The Straw that Broke the Camel's Back

And what a week it was…..Stocks suffered big losses as investors began re-assessing valuations in the face of surging 10 yr bond yields………..The selling – which began early in the month -  hit a crescendo on both Wednesday and Thursday last week as the Dow gave back 1300 pts, the S&P lost 157 pts and the Nasdaq choked up 497 pts.  The culprit?  By now you’ve heard it all.  Surging yields on the 10 yr bond, Trade, central bank policy, oil prices, and tax loss selling that led to profit taking in the ‘over extended’ technology space that caused the momo guys (momentum players = non-sticky money) to bail which all led to a mini meltdown.  And the truth is that we saw the collapse of a very crowded trade (think Technology) ……and as you would expect – when someone yells FIRE – everyone runs for the door……
 
Now who exactly is responsible?  Some pundits will tell us that it was the mutual fund industry that created the selling pressure – as they sold stock to meet redemptions.  Others will tell you that it was margin calls that caused investors to hit the sell button and others will say that it was the shorts that borrow stock they  don’t own to sell it – hoping to buy it back as prices collapse – (and since we no longer have the ‘short sale rule’ – this ‘investing technique’ only adds exponential downside pressure to an already weak mkt) and then some will tell you that it was the thousands of ETF’s and leveraged ETF’s that added to the excitement as investors in those passive products also hit the sell button causing redemptions of the ETF shares to add to the selling pressure.  And finally – others will tell you that it was the quants & HFT crowd and their smart logic algorythim’s that created the selloff -  In fact – all of those would be correct.  You see – it is not one of those reasons – it is in fact all those reasons that added to the pressure causing the buyers to re-consider what they are willing to pay.   Because – look – there WERE buyers - for every seller there is a buyer – so if all those players were selling – then who was buying?
 
Well – those same people – remember – everyone plays on both sides of the fence – people in the mkt play for both teams…at times they are sellers and at times they are buyers – and sometimes you can be both a seller of one stock and a buyer of another……so why the sharp selloff?  Well – the straw that broke the camel’s back was the surge in rates – then you just take everything else and pile it on.
 
Look – the mkt NEEDED and excuse….it needed a reason to back off – since it has done nothing but go straight up in with no real pullback of any consequence.  Asian and European mkts have been under pressure this year while the US seemed to be the ‘safe play’.  US economic data keeps improving, the FED is staying the course, Donny criticizes the FED for doing their job while he threatens China with even more tariffs, Christine Lagarde (the Int’l Monetary Fund Managing Director) comes out to say that the global trade war will cost billions (not bullish) and now investors are suddenly concerned over slowing earnings going forward……so what happens?  They run for the exits in the ‘growth’ names looking for safety in the ‘value’ names. 
 
And that’s where the fundamentals come in to play and we are moving from a FED/Monetary based mkt to a fundamental based mkt….…..Look – we have had abnormally low interest rates for years now – The FED forced money into the mkt – as we tried to rescue the economy – and when rates are near zero – where else is an investor to go?  Come on!  How long have we been talking about this?  So as the year rolled on and the eco data kept improving  – we saw the FED begin in earnest to draw the line in the sand – as they look to normalize rates….and while the FED has stuck to the plan and been very transparent – making slow and deliberate moves higher – investors last week forced the selloff as they sent yields thru 3% up to  3.27% in a relatively short time frame….a move that the mkts were not prepared for….and this is what caused the change in mkt psychology.  Remember – the conversation has been – at what rate will stocks stop going up?  Was it 3%? 3.5%, 4%?   Well it now appears as if 3.25% is the rate that lit the fuse.   
 
So, while the sell pressure mounted – the buyers – took advantage of the angst – choosing not to stand in the way of the oncoming train.  And while they are happy to buy stocks they are not happy to ‘overpay’ for them either.  So, when a seller is willing to sell stock down 2% or 3% at a clip – who am I to say “No – wait…I’ll pay up for that stock!”  that is NOT happening….….
 
And so – the selloff happens…..and then you get ‘technical breaks’ (or failure of short, intermediate and long term trend lines) – think both the Nasdaq and the S&P -which only invites more selling – while it signals to the buyers to ‘back off’ causing a void in prices that sends stock into a tailspin.  And that break in the technical’ s will now cause the mkts to thrash around as it searches for support – expect prices to ricochet for days to come as the mkt searches for support while testing resistance.  We will stand up, then sit down, then stand up and then sit down again……. Until we get thru earnings season, get some clarity on yields and clarity on trade….do not expect the mkt to settle down.
 
And speaking of camels – the Saudi’s are in the global hot seat (and oil is surging) …..as the world wants to know what happened to  that missing WSJ journalist that allegedly recorded his death in Turkey at the hands of the Saudi’s on his Apple Watch….Oh boy – can you just see how this is going to play out? (Movie to follow).  Trump has promised ‘severe’ punishment on the Saudi’s if they can’t answer the question about their role in his disappearance ….and the Saudi’s won’t have any of it…. promising to push back hard against any allegations that they were involved in Khashoggi’s alleged death.  Yesterday – the Saudi’s reminded Donny that they are the world’s largest oil exporter and they ‘play an impactful and active role in the global economy’ so before anyone jumps to conclusions – let’s just everybody sit down and take a deep breath as we investigate.  
 
