'Death zone'?

• Stocks continue to thrash around.

• Vlad blames the West for the war on the 1 yr. anniversary.

• Joey – in a surprise visit to Kyiv -  commits $500 million more to Ukraine.

• JPM and GS warn of further downside – while MGS talks of the ‘Death Zone’.

• Try the Lamb Shank Osso Bucco.

Stocks closed mixed Friday as investors/traders/algo’s continued to digest the very strong PPI report on Thursday….and since there was no macro eco data on Friday to consider….everyone continued to speculate on what it all means for future Fed policy.

The Dow and Russell were the two gainers on the day – but nothing dramatic – the Dow added 130 pts while the Russell tacked on 4 pts.  The S&P lost 11 pts, the ‘tech heavy’ Nasdaq gave up 70 and the Transports gave back 75 pts.   Bond yields surged….the 3 month yield is now 4.8% while the 6 month and 1 yr. T-bills have now pierced 5% while the 2 yr. is yielding 4.6% and the 10 yr. is at 3.83%....Short duration bonds are now offering a real challenge to stocks and that is partly responsible for the chaotic moves, the other part is just that the algo’s have taken stocks to levels that I don’t think make sense AT THE MOMENT.  Remember – the algo’s continue to think that the FED will pause in March and cut rates by late summer/early fall – something I do NOT think is possible.

Now on another note – think about what a 6 month or 1 yr. bond yielding 5+% will do to investor psyche?  Completely guaranteed, no risk, sleep at night – Vs. the ‘death zone’ that Morgan’s Mikey Wilson is calling for? 

Yes, that’s correct – Mikey refers to the current level in the markets as the Death Zone – Now the Death Zone is defined as the mountain altitudes above a certain point where the oxygen pressure is INSUFFICIENT to sustain human life for any extended time…..adding that investors have ‘followed stocks to dizzying heights once again – where they know they shouldn’t go and can’t live for very long.

Just a bit dramatic, no?  I mean dizzying heights.  Really Mikey? 

I addressed this issue with Ashley Webster and Scott – The Cow Guy – Shellady on the Claman Countdown yesterday.  Click here to see it.

Now, my point is – Is it out of whack just a bit?  Yup, Is it anxious? Yup, but is it about to collapse?  I don’t think so….I think S&P 4000 (down 2%) will be a place that gets tested this week and if it holds then that’s a positive….but if it fails – then I suspect we will test the December lows 3750/3800 which represents a 7% decline from here….and remember a 7% move (up or down) is within a normal band of trading…especially when the landscape is as anxious as it is right now.

This week there is a lot of eco data ….Manufacturing PMI, Services PMI, Existing Home Sales, the FOMC mins from January, 1st revision to 4th qtr. GDP (no change), Personal Income and Personal Spending AND the star of the show?  The FED’s favored inflation guide – the PCE Deflator…and after what we heard last  week – expect this one report to be the data point that everyone focuses on..    Now the market  is expecting the PCE to show a GAIN of 0.5% m/m – up from last month’s 0.1%, and  y/y unchanged at 5%.  ….If you look at the CORE PCE data set – it is still expected to show a GAIN of 0.4%  - up from +0.3% and y/y of 4.3% down from 4.4% - BUT not so quick…..both the CPI and PPI surprised to the UPSIDE last week – and they too measure inflation…..SO – you have to believe that the PCE – which also measures inflation has to be stronger than  the expectation – it has to be…if it isn’t then ‘something smells rotten in the state of Denmark’ – Now that says nothing about Denmark – I love Denmark – it’s the line spoken  by Marcellus in William Shakespeare’s Hamlet – Act 1 Scene iv. 

JPM is also out with a note today that suggests more downside and volatility ahead  - telling us that it is too early to take a recession off the table….and that the January highs will be the highs for all of 2023, while Goldman sees the FED hiking by another 75 bps before they pause.

Look – I’ve said it here for weeks now – the FED is not ready to pause, never mind pivot.  ……Traders and algo’s have taken stocks higher – they got well ahead of themselves…as so many talking heads convinced us that that not only are we not going into a recession  but we are headed for a soft landing as well – that the FED can navigate this, that the FED will pause and pivot…..…Something I don’t buy.

We have members of the FED floating the idea that the terminal rate is now somewhere between 5.5% - 6% range (up from the 4.75% - 5%)….And while some analysts/economists disagree – there isn’t one FED member that is challenging it and so, my gut tells me to pay attention. Is the narrative changing?  If it is, then stocks need to reprice (lower)…. Look – inflation was trending lower – although the past 4 readings have been revised higher – yet it isn’t trending fast enough and with the FED easing up on the increment of each rate hike,  I was afraid that inflation was going to rear its ugly head again and that is what we saw last week…...  The fact is CPI and PPI went up because inflation has become sticky in places that won’t necessarily respond until they take rates higher…So the question is – what is the rate that breaks the back of inflation?  4.75% - 5%?  5% - 5.25% or is it somewhere above 5.5%?  And that is what the market is considering now. 

