Dow at 20K: Roll Out the Barrel!

"Roll out the barrel....We'll have a barrel of fun, Roll out the barrel, We've got the blues on the run, Zing boom tararrel, ring out a song of good cheer, Now's the time to roll out the barrel, for the gang's all here!" - Beer Barrel Polka - The Andrew Sisters - 1939.

January 1939 - the Dow stood at 145 - (up from 41 during the depths of the Great Depression in 1932)  and yesterday - the Dow surged up and thru 20K (up from 6,469 during the depth of the Great Recession)  in the seconds after the opening bell! 

 In fact the Dow opened at 19,994 - with the next 'tick' taking it to 20,007 before the clock struck 9:31....and it was all over - just like that!  The Dow now having pierced the formidable 20K mark allowed the world and investors to assess the next move and say What's next?'  What does it really mean?  Is 20K anything to cause retail investors to either BUY or SELL? Is it some kind of magic number that should change the mindset of investors - whether they are retail or institutional?  The short and concise answer is NO.

20K on the Dow only means 20K on the Dow - it should not be your guiding force to make an investment decision at all. Investment decisions should come from a broader understanding of stocks and risk factors, Investor psychology, global macro data, technology  and industry disruption caused by globalization, political policy decisions, FED and central bank policy decisions, Currency moves - etc....   Dow 20K is the RESULT of all these factors it is NOT the factor to be making investment decisions at all....but that's another story - it makes the headlines because it is a BIG ROUND number - beyond that - it's just a number.   

So what happened?  Well - earnings continue to surprise and grease the wheels, forward guidance only adds fuel to the outlook, political policy decisions (or at least proposals) are next...and yesterday - we saw President Trump initiate another executive order that supports his campaign promises....at a meeting at the Homeland Security office - he promised to start building that wall and move on immigration reform,  this on the back of executive orders to replace  Obamacare, revisit the Keystone and Dakota oil pipelines, discuss massive infrastructure projects,  toss out the TPP (Trans Pacific Partnership) and discuss renegotiating NAFTA (North American Free Trade Agreement) that was put in place on January 1, 1994 after then President Clinton signed it into law on December 8, 1993.  (Some 24 yrs ago - and like most policies/industries - reforms appear to pick up steam at the 25 yr mark generally).     

Global investors seem to be loving the new found tone in American politics that they hope will translate into further gains for stocks.....The top ten industry groups for the past month include:

Building - residential/commercial + 10.7%, Building Heavy Construction + 8.7%, Building Wood Products - + 3%, Building Mobile/Manufacturing + 2.8%, Trucks-Heavy Duty + 5.8%, Oil and Gas Drilling + 3.6%, Finance - Investment Banks/Brokers + 5.9%, Building Cement/Concrete +5.8%, Electrical Power Equipment + 4.5% and Medical Systems/Equipment + 6.5% -

Does anyone see a pattern here?   Now - this could all change if Trump's policies do not move forward - but the mkt is betting that will not be the case.....Are our elected politicians listening?  Americans voted - now get on with it...This seems to be the theme enveloping the world - European mkts are also making new HIGHS - France, Germany, Spain even Italy is joining in the fun....... we saw it in Britain and this year will bring referendums and votes across continental Europe - France, Germany, Italy, the Netherlands..and the list goes on.....what will be the battle cry in those nations and what does that mean for global stocks? 

Next week brings us the first FED meeting of 2017.....Fed Fund Futures are putting a 14% chance of a rate hike on the table - not nearly enough to get investors really worried that Janet will pull a fast one and hike rates just 39 days after the last hike - NOT HAPPENING......But - what will she say?

She can now solidly rely on an improving economy and improving outlook to justify future moves and you can bet that investors will be paying attention to the tone as they read between the lines for clues on when that will be.  Fed Fund Futures are now putting a 36% chance of a hike in March while they put a 51% chance of a hike in May and a 75% chance of a hike in June.   And that is what the investors are pricing in.....unless we get a real increase in economic activity, pressure on inflation and wages - then the mkt is ok with a hike in June...but if she indicates  otherwise - then investors will re-price equities based on that new risk.  (Future hikes are being priced in for July or Sept and then November/December).  If all goes as planned - she will get 3 hikes this year which is what she prepared the mkts for in December......

