Encore Performance - Global Angst Continues

So yesterday morning's note began with an ominous message -
The mkt weakness had NOTHING to do with economics, earnings, central bank chatter, or rising rate chatter.....The tone was set by all the noise coming out of North Korea and the continued threats being spewed by Chubby (Kim Jung On).....which were then met with equally concerning rhetoric coming from the President - sending global mkts into a small tailspin.....Asian and European mkts were all lower as the concern mounted.....and US futures were suggesting that yesterday could have been a tough one..... The mkt opened lower - S&P down 8 pts - then traded down another 4 pts where it found buyers and did an immediate turnaround.....rallying back a bit, but not with much enthusiasm.
Government officials including the Governor of Guam came out to reassure the civilized world that while the rhetoric was not pretty - there was no immediate threat to any US territory - and the mkts appeared to take it all in stride.  Rex Tillerson - Sec of State - made a stopover in Guam to refuel on his way to Asia, other US state dept officials took to the airwaves to assure Americans that no one was in imminent danger....Elected officials on both sides of the aisle expressed concern - while some chose to slam Trump for his rhetoric....and to that I ask - what is he supposed to do?  If Chubby sets off a missile then they will be the first to say that Trump did nothing...so Senator Al Franken - should sit down and be quiet. 
As the morning progressed - European mkts recovered some of their early losses - but still ended the day lower.  Volatilty did spike early on...with the VIX index surging by 15% before falling back in the last 1/2 hr of the day.....to end the day +1%.   Volumes - while a bit higher than they have been, were anemic until about 2:30 pm when the mkts began to recover...buyers swooped in trying to take advantage of the angst - and the volume surged. 
By the end of the day - the Dow closed down 36 pts (BA and DIS took 63 pts off the index while HD, TRV, NKE, JNJ, AAPL, GE added back 44 pts),  the S&P was off less than 1 pt.  Nasdaq was down by 1% in early trading but also mananged to recover into the bell.  Tech, Biotech and small & mid cap stocks got hit......makes sense right???  The Russell (small cap/mid cap index)  took it on the chin and was down by 1% and this is important.....Why? 
Because the  Russell 2000  is the US small company index and it tends to move early, either way,   leading the broader market (S&P 500).   It is an early indicator of mkt psyche .  Take a look at a one-month chart, and you will see that the Russell has dramatically underperformed the S&P 500, dropping 4% while the S&P 500 was basically flat or down by less than 1%  during that same time frame. YTD the Russell is only up 2.8% vs. the S&P at +10.5%, the Dow at 11.5% and the Nasdaq at + 18% - so has the Russell been screaming - "Hey!  Look at me!!"  all along or are we just choosing to ignore the warning? 
 If you think about the relationship between the Russell and the S&P 500, it makes sense that the Russell would move first because it is an index comprised exclusively of US  small-capitalization companies. Small companies tend to be earlier-stage and have high growth rates, and are therefore more sensitive to economic conditions and geo-political concerns thus they are riskier than larger, more-established companies that make up the S&P 500 - Capisce?  Some analysts will refer to them as the 'canary in a coal mine'  - or an early indicator of potential danger ahead.  

[The phrase is an allusion to the caged canaries that miners would bring with them deep into the coal mines.  If there were any dangerous gases present - the canary would die first - giving the miners that 'early indication' of danger ahead and allowing them to escape]

The current P/E (price-to-earnings) ratio for the S&P 500 is 23.9 x (trailing 12 months)  - which is a very expensive valuation for this index. However, it pales in comparison to the 95.8  P/E for the Russell 2000.  (Can you say - BUBBLE?).   Now while smaller companies tend to have higher growth rates they command higher valuations, but it is hard to argue that the current P/E for the Russell is anything but extremely high.  Note that the same is true for tech and biotech stocks - valuations can be ridiculous.....thus investors/traders tend to sell them first in times of angst.  
And this morning - it appears as if we will have a repeat performance..... Chubby (Kim Jung On)  has announced that he is working on a detailed plan to fire 4  Hwasong -12 missiles at Guam any day now.......Global mkts continue to weaken and remain jittery.....demand for the safe havens is once again where the action is...Gold up $8,  German bunds and US treasuries are up along with the Yen and Swiss Franc once again.....(do you see the repeat performance?)  Japan and South Korea also warned North Korea that it would face a strong response if it carried out its threat to launch a missile at Guam... - the missiles would have to fly over Japanese airspace and the Japanese are not about to let that happen.   The South Koreans also gave this warning to Chubby -

