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What'S Next, Yellow Sticker, Note, Post Note, Reminder

Things you need to know 

  • Stocks look for stability, but continue to come under pressure as the new FED reality sinks in.  Value overgrowth in 2022.
  • OIL – pierces $80/barrel…. expect prices at the pump to surge….
  • Treasuries are now yielding 1.74% heading towards 2%…. how much more pressure will that put on stocks?
  • Crypto’s all under pressure as they too adjust to the new FED as investors move money around.
  • Try the Frittata for Sunday Brunch

Chop, chop, chop…. stocks continue to try and find some stability after the swift and somewhat violent reaction that saw stocks get whacked on Wednesday after the release of their most recent minutes……………Minutes that showed the possible ‘Triple Threat’ posed by the FED and by future monetary policy.  Stocks ended the day mostly lower…. The Dow gave up 170 pts, the S&P off 5, the Nasdaq gave back 19, the Russell added 12 pts and the Transports ended the day flat…..up 1 so we can call that flat. 

The 10 yr. treasury is now yielding 1.72%…that is up from 1.35% only 2 weeks ago……a swift 27% jump in yields….and oil is now trading at $80.45/barrel up 8% since January 1st….and that is WTI – Brent is trading even higher at $83/barrel.  Gold is trading at $1790/oz – down $40 in the last week.  Crypto’s are also under fire – with Bitcoin trading at $41k – down 20% from where it began the year and Ethereum is down 16% at $3,100 and other crypto’s are in decline in sympathy.

So, – The FED minutes revealed that someone wasn’t paying attention to what the economic data points were telling us…. they completely ignored the ‘warning’ signs that were flashing at the cash register, and that they overstimulated and overcompensated for covid and all its cousins.  In the end – the FED was caught with its pants down, they are behind the 8 ball vs. being in front of it and that has now boxed them into a corner….and that is what the minutes revealed…..and if you had been paying attention you would have heard and seen all of the signals – what’s funny is that the algo’s – the guts of the technology that drive so much of the action – other than elected officials with active trading accounts –  who are privy to what I will call ‘inside information’ – didn’t see it coming….because if they did, would they really have taken stocks to new highs? Or I guess the reality is that the algo’s did not assign the correct probability of a FED triple threat to hit the newswire.

I mean the odds of tapering were high – say close to 95% – right (because they told us in November that it was already happening), the odds of 3 rates increases were also high – at better than 70% (according to FED Fund Futures) and the odds of a balance sheet reduction in the future (think 2023) were better than 50% – but the odds that all 3 of these events would happen simultaneously?  Well that had to be something south of 10%…or at least that would have been correct if you drank the Kool Aid……but someone switched the Kool Aid and replaced it with a (choose your poison…)

I mean remember – Jay Powell told us that tapering, and rate increases would NEVER happen in unison – so those odds were very low….and that turned out to be ‘not true’ – because Never say Never.   St. Louis FED Pres Jimmy B – is the one that floated that idea back in November and then again in December – that tapering and rates needed to happen in tandem and now the minutes reflect that that was the thinking within the FED…..…….Most of the street paid no attention…..but I was skeptical, and I made it clear that where there was smoke there was fire…..yet the algo’s completely dismissed it and took stocks higher into the end of the year…..

Talk of balance sheet reduction was also simmering on the back burner, but again Jay Jay told us that in due time, that we needed to complete those two other issues first before the FED would even consider reducing the size of the balance sheet….and that made sense…. I mean how could they consider that given all of the ‘other’ concerns out there…?  But then they paraded out another non-voting member of the FED to present this idea on when? Tuesday….and it was Neely Khashkari – Minneapolis Fed President that put it out there in the Global Public Square (GPS).  When he suddenly came out of left field – woken up from his slumber to fill Bullard’s mouthpiece role saying that the ‘$9 trillion balance sheet had to be reduced…’ and then BANG – the FED minutes coincidentally revealed the same thing…. So,  how’s that working for you?  Because what the minutes did reveal was that all 3 of these FED moves are not only on the table, but are about to be served…..and the algo’s spun into a frenzy….assaulting buyers with waves of sell orders….that was until the buyers smartened up and stepped out of the way – allowing prices to plummet…..and that is where we are…..All of the indexes will end this week now in negative territory.

