• Stocks continue to waver ahead of a rise in rates.

  • Lots of talk about where is the line in the sand.

  • France and the UK discuss re-opening, German IFO data rises.

  • Lonnie Musk questioning the value of Bitcoin – on Twitter – ending it with LOL!

  • Oil teasing higher as Texas re-opens.

  • Try the Lamb Shank Osso Bucco.

Stocks wavered as they made their way around the final bend of the week – playing cat and mouse as investors attempt to find the clue for the next directional driver – …. Now, if you have noticed – they (investors) have been dumping bonds, sending the 10 yr. yield to 1.344% up from 1.286% last Thursday – in a show of support for the recovery….  Remember – the inverse relationship – as bond prices fall – yields rise and at some point, rising yields will become a headwind for stocks – what that yield is – no one knows yet…. Is it 1.5%? 1.75%, 2%?  Whichever you think it is will drive the future moves in your investment portfolio….and this is what is beautiful – everyone has their own opinion….so there is no real definitive line in the sand…. Although, if you follow me – I am saying 2% IS the line but would expect stocks to begin to show stress at 1.5% …. But hey!  What do I know? 

By the end of the day Friday – the Dow ended flat, the S&P’s lost 7 pts, the Nasdaq gained 9 pts and the Russell added 48 pts – adding 2.17% to their bottom line.And in a bid to the ‘Dow theory’ students out there – recall my piece last week – defining the Dow theory…..well, The Transports did it…they added 225 pts or 1.74% - leaving them at 13,274 – 94 pts above their closing high and 2 pts above their intra-day high on February 16th  So if you believe the Dow theory – both the Industrials and the Transports have now confirmed each other – and that suggests that this bull run has room to go! I guess the question is – will it pull back first, stamp its feet on the earth and then charge ahead or will it just continue to charge ahead?    

The money being taken out of bonds is being put to work into the economically sensitive stocks that are expected to do well in a strong economy…. On Friday – the Industrials – XLI was +1.64%, Financials – XLF + 1.19%, Energy – XLE + 1.67% and Basic Materials – XLB +1.8%, and Retailers – XRT +1.5%.  Utilities will suffer under rising rates and we saw the XLU down 1.5%, Parts of the Tech sector will also come under some pressure (think FANG names, think work from home names) – XLK lost 0.15% - which is not really any big deal…. because as we have discussed – Tech is MORE than just the FANG names……and while the broader market is sure to take a haircut if rates rise to quickly – we could expect parts of the TECH sector will get unduly punished…. while other parts will do just fine.  Artificial intelligence is Tech, Cybersecurity is Tech, Internet of Things is Tech, Electric cars are Tech, Software is Tech and those are sectors that are not expected to get hit as hard as say the FANG names (you get the picture, right). 

So, while the broader market feels a bit tired, it is not a reason to despair just yet…..this Bull has one big set of ‘feet’ (or pick you own adjective) and feels like he still has room to run   – helped of course by the FED holding rates at zero and promising to keep them there for at least 24 more months, the idea that we are getting not only a $1.9 trillion stimulus package but an even bigger fiscal (infrastructure) package – some estimating as high as another $3 trillion, quickly declining COVID-19 19 cases, massive ramp up in vaccinations and the real sense that as more and more people get vaccinated then more and more people are going to start to ‘hit the road’.  And this is all good….so I am not throwing water on it, I am just pointing out some of the bumps in the road ahead.

Now – in the Barron’s over the weekend – I read Nicholas Jasinski’s Trader piece – “This Bull Market Still Shows No Signs of Ending” – in it he makes a number of observations….about rising yields and rising equity prices….trying to justify why a surge in yields will not cause stocks to adjust….In it he talks about the ‘delicate balance’ between stocks and bonds and how good news could be bad news for stocks because it meant that the FED wouldn’t have to continue to serve up the Kool Aid and that was seen as a negative.  But on the other hand, good news could also just be that – good news – it depends on the context of the story.

As he moves through his line of thought he goes onto say that ‘this time it’s different’ - rates are already at zero, and the FED has made it abundantly clear that they will ‘tolerate’ higher inflation in the short term – until the economy and unemployment (or employment) are in better shape – thereby assuring everyone that rates are not going anywhere….  He then goes onto say the recent surge in 10 yr. treasury yields is happening for ‘right’ reasons (think improving economy) which is causing earnings growth and if earnings continue to grow, we can ‘absorb higher rates’ – this line of thinking confirmed by Jeffries equity analyst Stevey DeSanctis. 

But here is where his analysis fails me (and maybe you too).  He cites another guy named Keith Lerner – Chief Market Strategist at Truist Advisory Services – who looked at 16 post war periods in which yields rose along with stocks 81% of the time.  And get ready because here it comes…he goes onto say:

“An apt parallel might be 2009, when the 10 yr treasury increased by 1.6% and the S&P 500 returned 26%”

Is this guy kidding us??? He is comparing 2021 to 2009.  After the market got crushed and lost 60% of its value in the preceding 17 months – he wants to say that rising yields then did not dampen stocks? (Did he miss the GFC – Great Financial Crisis?). Just to clarify on February 28, 2007 the S&P stood at 1,565 and by March 2009, the S&P stood at 666.79 - a 57% decline……and then the FED and every other central bank opened the spigots causing global equity markets to rally… (recall the Uncle Mario Draghi quote – “we will do WHATEVER it takes…”) and this guy Keith Lerner is comparing now to then.  Yes, yields rose then because of the assumption that things were improving but stocks had gotten hammered!  Today yields are rising because things are improving but …….