"We give a strict warning.  If North Korea commits provocation despite our stern warning, it will face a strong response from South Korea's military and the US-South Korea alliance." 
No matter all of this geo-political noise - analysts/strategists are trying to stay on point about earnings, economic and central bank issues....but until this noise subsides that will be a difficult task.....now that being said - the noise will cause short term volatility along with opportunity.....so stay focused - while the noise is causing some caution - it is not a reason to completely 'de-risk'.....but do not ignore the rhetoric just yet.......this needs to play out before it will calm down. 
Asian mkt all lower - Japan - 0.05%, Hong Kong - 1.13%, China - 0.4% and ASX - 0.08%.
In Europe  - mkts are lower as the flight to safety continues.  There are a bunch of corp earnings out and those stocks are reacting appropriately, but the overall tone continues to be cautious. FTSE -1.2%, CAC 40 - 0.43%, DAX -0.7%, EUROSTOXX - 0.62%, SPAIN - 0.6% and ITALY -0.32%.  Other European mkts also still lower.....Switzerland, Portugal, Netherlands, Belgium, Denmark, Finland and Norway all joining in. 
US futures are off 10 pts at 7 am....Eco data today includes Initial Jobless Claims of 240K, Cont Claims of 1.96 mil, PPI  (Producer Price Index) of +0.1%, Ex food and energy of +0.2%.   Earnings include:  Nordstoms, Blue Apron, Canada Goose, Kohl's and Macy's....
NY Fed's Billy Dudley will speak at 10 a.m.  Between the eco data and his speech we will get the latest update on inflation and the Fed outlook.  Comments by Dudley could move mkts if they are too hawkish or too dovish.....if he stays the course and repeats what Yellen has been saying then I think it is a non event.   (Sept balance sheet reduction and a December rate rise).   
As discussed Gold is up 8 pts at $1,286.50 an oz.....looking to test $1300 in short order.....
WTI (West Texas Intermediate) is up 0.37 cts at $49.93/barrel  - Reuters reports that US crude inventories fell more than expected and this is helping oil move higher...... It has been churning in here for one month now.....and remains comfortably between support at $48.62 and resistance at $51.20. 
The dollar (DXY) is  up small at 93.71 
US futures are down 10 - at 2462.....real short term support is at 2446 - a level we could easily see today if the chatter heats up again.......... a test of 2446 is less than a 1% move....and if he mkts test it today - it will be important to see if buyers defend that position.  Stay tuned.  

Potato & Veal Meatballs

These are great as appetizer type cocktail party dish or can be paired with a mixed green salad and become a light lunch or dinner meal.  Unlike traditional meatballs – these do not go in the sauce…..and you do not serve these with spaghetti .  Try these “polpette” (Italian for meatball)  and you will not be disappointed…..

For these you will need:  1 lemon, bag of frozen artichokes, 2 lg Idaho potatoes, 2 lbs of ground veal, finely chopped thyme, 2 lg egg yolks, fresh grated parmegiana cheese, whole milk, s&p, butter, olive oil, about 3 cups of beef broth, 4 med carrots – peeled, cut in half lengthwise and then cut into bite size chunks, 1 shallot diced, splash of dry white wine, ˝ c of heavy cream, and chopped parsley.  

 In a saucepan, bring beef broth to a simmer; remove from heat and cover to keep warm.

Next boil the quartered potatoes in salted boiling water until soft – maybe 15 mins?  Drain and then crush in a classic potato ricer into a large bowl.  Add veal, thyme, 1 egg yolk, cheese, milk and s&p.   Mix well with your hands -do not over mix.  Form into balls….now if you are using as an appetizer then make them small bite size balls…if you are using as a lunch or dinner – then make the more traditional “bigger than a golf ball but smaller than a baseball”  .

In a large nonstick high sided pan – heat a dollop of butter and a bit of olive oil over medium-high heat - fry meatballs, turning occasionally, until well browned and cooked through, - depending on the size will dictate the time….small balls – 4 mins or so…larger balls – maybe 7 mins or so….remove and set on a plate lined with a paper towel.   

Add a bit more olive oil in the nonstick pan and heat on med high.   Add shallots and sauté for 3 mins….now add artichokes & carrots. Cook, stirring frequently, for about 4 mins.   Add wine and broth - bring to a boil, reduce to a simmer and cook for 10 minutes. Now add meatballs (If you like – you can add in a bag of frozen peas at this point in the process)  and continue cooking for about 10 more mins….gently turning meatballs halfway through.  You want the veggies to be nice and tender.  
In a separate bowl - squeeze 1 teaspoon juice from the lemon. Whisk together with the remaining egg yolk and cream.  Carefully introduce this mixture into the pot with meatballs. Return broth to simmer and cook for 3 minutes.  Sprinkle with parsley.

Buon Appetito.

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