Now what is interesting – is the way this is all playing out for individual sectors…. Energy – XLE is by far the early winner…up 9% in 8 days…. Financials – XLF up 4.2%,  while Real Estates XLRE and Healthcare – XLV are each off 4%, Broad Tech – XLK is down 3.7%, while Disruptive Tech – ARKK is getting hammered down 8.5%,  and Basic Materials – XLB is off 1.4%.  Retailers – XRT is down 2.5% and Homebuilders are down 3.8%. 30 yr. mortgage rates are now hovering at 3.25% and likely going higher (this is up from 2.65% on year ago) – and that will surely put a cap on out of control rising home values.   The Value trade is flat on the year, while the Growth trade is down 3.5%….

This morning US futures continue to look for stability…. they are all attempting to push higher and are currently up…. Dow futures are +44, S&P’s up 11, Nasdaq up 52 and the Russell is up 3.  10 Yr. Yields are at 1.74% and you know everything else…oil, gold, bitcoin etc.….

Today is a big eco data point day…. Non-Farm Payrolls are due out at 8:30 am…and the estimates suggest that we will see an increase of 450k new jobs created…. but on Wednesday we saw the ADP number double the estimate…suggesting a strong job market and we know that there are more than 11 million available jobs out there – as per the JOLTS report. So, it would not be a surprise to see a strong number this morning…. but rather than watch this one topline number – pat attention to the WAGE piece…average hourly earnings…expected to be up 0.4% m/m and 4.2% y/y.  If those numbers are stronger it plays right into the growing inflation problem and will embolden the FED hawks even more…..Look – employers have to pay more to satisfy worker demands and workers are demanding more to help them keep up with rising prices and the cost of living and that will only push prices even higher as business raise prices to accommodate rising wages – in what could be a 1970’s style wage/price inflation spiral….but that is a conversation for another day.

European stocks are marching mostly in place as the morning turns to afternoon…. FTSE is flat, CAC 40 + 0.1%, DAX – 0.1%, EUROSTOXX +0.1%, SPAIN -0.5% and ITALY +0.5% – so investors there are confused…..CPI in the Eurozone jumped by 5% y/y and is now pushing Christine Lagarde – ECB President into the same corner as Jay Powell.

The S&P closed at 4696…. after testing lower at 4670……recall the trendline support is at 4669 – if we breach that – then the December lows should be tested – 4500 ish…. The Nasdaq remains under pressure and is now between its long term and intermediate term trendlines……If it holds right here…. then we might see some stability until earnings season begins next week.  Pay attention to what the different FED heads are saying…because the song sounds the same…. there is no longer a definitive 50/50 margin…..the hawks appear to be in the lead… I would guess that its more like 70/30 that the minutes reflect what is about to happen.

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Chief Market Strategist, Consultant

Leek & Mushroom Frittata (for Sunday Brunch)

A frittata is kind of like an egg omelet – but different.  You can us whatever you like to make it, meats, veggies, cheeses whatever.  Today we are making a mushroom, Leek Frittata.  It is simple and delicious…. serve with toasted Italian bread and home fries.  This is a fluid dish – be creative.

For this you need:  12 eggs, leeks, sliced mushrooms, goat cheese (or shredded Gruyere or Fontina), heavy cream (or you can use sour cream), s&p, butter, olive oil.
 Preheat your oven to 350 degrees.

On the stove – turn the heat to med and add a ¼ stick of butter and a splash of olive oil to an oven proof frying pan (Teflon) – add the leeks – white and pale green parts only – sliced thin.  Allow them to soften.  Now add the mushrooms – and cook them for about 10 mins more and let it all blend.  (Let the water it creates evaporate)

In a large bowl whisk the eggs and add in either ½ c of heavy cream or ½ c of sour cream (not both), add softened goat cheese (or the shredded cheese- your call), Season with s&p.   Now add the eggs to the frying pan and let it set – maybe 5 mins…. now place the whole pan in the oven and bake for maybe 10 mins – or until it is firm and beginning to get golden brown on the top.

Remove and serve on a plate like a pizza…. cut it like you would a pizza.  Serve this with whatever else you are serving for Sunday Brunch.