HELLO???  The S&P is at all-time highs  – not all time lows and yields have rallied significantly already – causing stocks to pause….and yes the FED is artificially keeping rates at zero while pumping up the system with gallons of Kool Aid…..so, I can see how the market may not go down very much, but to say that rising yields now vs. rising yields then are comparable is almost laughable…..Keith – tell me- where do you see the dividing line?  In any event – this is what makes a market – both buyers and sellers….and here – Keith and I are on opposite sides of this argument…. Higher rates will cause a re-pricing – the pace at which they rise will be the lead actor while the level to which they rise be the supporting actor.  Fast and furious will cause increased volatility and a swift re-pricing…. a more tempered increase will also cause a re-pricing but not the one many want.   

US futures are down this morning….as concerns rise over what?  Oh, right 10 yr rates!  Dow futures pointing lower by 215 pts, S&P’s are down 35 pts, the Nasdaq lower by 181 pts and the Russell is off by 24 pts…. Overnight 10 yr Treasuries pushed higher and are now trading at a 1.375% yield while the 30 yr bond is at 2.17%.The VIX (fear index) is also higher…. trading up 2.25 pts or 10% to 24.32. (A rise in rates causing a rise in ‘fear’ results in profit taking – this is Econ 101).NY Fed President Johnny Williams telling us tyhat he is NOT concerned about rising asset values or rising interest rates – suggesting that the recovery is underway and that they need to see inflation run solidly above 2% for a while before anyone even considers changing the road map. 

And we expect to hear the same from FED Chair Jay Powell on Tuesday when he takes the stage on Capitol Hill in his semi-annual Humphrey Hawkins testimony…. Now the Humphrey-Hawkins Full Employment Act was signed into law on October 27, 1978 under the Carter Administration….it instructs the FED and the nation to strive toward four goals. Price stability, Balance of trade and budget, Full employment and growth in production. The FED Chair is required twice a year to appear on Capitol Hill to address each of these issues to both the House and the Senate – and that happens on Tuesday and Wednesday this week. I would not expect Powell to veer off course at all….Expect to hear questions around more stimulus as well as questions around a possible surge in inflation.  In the end, though – I do not expect us to learn anything new at all.

In another blow to BA – news over the weekend that the 777 aircraft have been grounded by United and others after a Pratt & Whitney engine failure is causing investors to hit the SELL button – the stock is quoted down $8 or 3.5% at $209/50/$209.80 in the pre-mkt.
Eco data today includes: the Chicago Fed Actvity Index – exp of +0.5%, Leading Economic Indicators of +0.4% and the Dallas Fed Survey of +5. 

Again - let us not kid ourselves – investors are keeping a keen eye on 10 yr. yields and if those yields rise quicker than expected – it will spook the markets and cause the ‘bigger’ re-pricing that many expect…. but a more gradual methodical rise in rates over months and not weeks will have a lesser impact on equity prices – yes, prices will still adjust lower, but maybe not to the extent they will if yields surge to 1.5% or greater in days – not weeks. And if they pierce 2%, I expect much more resistance in the near term. 

European markets also moving lower – following the weak action in Asia overnight.  All a result of those rising bond yields and how higher rates will challenge the high growth names.  Tech stocks getting slammed in Europe this morning falling more than 2% as a group while the broader markets take a breather. And yes, vaccination rollouts are in the news as well, as both the UK and France consider re-opening measures in the coming months…. Months not days. German IFO Institute released its February survey on the business climate and it showed a move up to 94.2 vs. the expected 91.7. At 6 pm the FTSE -0.55%, CAC 40 -0.52%, DAX -0.57%, EUROSTOXX -0.66%, SPAIN -0.73% and ITALY -0.73%. 

Oil – is up small today after the selling we saw at the end of last week. Refineries in Texas are now opening and oil execs telling us that output would be returned to normal in a couple of days….and this is causing a small uptick in prices as it signals an expectation of a surge in demand. Oil is up 40 cts at $59.65 and I am still in the camp that it will come back and settle in in the mid 50’s for now. 

Bitcoin –has been all over the place…. Lonny Musk making comments that he thinks both Bitcoin and Etherium are a bit ‘overpriced’ now only caused traders to take it up even more before it reversed course to head lower. …..(which I believe is a psychological move…..Lonnie comes out and supports it big time, makes all kinds of bullish commentary, takes a $1.5 billion position in the asset, talks it up and is now trying to talk it down a bit before he buys more) The media reports this morning that since his initial purchase – the action in the asset has reaped him a billion dollars in profit……It is now down $650 at $54,900. 

The S&P closed at 3906….and appears to ready to test the lows of last week at 3884…. on its way to what could be a test of trendline support at 3790. You can feel the angst in the markets, with some looking to ring the cash register while others are trying to pick a bottom…. Again, you must ask how long will investors be able to ignore the threat of rising rates bubbling beneath the surface as we keep telling ourselves that it is all OK?  We remain in the channel of 3771/4040.  You know how I feel - the market feels tired – and the attempts to advance feel less robust… There is no reason at all to chase anything.  

Stick to the plan, trim where necessary and put money to work in some of the underperformers…. Stay awake…. this is not the time to doze off.

Lamb Shank Osso Bucco 

Now I love Osso Bucco – and while it is usually made with veal shanks – here is a recipe that I got from a MT reader and friend that features Lamb Shank….and it is good….  I hope you enjoy – Thanks Vince for the recipe. (the recipe is in his voice).

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, lamb stock if you can find it or are adventurous enough to make it, 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 a little while 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.

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