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Things you need to know.

  • Japan and Taiwan monitor the Chinese warship in the East China Sea
  • Janet Yellen lobs in a comment – hitting investors upside the head.
  • Oil surges up and thru $65/barrel as crude stockpiles plunge suggesting strong demand – hello?
  • US futures are up today, European markets are up +1% as well.
  • Try the Vegetable Paella

Futures came under a bit of pressure in the pre-market yesterday morning – with some news that Japan, and Taiwan are tracking a Chinese warship in the East China Sea raising a new set of concerns on an ‘old issue’ – what is China’s intent and is there a threat for Taiwan’s independence?  And then –

Janet Yellen – former Fed Chair and now Treasury Secretary of the United States – hits us upside the head making this comment while giving a speech during an Economic Summit hosted by the Atlantic…. – and remember – it is a comment like this that appears to be one of those ‘balloons’ that they float to test the atmosphere….

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat…”  

And BAMMMMMM!  The algo’s went into a tailspin screaming ‘Danger Will Robinson, Danger’ (a reference to the 1965 TV series – Lost in Space)  as the smart logic algo’s  tried to define and understand  ‘overheat’  ……The first reaction was to go into SELL mode – The Nasdaq and all the sexy names taking body blow after body blow…..as waves of selling pressure washed over the markets….the Nasdaq down more than 400 pts by noon struggled to gain its composure – attempting to stabilize as buyers began picking away ever so gently as investors tried to dissect her comments and figure out what’s to come.

As the waves of selling punished the ‘high growth’ sectors – all the other indexes sold off in sympathy as that conversation heated up causing the broader market to retreat.  Alarm bells going off at the FED and the White House causing Jen Psaki (WH Press Secretary) to call Janet to tell her that she needed to reframe her ‘off the cuff’ comment because it was sending the markets into a tailspin – she did what we call a ‘do over’…. she tried to walk back her comments saying that she ‘was not predicting or recommending any rate hike.’

And this morning’s WSJ could not be any clearer in that regard – the front-page headline says it all.

“Yellen Backs Off Comment on Rates Inflation – says she is not predicting higher interest rates.”

But let us be clear – you do not need to be an economist or Treasury Secretary or a Fed Chair, Governor or President to understand that this comment is self-evident – and that rates will rise as the administration vows to spend money like a drunken sailor and the economy responds with faster growth.  That process has already begun – recall that we have seen the 10 yr. Treasury go from 0.6% to 1.771% before settling in at 1.61% over the winter and into spring……and calls came from all the investment banks that 2% – 2.5% 10 yr. rates would be here by year end.  Every street analyst opining on what would happen as rates rose causing investors to begin to consider what they would do as rates rose as well – all while the FED and the FED chair told everyone to relax….

As rates hit 1.5% we saw the market begin to tremble and then it shot up to 1.6% and the retreat started – high growth names becoming the victims only to have the talking heads talk traders and algo’s off the edge….stocks stabilized and then boom – rates shot up to 1.77% and that caused the process to repeat itself – the Nasdaq losing a quick 11% while the broader market only backed off about 3%- and then stability was restored – in fact it was restored so much that stocks suddenly began hitting new highs…..all while rates remain ‘elevated’ as we celebrated the re-opening and blowout earnings accompanied by robust forward guidance.

So, was yesterday’s reaction an overreaction? Or was it just more noise?   I mean is this really something that no one knew.  Or was it that the comment came out of left field from the Treasury Secretary as someone who has ‘sat in that seat’ – does she have an inside track, or did they send her out to float that balloon to test the markets’ reaction?

Whatever the reason – it is what it is….and stocks will sell off as rates rise – Why?  Because it is a simple math problem – Current valuations are based on zero interest rates and as rates rise that equation changes as the inputs change – think about the inputs to the PPI – Producer Price index – as producers are forced to pay higher prices – the PPI goes up…. In this case – as interest rates go up then valuations must go down to account for the change in inputs…. think about housing…as mortgage rates rise the price of housing typically comes down because rising rates mean higher carrying costs.

In the end – the Dow gained 20 pts (after being down 300 pts), the S&Ps gave up 28 pts, the Nasdaq lost 260 pts and the Russell gave up 30 pts.  And again – none of this signal a correction at all…. the Dow is off 1.8%, the S&P off 1.8%, the Nasdaq off 4% and the Russell off 6% – from their highs…. Well within normal….so let us not get all worked up…. (yet).

