break lower…the speed at which the markets reacted to yesterday’s new continues to suggest the underlying angst….so patience is a virtue.  Remember – you are invested so you are participating – if the market moves higher, you are in and if it moves lower, it will give you a chance to add money at better prices…in any event – it is about the long-term plan.  Stick to it.

Remember – the broad channel is now 3960/4400 – but my sense is that 4200 will prove to be a bit more difficult to pierce while a move into the 4050/4070 range is more likely….and would only be a 2% move lower from here.

Remember – investing is dynamic not static…- pay attention to the price action and do not allow yourself to get way out of balance. Trim where necessary and re-allocate or just add more money to the underrepresented sectors!  Adding more money is always the preferred method…. this way it keeps growing and growing.

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

Baked Shells w/Brocolli Florets, Goat Cheese & Toasted Breadcrumbs

This is an easy family style easy dish to make when everyone is on the run…. make it, bake it, and then leave it for the kids to eat when they can.

Preheat oven to 350 degrees F., and lightly butter a 9 x 13-inch oven-proof baking dish.

Bring two pots of salted water to a rolling boil.  In one – blanch the florets and set aside.  The other one is for the pasta.

Begin with the sauce – for this you need: Butter, flour, whole milk, grated Fontina Cheese, Softened Goat Cheese, s&p, and minced garlic.

In a heavy saucepan, melt the butter – add the minced garlic and stir for 2 or 3 mins.  Now whisk in the flour.  Cook, whisking continuously until just lightly colored.  Slowly pour in the milk, whisking to blend.

Cook over medium heat until the sauce is creamy and thick – keep whisking.   Reduce the heat to low, then add the fontina and goat cheese – stir to melt and mix well.  Season with s & p and continue to stir until the sauce is smooth.   Keep the sauce warm – on simmer.  – this should take you about 10 -15 mins max.

Now add the pasta shells to the water and cook for 8 mins…. Drain well (always reserving a mugful of water). Return to the pot – add back ¼ c to re-moisten and stir….do not soak the pasta…just enough to re-moisten.

Add the blanched broccoli and the sauce to the pot…mix well to coat.  Now pour it into the buttered baking dish.

For the topping – you need:  olive oil, 2 cups of coarse plain breadcrumbs, s&p and fresh grated Parmegiana cheese.  – Mix together well and then sprinkle over the pasta – Do not mix – leave it on top.
Put in the oven and bake until golden brown – no more than 20 mins.  Remove from the oven and serve family style.