What is the VIX telling us?  The VIX is the fear index (volatility index) and it defines the mkts expectations over the coming 30 day period - it is constructed using implied volatilities of a wide range of S&P 500 options - and so where is it now.....10.66 - which is very complacent...it implies that the stock mkt has an implied volatility of 10.6%  on the S&P - which then means that investors think that the index has a 68% chance (one standard deviation) of trading within a 10.6% range of its current level over the NEXT year.  When the VIX surges to say 20 - then the risk of increased  volatility - either way - rises.....becoming what is described as more fearful of instability.  So at 10.6 - investors are saying - "I'm ok with this".  But if we see this index begin to move up - then logically we should see the mkt back off - how much?  Well that depends on how high the VIX goes.....

US futures are now up 1 as we are about to get hit with a lot of earnings and economic today....
ADS (Adidas), JBLU (Jet Blue), BX (Blackstone Group), RCL (Royal Caribbean), SWK (Stanley Black & Decker) , WHR (Whirlpool), LUV (Southwest Air), CAT (Caterpillar Tractor), BHI (Baker Hughes), DOV (Dover), DOW (Dow Chemical), RTN (Raytheon), LLL (L3 Tech), BMY (Bristol Myers), F (Ford), CMCSA (Comcast), SHW (Sherwin Williams), TROW (T Rowe Price), CELG (Celgene), to name just a few....

Eco data includes:  Wholesale Inv of +0.1%, Chicago Fed exp of -0.5%, Initial Jobless Claims of 247k, Cont Claims of 2.04 mil, Markit US Services PMI of 54.4 (bullish), New home sales of 588k or -0.7% m/m, Leading Index of +0.5% and Kansas City Fed Survey of 8. 

Will we see another surge higher or will the mkt digest the explosion?  My guess it will digest a bit here, individual stocks that are reporting will clearly react, but the broader mkt feels like it needs to re-group a bit.  Trumps ABC interview was uneventful and the Republican’s formally adopted a 200 day plan focused on tax reform, Obamacare reform (repeal) and not so much on infrastructure as expected.
 
In Europe - those mkt are all moving higher- the Pan European Stoxx 600 is up 1/2% as it also makes a NEW HIGH.....This index is Europe's leading blue chip index for the Eurozone and provides representation of the 'super sector leaders' across the zone - and the recent action has the BULLS in complete control..... In Britain - GDP beat estimates 2.2% yoy vs. (E) 2.1% yoy but with Brexit uncertainty looming, investors are not really paying attention.  FTSE +0.19%, CAC 40 + 0.01%, DAX + 0.5%, EUROSTOXX + 0.13%, SPAIN + 0.34% and ITALY + 0.36%.

Gold is off another $8 and is now below $1200/oz.  As I said yesterday the recent rally in Gold (think flight to safety) appears to be taking a breather.....- a test of what is now support at $1183 would not be out of the question......
 

Take Good Care
KP

Braised Beef Short Ribs 

Begin with 6 / 8 beef short ribs.  season with s&p and then brown in a frying pan with a bit of Olive oil.  Make sure to brown all sides being careful not to burn the meat.  After you have browned them - place them in a large/deep baking pan.  Lining them up on their sides. 
 
Next -  large Chop - 2 lg White Spanish Onions, 1 bunch of celery stalk, 1 bag of carrots.  Smash 4 /5 cloves of garlic and add to the meat - making sure you disperse the garlic all around.  Next add the chopped veggies right on top. 
 
In the frying pan that you used to brown the meat - add:  1 can beef broth, 1 can tomato paste, and  1/4  to 1/2 bottle of red wine.  mix well and let the broth come to a boil for a couple of min as you steam away some of the alcohol in the wine.   Bathe the short ribs in this mixture and cover tightly.   Place the baking dish in the oven - preheated to 350 degrees. Let cook for 4 hours - tightly covered. 
 
The presentation:  Remove the baking dish from the oven.  Puree 1/2 the veggies in the food processor.   On a warmed serving platter - pour the pureed veggies down the center of the platter.  Arrange the short ribs on top of the pureed veggies and then place the balance of the cooked veggies around the meat. 
 
Complement this meal with oven roasted red new potatoes.  - Rinse the potatoes - toss in baking dish....season with s&p,  add a bit of olive oil to coat the potatoes.  mix well.  Prior to putting in oven - add 1/2 stick of butter - cut into pieces and strategically place around the potatoes.  Cover and roast at 400 degrees for 40 mins.  Remove cover and lower heat to 350 degrees and roast for another 15 mins or so - ....check for doneness by piercing with a fork. 

  
Buon Appetito.