Headline Risk and the Crowded Trade

Here we go - the Headlines say it all......it is the return of 'Headline Risk'
 
"Stocks Post Biggest Drop of Year as Trump Trade Stalls" - wsj
 
"Stocks Retreat, Havens Gain as Trump Trade Wobbles" - bb
 
"Gartman Says US Stocks Set for 5% Correction...or Perhaps Something Far Worse" - cnbc.com  
 
"Europe Lower After Wall St Sell-Off; Banks Lead Declines" - cnbc.com
 
Good morning...and now we HAVE something to talk about.....seems like the mood has changed a bit, no?  Stocks took it on the chin yesterday as the uncertainty grows over exactly what can or cannot get done in DC to alleviate the stagnation.........Remember yesterday's opening paragraph -
 
"You can feel the exhaustion in the mkt....the excitement that existed over the past couple of months is now turning to frustration...and frustration leads to re-assessment"
 
Re-assessment usually leads to a 'change in prices'...and yesterday that is what we started to see.....that change in prices.... - and while so many will credit Healthcare Reform as 'the headline risk' - it is so much more than that....if this continues it will be all about the Trump agenda.......Yes - the healthcare reform bill appears to have a zero chance of passing on Thursday (and it shouldn't because it still needs a lot of work) but if this bill doesn't pass, then what does it say about a budget, or tax reform or fiscal reform and then what does it mean for the 'rally'  and the 'expectations' that have been priced in?   It means that investors will reconsider what they are willing to pay today for stocks, bonds, gold etc.....
 
Now - don't sit there and tell me that you are surprised......I mean it’s not like yesterday's action came out of left field at all...... Traders/investors have become way too complacent - we have been talking about this for weeks now...... with little regard for risk....Smart logic algo's (think artificial intelligence) had it all figured out.....but like always - those algo's can't see the whites of their eyes, can't interpret the tone of the discussion, can't read between the lines, (they can't see the hands moving).......talk of exciting days ahead led to irrational behavior - the 'smart computers' issued BUY orders thinking that they had it all figured out - making bets on expectations.....getting out in front of the herd....that all of these 'reforms' were just a matter of a simple vote......that the GOP majority in Congress would stand behind the President and fall in line.......How's that working out? 

Well yesterday - it didn't work out so good.....Financials got whacked down 2.7%, small caps got plugged down 2.6%, Nasdaq spit up 1.8%, the Dow and S&P gave up 1.2% , Industrials gave up 1.5%, Energy down again (as oil continues its decline into the abyss).....On the other hand - Gold +$12,  treasuries and Utilities (XLU +1.3%) all benefitted from the anxiety.....and that makes perfect sense......

Look - bets that Trump would succeed and push thru reforms in the first couple of months of his presidency caused so many to go 'all in' - buying stocks while selling treasuries and other safe haven assets....(think Gold, Utility stocks)...I mean it became a very crowded trade.....making it completely vulnerable to a sell off on even a hint of doubt...and while that doubt has been building - it appeared that not so many were paying attn.....until they do.....and then you get what looks like a panic - but let me assure you - It was not at all and if you really think about it - where are we?  Nowhere NEAR a correction at all......

Corrections come when stocks and mkts are down 10%+ (bear mkts happen when that percentage hits 20%)....so think about this.....The S&P and Dow are only off 2.6% from the highs of early March...The Russell - (RTY) is off 4.9%, and the Nasdaq is off 2%, Transports are by the far the worst off...they are down nearly 7% since the highs of early March.... This is all within the normal range of trading - it may feel a bit uncomfortable as individual names get whacked more than others but that then comes down to stock selection......which is why diversification works.....

Now the VIX (Fear Index) shot up by 13% yesterday.....and that also makes sense...but do not get all worked up.....what has really changed other than the timetable for reform.....companies are in fact doing better, earnings are positive, the fundamental outlook continues to be positive, macro data is relatively strong, job creation is now running in the 2's and inflation is sure to rear her ugly head in the coming months after 8 yrs of ZIRP (Zero Interest Rate Policy)  and last night those 2 other FED speakers (Mester and George) re-iterated the path of future rate increases.....(which in a nervous mkt will cause more downside pressure temporarily). 

Last night while we were sleeping - Asian mkts got clobbered...Japan - 2.1%, Hong Kong -1.1%, China -0.5% and ASX -1.5%.....on the back of the US action yesterday...and as if the world needs this - it also appears that Chubby (Kim Jung On) fired off another 'test missile' that failed within seconds of its launch......which only adds to the level of angst around the world.....Additionally the weaker dollar caused the Yen to strengthen and the BoJ (Bank of Japan) left rates alone - and this  also contributed to the weakness in Japan....The rest of Asia moved in sympathy with the global weak tone.....

