• Bond yields continue to surge; Utilities and Energy get Crushed.

  • FED Heads create conflicting headlines – One said hold, the other said hike.

  • Earnings to start next week – but only after we get the next inflation read.

  • Try the Spaghetti con Melanzane Fritte.

And it’s a (xxxx) show……The rout in treasuries just won’t quit…. bond yields climbing by double digits now…the 10 yr. jumped by nearly 11 bps in 6 hrs.… to end the day yielding 4.68% - only after it hit 4.701%.... the 30 yr.?  It jumped by 9 bps to end the day yielding 4.788%, the 2 yr. jumped by 6 bps ending the day yielding 5.104%. The dollar index pushing up and thru 107 – to rise by 0.8% to end the day at 107.01…. Yesterday I told you.

“This morning we are seeing strength in the dollar again – up 16 cts at $106.32…. marking a new high for 2023…. the prior high was back in March when the dollar kissed $106…. leaving $108 as the next upside target.”

Well sports fans – we are now less than 1% away from 108…. less than 1%...this morning the dollar index is holding steady at 107.01.

And stocks got walloped again for most of the day – Utilities and some Energy names falling 4, 5, 7…. & 15% as investors ran for the door.

Utilities – which are considered some of the safest sectors in the market, which offer some of the highest dividends - got absolutely crushed – the XLU falling 4.65% - after being down more than 5.5%.... Do you realize that over the past 6 trading sessions – the utility sector has fallen by 11% - all while the S&P has lost just 1%.... The XLU is now down 20% ytd……What does that tell you?  It tells you that rates are going HIGHER and when there – they will REMAIN there for longer… and you know what else it is telling you? It’s telling you that the collective 4% dividend yield in Utilities doesn’t compete with the 5.5% yield in short duration treasuries or even the 4.68% yield in the 10 yr.  It is also telling you that inflation is going to remain higher and stickier for longer as well. It is telling you that investors are dumping these usually boring names in favor of treasuries, cd’s and gov’t money mkt funds that are currently yielding MORE than what they pay……– with NO risk.  It doesn’t get any more complicated than that.  

Look, utilities do a lot of financing – they carry a high debt load – their business depends on large infrastructure requirements that require large capital expenditures – this isn’t new….but they also have large amounts of investment equity – BUT when the sh*t hits the fan – none of that matters – investors/traders and algo’s will focus on the negative….(always happens)…..and with rates only going higher – that financing is going to cost a whole lot more….and just think about what that is going to do to your utility bill…..’Ouch’! 

NEP – Nextera Energy Partners (power generation)– suffered a downgrade by BAC – and that stock fell by 16% to end the day at $24.74… is now down 65% ytd….NEE  - Nextera Energy (integrated electric utilities) went along for the ride after our friends at Goldman cut their price target from $83 to $72…it fell 9% to end the day at $52.16 – leaving it down 40% ytd.  Ugh…Other names that took it on the chin include AES, PCG, D, ES, AEP, ED, AGR – all down more than 5% - YESTERDAY…. And here I thought utilities were boring.  

Energy took it hard as well….– the XLE falling nearly 2%.....Oil fell by 2.4% to end the day at $88.58….ARCH resources fell by 10% after the company said that they expected earnings before interest, taxes, depreciation to fall by 10% in the 3rd quarter and that dragged a bunch of other names lower  BTU lost 2.5%, AMR lost 3.1%, HCC down 2.3%, CEIX down 4%, XOM lost 1.7%, CVX – 1.2%, MRO, OXY and Devon Energy all down more than 4% as well.

The other 6 sectors that ended lower were XLI – 1%, XLF – 0.9%, XLP – 0.7%, XLV – 0.2%, XLB – 1.3% AND XLRE – 1.8%.   Now in a twist – we saw the 3 best performing sectors on the year – end in positive territory….XLK + 1%, XLC + 0.7% & XLY +0.1%.  – which is a bit curious…. those 3 sectors are all up more than 30% ytd…. Yet money continues to move into those sectors as the 10 yr. treasury readies to kiss 5%.  It’s illogical…. So, be careful, I for one am NOT chasing any of them.

The VIX was all over the place yesterday during the day….but settled essentially unchanged….as the 4 pm bell rang…..In the end – it was a curious day – as the Dow lost 75 pts, the S&P gained less than 1 pt, the Nasdaq added 88 pts, the Russel lost 28 pts – putting that index into negative territory for the year while the Transports lost 172 pts. 

And so, you ask – who said what????  Well, we had Vice Chair Mickey Barr – telling us that the biggest question out there was how long to leave interest rates elevated…. while Board Governor Mishy Bowman – a real hawk – reminded us of the need to raise rates ‘multiple times.  Did you hear me?  Multiple times…. The dictionary defines multiple times as ‘having several parts, having MORE than one – it’s like having twins…. you don’t have one baby; you have two and if it’s triplets then you have 3 babies – all at the same time…. Capisce? 

