Is Inflation Sneaking up on Us and Who is Danny Pinto? (Pay attention)

The S&P closed at 2711.45 – So today’s circuit breakers are:
Level 1.  189.80 pts (7%) or 2521.65
Level 2.  352.49 pts (13% total) or 2358.96
Level 3.  542.28 pts (20% total) or 2169.17

So yesterday I said that I did not think that we would test support at 2707 – I just thought we would churn a bit in the 2715/2720 range…. but then we got a couple of things….and it appears that inflation IS rearing her ugly head (again) or at least that was the message yesterday morning at 8:30 when the gov’t released the Empire State Manf report and the retail sales report.  Consumers apparently spent money in line with expectations but future guidance is suggesting that Americans are about to spend money ‘like a drunken sailor’ in the months ahead on everything from electronics to clothing - and manufacturing activity in the NY metropolitan region is stronger than last month sending the message that the US economy is ALIVE AND WELL - so that should be good, right?  So then WHY the selloff?  It’s an oxymoron.... we’re doing better, yet the mkt is selling off??? HELLO??? 
Well – sit back – let’s talk about this….Here is where the inflation boogeyman is see - in addition to those two reports - the NAHB (National Assoc of Home Builders) told us that lumber prices are going up (not good for the homebuilders – XHB lost 1.5% yesterday) ....and so the mkt now assumes that if the economy is getting stronger and it’s all good - then that MUST mean that inflation is stirring -  about to awaken from its long slumber and the fear is that while inflation appears to be sleeping now - it will wake up - and it will wake up ‘on the wrong side of the bed’ and BOOM – the FED will have to act more aggressively……Yesterday morning -

  • Treasuries immediately sold off sending yields on the 10 yr up and thru 3% again, 
  • Fed Fund Futures point to a 55% chance of the FED moving 3 MORE times this year – that is up from 39% last month.
  • Dollar surges – hurts the big US multinationals
  • Oil surges – good for energy companies, good for OPEC, good for Saudi Aramco, bad for global consumers
    Worries that street analyst’s estimates are way to high – think HD         (Home Depot -1.6%)
  • The continued move out of emerging mkt bonds causing global investors to consider reducing risk across the board – resulting in pressure on stocks (at least for yesterday).

And the world turns……US Futs tanked and the tone was set.... Do not discount the fact that the mkt had rallied for 8 straight days - so traders were just looking for a reason to take some money off the anything that allowed that narrative to become a reality is what was going to happen.  Look – the mkt sold off with little fanfare – as PM’s (Portfolio Managers) are forced to take stock of what they are doing, what is working and what isn’t. 
Well – bonds are not working, large caps appear to be under a bit of pressure (think stronger dollar) but US small caps are up….as of last night the Russell is up 4.9% vs. the Dow at -0.05%, the S&P + 1.42%.  Now look – small caps are a different animal – with little exposure to international mkts they are not affected by the stronger dollar and because they are US centric – they are benefitting from lower corp taxes and the stronger US economy and that is a theme that we have hit on once or twice this year…. just sayin’
Over the past week – we have seen Energy surge by 3.3%, Healthcare up by 3%, Basic Materials add 2%.  Financials, Consumer Disc, & Cons Staples are essentially flat and Utilities are falling behind.
O’Neil Methodology continues to confirm that we are in an uptrend – BUT makes this distinction – “Stalling action on Monday led to both the S&P 500 and Nasdaq to gap down and picking up a distribution day yesterday. Distribution does not begin to expire until the end of next week. To remain positive on the market, we will need to see the major averages hold their respective 50-DMA should the pullback persist and avoid a clustering of distribution over the next week.”
So, the 50 DMA’s are:
S&P 2,678, DOW 24,424, Nasdaq 7,210, Russell 1,560 & the Transports 10,464.