With the 6 month and 1 yr. T-bills yielding more than 5% this morning….I would expect to see short duration cash go into those assets before much of it goes into stocks – especially if the narrative about how high the terminal rate will be continues to suggest somewhere in the 5.5% - 6% range.

US futures are weaker on this Tuesday morning….Dow futures – 250 pts, S&P -40, Nasdaq down 150 pts and the Russell – 20 pts.  Wednesday brings us the FOMC mins from the January meeting…will they reveal anything really new or just leave it open to interpretation? Are we in for a hard, soft of NO landing?  Now NO landing is the latest narrative – and suggests that the economy does NOT slow down and inflation remains stubborn potentially going higher….and this makes no sense to me – because the economy WILL slow down if the FED takes rates high enough…..and if their goal is a slowdown – then expect them to take rates high enough and keep them high for an extended period of time.

In fact – NY’s Johnny Williams told you that last week….he said that rates will continue to move up and when they get to the ‘terminal (neutral) rate’ he expects them to keep them there for a ‘few years’ not months, but years…and that flies in the face of all of those that are calling for a rate cut later this year.   

Eco data today includes Manufacturing and Services PMI”s…both expected to be in contractionary territory…..(sub 50). We will also get Existing Home Sales and they are expected to be up by 2% - many now suggesting that declining mortgage rates are key…current 30 yr. conforming rates are about 6.2% down from 7% only 2 months ago (11% decline) but up from 3.5% one year ago (an 80% increase in the cost to carry)  And they are likely to move up in the weeks ahead as the fed raises rates and the 10 yr. pushes higher.

Oil is under a bit of pressure – think the stronger dollar on the back of higher rates….This morning oil is trading at $76.30 – getting closer to that level that forces the Saudi’s to make noise about cutting production to help support oil prices… Recall - $80/barrel is their preferred price.

The dollar index is up 12 cts at $104 and that is putting some pressure on the commodity complex.  Expect the dollar to continue a push higher as rates move up.

European markets were lower on Monday and are lower again this morning.  Markets across the region are all down about 0.5%,  UK PMI today was a bit stronger than expected while earnings are mixed.  Vlad is giving a ‘state of the union’ type speech in Moscow and is blaming the expansion of NATO along with new European anti-defense systems for ‘provoking Russia’ forcing him to stop the war that the west began.  Remember – Friday marks the 1 yr. anniversary of the Russian invasion.  Joey made a surprise visit to Kyiv yesterday and promised even more money for Ukraine - $500 million in fact that will serve to pay pensions for Ukrainians and provide more weaponry for Zelensky.   All this to ‘reaffirm our unwavering and unflagging commitment to Ukraine’s democracy, sovereignty and territorial integrity”.  Joey is now giving a ‘rebuttal’ type speech in Poland this morning, so expect lots of chatter about what it all means.

The S&P lost 11 pts to end the day at 4079….after trading as low as 4047……a level where it found support in early February.  Remember – S&P 4000 is the key level to watch…the S&P pierced it on March 29th and has pushed higher since and then on February 2nd - we saw the golden cross ….that is when  the short term trendline (50 dma) crosses up and thru the long term trendline (200 dma) – which is a ‘technical bullish signal that suggests higher prices….which is why I say S&P 4000 is key.

Lamb shank osso bucco

Now I love Osso Bucco – and while it is usually made with veal shanks – here is a recipe that features Lamb Shank….and it is good….  I hope you enjoy.

For this you need – lamb shanks, flour, s&p, onion, garlic cloves, carrots, parsnips, rosemary, thyme, tomato paste, your favorite red wine and beef stock.

In a large Dutch oven pot or like cast iron vehicle, add a little oil and let it get hot.  Take your cleaned lamb shanks, coat them lightly in S&P seasoned flour and add them to the pot to brown on all sides.  Remove and set aside. 

Add one large, chopped onion, 12 cloves of chopped garlic, 4 peeled and cut carrots and parsnips, I like parsnips because they add a little sweetness, about 1 teaspoon each of finely chopped rosemary and thyme, half a can of tomato paste, and S&P, and let it come together on medium heat for about 5 minutes. Should be smelling pretty good by then!

Deglaze the pot with half to three quarters of a bottle of your favorite red wine, I use a nice Cabernet, and scrape all the good stuff off the bottom. You can add the Carrots and Parsnips halfway through the cooking process if you like them crunchier, but I have found that it is the lamb and the sauce that are the stars of the dish, and the root veggies are there to add their flavors to it.

Add the shanks back into the pot nestled nicely in all that goodness and add some good beef stock, covering the lamb as best you can.  Preset your oven to 325F degrees and put the covered pot into the oven for 4 hours.

Give it a stir now and again and watch to see how the meat is separating from the bone as this will tell you how the cooking is going.  I like mine literally falling off the bone, so I have left it in for more than 4 hours if the shanks are big. Remove from the oven and let sit for 20 mins to allow the flavors to come together.  There are lots of things that you can serve this deliciousness over to suck up the all the sauce, but I like Creamy Polenta.