In Europe - the story is being retold......increased concerns over the Trump trade and his ability to pull it off is causing investors/traders to take profits - mkts there are not in panic mode at all........remember - it is about capital preservation and taking advantage of the opportunities created.... FTSE -0.81%, CAC 40 -0.38%, DAX -0.44%, EUROSTOXX -0.31%, SPAIN -0.15% and ITALY -0.13%. 

Oil was on the wane again falling 67 cts to $48.24/barrel dropping back below the 200 dma thanks to another bearish API release late yesterday that showed an increase of 4.5M bbls vs E: +2.1M and that is ahead of this morning’s weekly EIA Inventory Report (10:30 a.m. ET).  Another build will push oil lower and  that could weigh further on the stocks. 
 
In the last two weeks crude oil prices have fallen below the 50 dma  to test the 200 dam -  rose above the 200 dma and now  has once again dropped below the 200 dma again – suggesting that the test of the 200 dma was unsuccessful and that even lower prices are in the cards for near future.
This runs counter to the traditional season and is an omen that OPEC’s attempt to prop up oil prices has failed.   But again I think this is a supply issue and NOT a demand issue and despite the OPEC and Russian production cuts, the picture for oil has dramatically changed.

Technological gains in producing shale oil and other US/Canada sources have taken the breakeven cost of getting oil out of the ground to low enough levels that OPEC may no longer be in the driver's seat.... While it was extremely expensive back in 2013  for US producers (at $70 to $100 a barrel), technological advances have steadily reduced the cost to produce to fall between $30 to $40 and is likely to go lower as technology improves.....

US futures are trading down 3 pts - eco data today includes Mortgage Apps - down 2.7% and Existing Home Sales -- exp of 5.5 mil or a drop of 2.5%.  There are no FED speakers today, but Janet takes to the airwaves tomorrow.....so stay tuned..   Look for the S&P to test its 50 dma at 2325 ish...in the days ahead before it finds stability....will the bulls be there to defend that position?  Or will the bears go charging for the door as we test that support level? 
 

Take Good Care
KP

Chicken Parmegiana

 

 

Now there seems to be some debate about what exactly Parmegiana is and where it comes from.  Parmegiana is a popular Italian dish - that originated in Parma, Italy -  Parma is north of Bologna and south of Milan in the Emiglia Romana region and is famous for the cheese and the 'Prosciutto di Parma'....so when you make Eggplant, veal, chicken or pork parmegiana - you are really making a dish that originated in that part of the country (Parma). 

It is not called parmegiana because of the cheese - it is called Parmagiana because of the locality that it originated from.  Now you CAN make this with shaved parmegiana but you can also use sliced provolone or fresh mozzarella....It just depends on what you like.  Now to be fair - Southern Italians (Naples and south) will always make this dish with fresh mozzarella - they just will.

For this you need:  thin sliced chicken breasts, seasoned Italian breadcrumbs, eggs, flour, s&p, the cheese (either the Parmegiana, Provolone or Mozzarella), olive oil,   and some homemade tomato sauce - you can use a meat sauce or you can use a marinara sauce - makes no difference - if you use the classic meat sauce then the flavor will be different than a simple marinara sauce.  Either way - you can't go wrong. 

Rinse the cutlets and pat dry with a paper towel.  Set aside.

Heat the tomato sauce up on the stove and keep warm.  Slice the cheese and set aside.

Now make an assembly line - in the first bowl put the seasoned flour (s&p), next bowl the scrambled eggs (egg wash) and the 3rd bowl the seasoned breadcrumbs. 

Dredge the cutlet in the flour, dip in the egg wash and then dredge in the breadcrumbs.  Set aside - repeat until finished.

Now turn your oven to broil and in a large broiling pan - add enough olive oil to cover the bottom of the pan - do not create a pool of oil - put in the oven and heat up.  Once the oil is hot - then place the cutlets one side down in the oil and then flip to coat the other side.  Now slide the rack in and close the oven door to broil the cutlets...should be maybe 5 - 7 mins..  Now flip when golden brown and brown the other side.  Once done remove. 

Now in a baking dish - add some of the tomato sauce -  just enough to coat the bottom of the dish.  Now place the cutlets in the dish and top with the cheese of your choice.  (Really any of them are fine - it is your choice....)  Now dress each cutlet with some more tomato sauce and place in the oven on bake - 350 degrees.  Leave them in the oven long enough for the cheese to get soft and melty.  Remove and serve. 

This is best served as a second dish after you have eaten a bowl of spaghetti! 

Buon Appetito