Now yesterday late in the day – Chubby (Kim Jung on) – who must have been feeling left out -  began to make some noise about coming to the table or not. He cancelled some meetings with South Korea saying that the military air exercises are a direct provocation and he is now threatening to ‘blow off’ his meeting with Donny if all Donny wants to talk about is ‘denuclearization’ saying:
“Pyongyang isn’t interested in a summit with the US focused solely on denuclearization and accused Washington of trying to impose on our dignified state the destiny of Libya or Iraq”  
News flash…. There isn’t anything else to discuss until you recognize that you are not in a position to make demands – You can come to the table talk like a leader or you can try and stamp your feet and make threats – How’s that been working for you?
This morning the chatter is all about Daniel Pinto – Co-Pres at JPM – pay attn to this man – because he is now in line to succeed Jamie…oh yes – he is Co-Pres so the other contender is Gordon Smith – who leads the consumer bank – but it isn’t Gordon who is travelling the world, talking to clients and being quoted all over the place…… is this Argentinean who has been at JPM for 35 yrs and is now head of the firms corp and investment bank – the world’s biggest by revenues.  And you gotta love the headline –
‘JPMorgan’s Wall Street Chief Talks China, Bitcoin, Amazon and preparing for an inevitable downturn in stocks’
No worries – that downturn (40%) isn’t happening until 2020.  
European mkts are mixed…….EU inflation numbers were in line with expectations – the story is the same…concerns over US interest rates, US inflation, ECB interest rates, EU inflation, geo-political stuff and now the latest headline concerning Chubby…. but none of this is causing any real angst and I suspect that the mkts will churn here. FTSE +0.12%, CAC 40 +0.07%, DAX +0.36%, EUROSTOXX -0.13%, SPAIN -0.97% and ITALY -2.14%. 
Oil is DOWN 31 cts at $71.  The IEA reported that global stockpiles hit 3 yr HIGHS – remember what I said yesterday…. the world is awash in oil – so why is oil trading at $71? 
Gold broke down big yesterday ($20) ….and is down another $3 today at $1,290/oz. Breaking well below support at $1,315 trading at levels last seen in December.  You can thank rising yields and the stronger dollar for the move.
US Futs are down 1 pt.  Eco data today includes: Housing Starts exp -0.7%, Building Permits of -2.1%.... NOT good since we are in the middle of the building season.  Ind Prod exp of +0.6%, Cap Util of 78.4% - that is nearing 80…and 80 triggers INFLATIONARY concerns…. because 80 suggests that we are utilizing 80% of our capacity and anything beyond that will force wage prices higher as we try and push the envelope…Capisce?   In the late 60’s early 70’s the Cap Util rate approached 90….and inflation went from 3.46% in 1967 to 6.1% in 1970…. just food for thought….
Now yesterday – we traded down to and thru short-term support at 2707 but managed to close above it as the mkt gets used to 3% rates…but my bet is that rates will move faster as the inflation story becomes the major theme….and that is when the mkt will hit a brick wall.  For now – another breach of 2707 will force us to test the 50 dma at 2678 – just like the O’Neil methodology tells us.  Stay close….and stay awake….


Mahogany Chicken 

You need:  Chicken parts – on the bone. (thighs and breasts; skin on); Olive oil, Garlic – 1 whole head, but more depending on how much chicken you are making; Fresh rosemary, Fresh sage, Fresh thyme, Bay Leaves, onion, Olives – green and/or black, Kosher salt & fresh ground pepper, and a good quality 'thick' Balsamic vinegar
 Soak & clean the chicken.  Pat dry on paper towels.  Arrange in a roasting pan.  Drizzle with olive oil, rub it onto each piece. Season with salt & freshly ground pepper.
 Peel garlic and arrange around and under the chicken parts.  Add rosemary, thyme, sage & bay leaves. Put the herbs around and under the larger pieces of chicken.  Add 2 cut up large onions and spread it around the chicken.  Use Vidalia onions if you have them, but any onion will work.
 Roast the chicken in the middle of a 400-degree oven for about 45 minutes.  Check the pan every 15 minutes or so and remove any excess liquid with a turkey baster.  The object is for the chicken to roast, not braise. - Save the juice on the side in case someone wants some with their meal.
 After 45 minutes, drizzle the chicken with the balsamic vinegar, add the olives, turn the heat up to 450 degrees, and roast for 15 minutes more.
 You can serve this with roasted vegetables, roasted potatoes or rice.  Always include a tossed green salad.

Buon Appetito.

The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O’Neil Securities, Incorporated or its affiliates.