Markets in Rally Mode - Yield Curve Goes 'Normal' (You're Kidding!), Geo-Politics Quiet, Trade Thawing?

What You Need to Know Today

• Trade talks appear to thaw

• Yield curve no longer inverted – fueling Risk On around the world

• Mkts prepare for the Jackson Hole boondogg

What a week it was……wild swings in the mkts, caused by more tension in trade talks, more geo-political angst – think protests in Hong Kong, elections in Argentina raising concerns about a possible debt default, unrest in the Italian political landscape, ongoing talks between the UK and the Eurozone (EZ) over BREXIT, blah, blah, blah…… causing investors to rush into the safe haven assets – think Gold & US Treasuries -  which for a very brief moment caused an inversion of the yield curves suggesting that a ‘recession’ is ‘on the horizon’ (whatever that means)  sending shivers down the spines of mkts – or rather shivers down the spines of the people who code the algorithms – who btw – have zero clue about how the capital mkts work  as they write code based on mathematical formulas with little to no understanding of the impact on the mkts.  (And we could go on and on…..) 

And the frustration is that because the algo’s are responsible for so much of what the action is these days - at some point – someone has to stand up and say ENOUGH…………But the story that caused most of the angst and then the meltdown of the algo’s  was that ‘brief’ moment of yield curve inversion…..the one that saw the 10 yr and the 2 yr curve invert…meaning that the 10 yr was yielding LESS than the 2 yr…which legend tells us portends a certain coming recession……the only problem with that is that the coming recession is at least 15 -  18 months out……So we need to ask – Should that have received all (or any of) the attention that the media and the mkts gave to it?  I mean think about it – the momentary inversion – which lasted maybe 10 mins is now the be all, end all SIGNAL for a US recession?   Seems a bit ridiculous to me….because let’s be honest – the US will enter a recession at some point – anyone who thinks not – should go back to school and study the basics of economics….specifically the business cycle…..   On Friday – I was  at the NYSE and appeared on Squawk Alley with Carl Quintanilla and Scott Wapner discussing the weeks action and then I appeared on Jim Cramer’s – TheStreet.com and finally got to chat with Sue Herrera on the Nightly Business Report for Friday August 16th…. in there – I talk about how ridiculous it was for the mkts to have such a visceral reaction to this momentary breach – a breach – btw – which was caused by a rush in to safe haven assets – in this case – US treasuries notes and bills… Now while some of it is due to concern over the future of the economy there is also the fact that rates are negative in other parts of the world (and threatening to go even more negative) which forces international money as well as US money into US assets as they chase POSITIVE yields…and the consequence of that is that as bond prices rise – yields fall.  (Remember – there is now some $17 Tril of negative yielding debt)   Now yes – there is some broader global macro concern but NONE of which is new and in my opinion – even those are overdone……and like I suggested just above – there is this thing called ‘the Business Cycle’ the normal ebb and flow of business, the normal rise and fall in production of goods and services in the economy.  It is not something to be afraid of, but it is something that you should be aware of as you move through the cycle.  It’s not rocket science – it’s common sense. 

So yes, the mkts thrashed around and will continue to thrash around until the damage done from last week’s swift and stunning selloff stabilizes….and that may take a couple of weeks  - considering that we broke some if not all of the technical trendlines that drive the action in the very algorithms discussed above.  The headlines will be important and the headlines for now will drive the action….so over the weekend – guess what – nothing bad happened – in Hong Kong, Argentina, or Europe, there was no devaluation of the Chinese Yuan nor were there any retaliatory tariff announcements. 

Yesterday – the President along with Larry Kudlow and his sidekick Petey Navarro took to the stage to discuss the US economy  and the very strength of the US consumer and why there is no recession on the horizon – blockbuster retail sales, continued strong job numbers, rising wages etc…..but again if you want to look for the negative then you’ll find it…and if you look for the positive you will find that as well…..so again,  define horizon – is it 6 months, 18 months or 24 months….and then find me the person that can articulate exactly where we will be during those time frames….and on what date the recession will arrive…..Do you see the ridiculousness of this argument?   Investing is dynamic – it is not static and therefore a decision made today may be right next year or it may be wrong  but not only don’t we know that – we will have time  to adjust as the weeks turn to months and the calendar changes from 2019 to 2020.   Look Bridgewater’s Ray Dalio is putting a 40% chance on a recession coming in the next 2 years…..that gives him 24 months to be right…..(and it gives him 24 months to change HIS story – as the broader story is sure to change) 

This morning – mkts are HIGHER…… the Commerce Department extended Huawei waivers for 90 days, which is a mild positive in the U.S./China trade situation signaling another ‘olive branch’.  There were a lot of trade related headlines but the net/net is that trade tensions appear to be receding , which is helping to support the broader global extension of Friday’s rally.   There are no economic reports today and no Fed speakers as they are all preparing for the Jackson Hole boondoggle that takes place this week on August 22 – 24th.   I suspect that the focus will be on trade related headlines and any rumor of what Jay Powell may or may not say while at Jackson Hole.  Expect to see conflicting messages on Twitter which  will then create lots of conversations on the cable business programs.   – Either way – it appears as if trade tensions, mkt tensions, geo-political tensions all appear to be receding – and that will be a positive for stocks – especially since there was so much price dislocation last week. 

Later in the week we will get the FOMC Mins from last month’s meeting along with some global flash PMI’s – toss in US macro data on Home Sales, regional FED reports & Durable goods and we will have just a couple of things to talk about.  Between Jackson Hole and the global macro data – we will learn what central banks are thinking and what the path forward might look like and if the sense is that the global economy is stabilizing and central banks remain dovish – then we will see stocks continue to rally.   The yield curve which is no longer ‘inverted’ is adding fuel to this fire…..which just speaks to the ridiculousness of last week. 

Now that being said – I still think that US stocks will find some resistance at the 2930/2950 range as we move into end of month and into September as trader types and asset managers prepare for qtr end window dressing.   

Oil has clawed its way back from the $50 level seen two weeks ago is now trading back at $54.91 heading towards the trendline…at $56.16 – partly due to an attack on a Saudi oilfield by Yemeni extremists……and signs of a thawing in trade talks.   Either way – do not look for oil to surge very much as there is still concern over the demand picture and will continue to be until the US and China resolve this dispute – a dispute will at the moment has no end in sight…….Capisce?

This takes all of 12 mins to prepare and serve....an easy dish that appears harder than it is.....

You need only a couple of things....1 lb of large cleaned, deveined shrimp, butter, olive oil, garlic, lemon, white wine, chopped parsley, s&p....and  a lb of linguine.....

Bring a pot of salted water to a rolling boil and add linguine.....cook for about 8 mins or until aldente....

In a sauté pan - melt butter and add a splash of olive oil, add crushed/sliced garlic......and sauté....keep heat on med so that you do not burn the butter or garlic.....add the juice of one lemon, complement with some white wine...about 1/4 cup...in pan - and a wine glass full for you - turn heat up to high....next add shrimp, s&p and sauté quickly until nice and pink on both sides...no more than 5 mins......strain pasta - reserving a mugful of water - add pasta to sauté pan - mix and serve.....You may need to add back a bit of the pasta water to keep moist -as the pasta sucks up the juice....  Serve in warmed bowls with fresh grated cheese at the table.