Stocks kiss the highs while bonds turn up the heat — Caveat emptor

Stocks advanced again yesterday as investors, traders and algos decided that the ‘expected’ strong earnings reports and the AI spending boom were enough to keep the party going – even though the bond market continued to turn up the heat. Oil gave a bit back, giving the market something else to celebrate, but borrowing costs (think 10 & 30 yr bond yields) rose while the latest round of eco data reminded us that inflation remains very much alive.

At the end of the day - the Dow gained 0.2%, the S&P added 0.7%, the Nasdaq gained 1%, the Russell up 0.5%, the Transports lost 1%, the Equal Weight S&P added 0.6% while the Mag 7 rose 1.2%.

Communication, Basic Materials, Energy, led the charge, all rising more than 1%, Healthcare and Financials rose by 0.75%, followed by Utilities, Tech, Consumer Staples, Consumer Discretionary. Only Real Estate ended the day lower – down 0.4% and we can point to the rising cost of money.

Down the chain – we found weakness in Home Builders, Airlines, Aerospace & Defense, Big Pharma, Quantum computing and big Transportations names.

We found money moving into – Metals & Miners, Growth & Value, Cybersecurity, Semi’s,. Software, Biotech and Small Cap Growth names.

Yesterday’s economic data gave both sides something to chew on.

September’s ISM Services PMI came in at 54.9, down from 55.4 in August, marking the 27th consecutive month of expansion. Business activity slowed to 56.5 from 61.7, new orders eased to 59.8 from 60.9, and employment improved to 50.1 from 47.8—moving back into expansion territory. So, services is doing just fine.

Meanwhile, the separate S&P Global survey showed September’s final Services PMI at 58.8 and its Composite PMI at 58.4, pointing to continued strength in services activity.

But here is the issue: Prices paid rose to 74 from 72.6—the highest reading since July 2022 and that means rising input costs remain stubborn. In the end - activity cooled a bit, but cost pressures intensified and that is the conundrum that Kevy has to deal with.

The futures market is now pricing in a ‘hold’ on rates in October and a raise in December. Whatever happens will depend on the ‘data’ between now and then.

And bonds? They continued to get whacked…. the TLT lost 0.5% while the TLH gave up 0.4% and that sent yields higher…the 10-yr pushed to an intraday high of 5.35% while the 30-yr kissed 5.7%.

But here is the detail that matters: Since September 23, the 10-year yield has climbed about 20 bps, the 30 yr is up 25 bps while the 2-year yield has declined by 12 bps.. That tells you that – One – the FED nor the Treasury controls the long end of the curve and Two – that investors are demanding more compensation to lend money for longer periods because they are concerned about inflation, gov’t borrowing and economic uncertainty about the outlook all part of the equation.

Yesterday, Earl Davis –Managing Director of Fixed Income at BMO told Bloomberg that he thinks a 30 yr - 6% yield is ‘inevitable’ possibly even happening this month’. And IF that is the case – it may not matter what earnings look like!

Now watch the auctions. Today brings a $58 billion sale of 3-year notes, followed by a $39 billion auction of 10 yr notes tomorrow and a $22 billion auction of 30-year bonds on Thursday. Higher yields attract buyers. The question is whether current yields are high enough to steady the market—or will buyers insist on still more? Hold onto your hats, we’re about to find out!

WTI fell $1.68, or 1.8%, to settle at $89.43, while Brent lost $1.93, or 1.9%, to settle at $100.32. It was the improving Saudi exports and additional European supply measures that helped take some pressure off prices. This morning – WTI is down another 1% at $88.60. It is now down 11% from the September high – trendline support is at $86.20.

And Gold continues to spin its wheels…. stuck in the $4000/$4,270 trading range. Yesterday it fell $5 to end the day at $4,140 and this morning it is down $2 at $4,138. If Earl is correct and 30 yr rates go to 6%, then expect even more pressure on gold…. $4,000 would be the test…. Should it fail – the chart tells us that the potential downside could be $3,400/$3,500 – so, sit tight.

There is no real eco data today that will drive the action…Tomorrow gives us the September FOMC mins…. Expect the talking heads to pull this apart as they look for more clues about what’s next for the Fed.

Meanwhile, the VIX, continues to tell us that there is nothing to worry about, which given the action in the bond market – makes little to no sense. Expected volatility remains subdued, making protection relatively inexpensive. Just something to consider….

European markets are all higher, Italy in the lead – up 1.1%, Spain is up 1% while the rest of them are not far behind.

US futures are up at 4 am. Dow futures +250, S&P’s +15, Nasdaq is + 60, while the Russell is +6.

The S&P closed on Monday at 7,773 - up 51 pts and just 12 pts off the all-time closing high and just 27 pts off of the all-time intraday high. Think about that for just one minute…. The Nasdaq is making new highs, and the S&P is kissing all-time highs even as bond yields surge…..What this tells me is that investors are betting that earnings growth and the SI (super intelligence) boom is more important than the rising cost of money…. I say at these levels – Caveat Emptor!

Veal scallopini in a marsala cream sauce

Prep time: 15m

Cook time: 15m

Total time: 30m

Serves: 4-6m

Ingredients

6 Veal Cutlets, pounded thin, Olive OIl, butter, flour, s&p

3/4 c heavy cream

1/2 c Marsala Wine

Preparation

Step 1

In a large sauté pan – heat up some butter and olive oil on med high – let the butter foam and when it subsides

Step 2

Dredge the veal in seasoned flour (s&p) and brown quickly in the pan on both sides – maybe like 30 secs per side…. remove and set aside. 

Step 3

Now turn the heat up to high and add some Marsala wine – bring to a boil and scrape the bottom of the pan….as the wine begins to boil away – add the cream – turn heat to med and stir until you have a semi thick sauce…

Step 4

Reduce heat once again to low (not simmer) and add back the scaloppini – turning them to coat well.  

Step 5

When ready – serve on a warmed platter in the center of your table.

Step 6

Serve this with a green veggie – something like steamed French cut green beans or asparagus – something simple – not garlicky…. steamed - then seasoned with a dab of butter and s&p. 

Step 7

Try a nice medium bodied red with this meal….. Cabernet – playful yet sophisticated.