We are now just 4 weeks away from the next FOMC meeting….and before we get there, we will have plenty of new data to add to the list…. The most important being the CPI and PPI due out next week.  What will that cause JJ to do now?  If anyone out there thinks that the Fed is done, I’d say – you should rethink that….no hard feelings, just rethink it….Look at what the market is telling you….it is finally recognizing the fact that valuations and reality were disconnected….an S&P multiple of 19.8 x’s 2023 earnings in a RISING rate environment accompanied by stickier inflation just didn’t makes any sense… of last night – that multiple is now 19.2 x’s and likely going a bit lower still.   19 x’s 2023 earnings puts the S&P at 4218…..just a cut above the long term trendline support…..a level that I think we test- and hold….That is of course – unless the data remains so strong and inflation remains even stickier than we think…..and then – it’s anyone’s guess.  And if you put a long term historical average multiple (17 x’s) on the S&P – well, let’s just say it isn’t pretty….  (17 x $220 = 3740).  I am NOT suggesting that is where we are going, I am merely just painting a picture…. But – it IS October…. Do I need to remind you what happens in October?  I didn’t think so.

Eco data revealed that Manufacturing PMIs remain in contractionary territory…. while Construction Spending rose by 0.5% - below last month’s rise of 0.9%.  Today’s eco data includes JOLTS job openings and they are expected to decline just a bit. Tomorrow we will get ADP Employment and Services PMI’s – which are important because the US economy is a 75% SERVICES economy, and those numbers are expected to be sitting on the neutral line….50.  Anything below 50 puts us in contractionary territory.  We will also get Factory orders – expectations of +0.3% and Durable Goods Orders of +0.2%.

US futures this morning is churning…. The Dow up 20, the S&P’s up 2, the Nasdaq is down 5 and the Russell is down 1. Stocks and investors remain confused as the ground feels unsteady…. Earnings start next week – and while no one is expecting a disastrous 3rd quarter earnings season – there is some concern that the annual expectations for both 2023 and 2024 are still too high…. And the risk to investors is just that…. Are the estimates too damn high or not?  Are many of the S&P 500 companies being meaningfully affected by higher rates and a slowing economy or not?  

In any event – we remain in a seasonally weak time of the year…. (Sept/Oct) so don’t stress, stick to your plan, keep putting cash into the ‘cash account of your long-term portfolio’ and then we can take a look in a couple of weeks. 

European markets which all ended down more than 1.5% yesterday are weaker again this morning……Consumer sentiment remains weak…..Manufacturing output continues to weaken – utilities across the board are down 1.5%, UK food inflation advanced by 6.2% - but that is lower than last month at that is a plus…..the fall though is in the supermarket brands – not in the ‘high end brands’.    

The S&P ended the day at 4288 – neither up nor down…. but flat…. And this morning it feels unsettled…. we are smack in the middle of the trading range….4200 / 4385. My sense is that the market will churn into the start of earnings season…and the path of least resistance is always lower when there is performance anxiety…. (isn’t that the damn truth…. LOL).

In fact – rising treasury yields will take its toll on the broader market as well….no one will care about 4% yields in stocks (with risk) if you can put your money into the bank and get 5.5% (with NO risk).  

Remember – as a long-term investor you need to eliminate the noise and stick to the plan – even when it feels uncomfortable.  If you are well diversified, you have nothing to worry about…. short term price dislocations create longer term benefits…and opportunities.  Rising yields do offer a short-term opportunity for you to keep your money invested with no risk….and that will offset your stock portfolio.  Using those contra trades will also help mute any setback…. the most important thing you can do now – is not panic.

On a side note -

On top of all of this – FL congressman Matty Gaetz made a motion to vacate the Speaker of the House’s position…..which means that they (the Republicans) are attacking their own….and what is even more amusing about this – is that Matty Gaetz NEEDS the support of the Democrats to make this happen….which is exactly what he accused Speaker McCarthy of doing….….  In the end – American’s are disgusted with DC – and we can only all hope that 2024 brings real and substantive change…. across the board…. And while this (again) will not price stocks in the long run, it can though, temporarily cause more consternation at an already anxious moment.

Spaghetti con melanzane fritte (Spaghetti with fried eggplant)

Simple and fantastico.

For this you need – 1 large eggplant, ½ lb. of spaghetti, sunflower oil, basil, and fresh grated parmegiana cheese.  (That feeds two people….)

Bring a pot of salted water to a rolling boil.

Begin by peeling the skin off the eggplant – then cut it in half.  Now cut each half into strips and then cut across the strips creating small cubes. Capisce?

In a deep pot – add enough sunflower seed oil to deep fry the eggplant.  When the oil is nice and hot – fry the cubed eggplant in batches…. using a slotted spoon – remove when fried and place on a plate lined with paper towel – to drain the oil.

Now – cook the pasta until aldente…maybe 6 – 8 mins. 

Remove the pasta from the pot and place in a large sauté pan….   Add in the fried eggplant, fresh chopped basil and plenty of parmegiana cheese.  Now add in one ladle of the pasta water – turn the heat to med low…. Toss the pasta.   It will make a deep nutty brown, creamy sauce that coats the pasta.

Serve this in a warmed bowl – topped with plenty of the eggplant and more chopped basil and more cheese.  Yum, yum, yum.

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Information and commentary provided by ButcherJoseph Asset Management, LLC (“BJAM”), are opinions and should not be construed as facts. The market commentary is for informational purposes only and should not be deemed as a solicitation to invest or increase investments in BJAM products or the products of BJAM affiliates. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. There can be no guarantee that any of the described objectives can be achieved. BJAM does not undertake to advise you of any change in its opinions or the information contained in this report. Past performance is not a guarantee of future results. Information provided from third parties was obtained from sources believed to be reliable, but no reservation or warranty is made as to its accuracy or completeness.

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The S&P 500 Index is a stock market index based on the market capitalization of 500 leading companies publicly traded in the U.S. stock market, as determined by Standard & Poor’s.


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