This morning – US futures are UP – as calm is restored.  Dow futures are +106 pts, the S&P’s up 17 pts, the Nasdaq up 70 pts and the Russell is adding 15 pts in what appears to be a bargain hunting bounce.  Tommy Lee of Fundstrat takes to the airwaves telling us that ‘despite the selloff – the markets are poised for new highs by the summer’ calling for S&P 4400 before the sun sets on labor day…..and btw he also thinks that the work from home (WFH) trade and tech disruptor trades will be slaughtered before this is over…Because in his mind – it’s the recovery trade, it’s the cyclical, value trade.  And as you know – so many have been calling for the shift out of growth and into value for 2021…. Ytd – that trade looks like this –

The S&P Value ETF (SPYV) is up 15% ytd vs the S&P Growth ETF (SPYG) up 7%…. Value outperforming by more than 100%……with more upside potential if what Tommy tells us is true….   The high growth/WFH/Disruptor trades are a ‘crowded space’ so if it does hit the fan – then watch for the collapse as everyone runs for the door but that does not mean that parts of that trade are dead forever… it just means you need to rethink your position and reconsider (or not) your level of risk tolerance…..remembering that that money has to go somewhere – and in my mind, if you are in that camp – the old fashioned, ‘not so sexy’ cyclical names make perfect sense and I have been saying this for weeks now……(check out yesterday’s note)

Eco data today includes the first look at April Employment – the ADP employment report is due out at 8:30 and the estimate is calling for +875k new jobs created (or restored).  In addition, we will get the Markit Services PMI – exp of 63.1 and ISM Services PMI – exp of 64.1 – both solid numbers.  We will also get weekly mortgage applications and mortgage delinquencies and foreclosures as well.

European stocks are all up by better than 1% across the board after yesterday’s beat down.  Eco data from across the region is out and it showed an increase in the services sector.  IHS Markit’s final composite PMI reading for the Eurozone (EZ) came in at 53.8 up from 53.2 – and that is moving in the right direction as anything +50 is in the expansionary zone.  EZ PPI index also rose 1.1% – in line with expectations. Individual reports for Germany, Italy and France are also due out.  At 6 am the FTSE +1.18%, CAC 40 + 0.91%, DAX +1.36%, EUROSTOXX +1.36%, SPAIN +1.18% and ITALY +1.31%.

DXY – is up small after having risen by 40 cts only to back off to unchanged….at 91.30 – well above trendline support at 91.05 with resistance at 91.74.

Oil continues to rise…. up 82 cts this morning at $66.52/barrel……as the demand story is alive and well…. the API (American Petroleum Inst) reveals that crude stockpiles FELL by 7.7 mil barrels – more than 3x the expected draw down.  Need I say more other than we have broken out of the $60/$65 range that I had been calling for by summer and if demand remains strong (which it will) we will have $70 oil before Memorial Day….and think about what that means for gas prices!  In addition to energy stocks…the Energy ETF XLE is +10% at $50.78 since the April retreat when they were telling us that the virus surge in India and Japan was going to destroy energy demand and now it is above all 3 trendlines….and if the cyclical story continues to build – the March high of $55 is within reach…. (that is another 10% from here).

Bitcoin is trading at $55,000, Ethereum is at $3,300 and Doggy Coin continues to rise…now trading at .68 cts up 21% overnight.

The S&P closed at 4164  – after testing 4128 yesterday…..well below the 4140 level I thought it would find support…..but either way – it tested and bounced and this morning the bounce back UP continues…..with futures up 16 pts – we will be testing near the highs before you know it….and if Tommy Lee is correct – we will be up and thru 4200 on our way to test S&P 4400 – the broader trendline that I also pointed out weeks ago.   But again – while I do think we test it – I am just not sure it will happen by summer – it stills feels a bit toppy to me, and while we certainly could go higher – I would like to see it come in and shake the branches again to see who falls out.

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

Vegetable Paella

Like traditional paella – this dish is relatively easy to make, and you can easily increase the amount of ingredients to feed many people.  It features no meat or fish is only veggies and rice – made with the traditional paella seasoning.  Try it – You will like it.

If you do not have a Paella Pan – no worries…you can use a large nonstick frying pan to accommodate this typical Spanish rice dish.

You will need: Olive oil,   1 red & 1 yellow bell pepper, chopped,  6 scallions thinly sliced,  5 cups vegetable broth,   3 cloves of garlic – minced,   1 tsp. crumbled saffron threads,   1 cup short-grain white rice – like Goya, or Vitarozz,  3 cups broccoli florets,   1 cup fresh (or frozen) baby peas,  1 cup of chopped aspargus,   1 cup halved grape or cherry tomatoes,   12 pitted green olives – cut in half,  12 pitted black olives – cut in half,   1 lemon, cut into wedges,   ¼ cup chopped fresh parsley

Begin by heating olive oil in the large nonstick skillet over medium heat.  Add bell peppers, garlic, and scallions, cook 5 minutes. Next add the broccoli, peas,  asparagus, tomatoes and olives.  Saute for 5 mins….

Next add the broth.   Stir in saffron, bring to a boil.  Add rice and stir – reduce heat to medium-low, cover and cook for about 20 mins or so…until the rice is tender and fluffy.

Remove from heat.  Let rest, covered, 5 minutes.  Taste and adjust for seasoning.   You can present this on a large family style platter garnishing with lemon wedges and chopped parsley.

Buon Appetito.