*Side note:  The Saudi Investor conference slated for later this month is seeing participants cancel in droves…. JPM, Blackstone, Blackrock, CNBC, CNN, Financial Times and the New York Times all announcing that they are no longer participating.  More to follow. 
 
It is earnings season and look for the banks to continue to beauty pageant.  This morning BAC announced that they too BEAT earnings – coming in at 66 cts/sh vs. the expected 62 cts.  Stock is up 1/3 of 1 percent in early trading… And Sears finally throws in the towel…as Eddie Lampert files for bankruptcy….and steps aside……. Earnings from CMA. MS, JNJ, BLK, UNH, GS are all expected as the day wears on. 
 
Asian mkts came under renewed selling pressure overnight – completely ignoring the US rally on Friday as investors in that region remain very cautious.  Japan – 1.87%, Hong Kong -1.38%, China – 1.40, ASX -1%. 
 
European mkts are flat to up small but lack any real direction.  Concerns over Brexit, Saudi Arabia, Trade and rising interest rates continue to be the talk of the day.  While there were no outright negative macro data points over the weekend to cause the resumption of selling there was plenty of geo-political news that will serve in the short run to be a negative. Either way – the mkts are trying to shake off the negative tone and digest the gains from Friday.   FTSE flat, CAC 40 – 0.15%, DAX +0.37%, EUROSTOXX +0.31%, SPAIN -0.15% and ITALY +0.19%.
 
Oil is up 50 cts at $71.83/barrel driven by the rhetoric out of Saudi Arabia concerning Khashoggi.  Couple that with evidence that the South Koreans have stopped importing oil from Iran and that only puts more pressure on the Saudi’s to produce…. which they may not do now if the world imposes sanctions on them.  Recall that last week – the IEA told us that the world oil mkts are well supplied – and that put downward pressure on prices…but if this latest drama plays out – then the mkts will assume a drawdown on current supplies and force the price higher.  …..
 
Gold is up $11 at $1,233/oz. After having piercing resistance at $1,204 it shot right up to intermediate resistance at $1,239 before backing off a bit.  Think of this as a safe haven play while the global stock mkts come under pressure. 
 
 
The O’Neil Methodology now has the mkt in a Downtrend. 
 
“The S&P 500 and Nasdaq undercut their respective 200-DMA last week. With Friday’ssnap back rally, we are now looking for both indices to hold above the intraday low from Thursday (S&P 500: 2,710; Nasdaq: 7,274) for another two sessions, before moving the market into a Rally Attempt. Should this occur, we will be looking for a follow-through day as early as Wednesday before moving the market back into a Confirmed Uptrend. 
 
Like the major averages, ideas have begun to whipsaw around, with multiple names breaking both short and long-term support levels last week.  Nine U.S. Focus List ideas were removed due to technical deterioration with eight still trading below the 200-DMA and at risk of removal. We'll maintain our cautious view of the general market until we see a follow-through day that coincides with constructive technical action across quality growth ideas.  
 
For now, stay defensive, selling ideas that are trading below long-term support and focusing on ideas and industry groups that rebound the quickest when and if the market recovers.”
 
The S&P Futures which were down 14 pts earlier today have rallied a bit and are now flat – feeling like they want to continue to trade higher.  2766 is resistance – right where we ended on Friday…if we pierce up and thru – then look for the algo’s to take it to 2822 (intermediate resistance) before it fails.  My sense is that the Saudi issue will be the next catalyst for continued volatility…. unless of course they can prove that they had nothing to do with the suspected disappearance of that reporter…. And while that issue alone will not determine stock prices or economic activity – surging oil prices will. 
 
 

Timbale di Riso e Salsiccia Dolce 

Just the name sounds delicious - right?  It rolls off your tongue -  So now you ask - What is it?  Well - a timbale is a dish - usually made with meat that is prepared and cooked in a mold and then served.  It could be sautéed beef, veal or sausage or any combo of each - and wrapped in a pastry dough or pasta dough to form an 'envelope' or it can be like today's dish and cooked in a bundt mold with rice.  Try it won't you?  It makes a great thanksgiving side dish.
  
For the rice:
 
1 lb Arborio rice, 1 diced onion, 5 cups chicken broth, butter, 2 1/2 cups freshly grated parmigiano reggiano, 3 large eggs - beaten and at room temperature.
 
For the sauce –
 
·  1/4 cup olive oil, 1lb Italian sweet sausage - removed from casing, (Now if you prefer to use  am mix of the meats  then adjust accordingly)   1 shallot, sliced, 2 cloves of chopped  garlic, s&p, 1 (28ounce) can crushed tomatoes, 2 sprigs of fresh basil and 1 (3 inch) piece of parmesan cheese rind, 1 cup frozen peas, thawed,  freshly made mozzarella cheese, diced, bread crumbs.
 
To begin -
 
In a large sauce pan heat up some butter and a splash of oil and add the chopped onion and cook until soft.  Now combine the Arborio rice, chicken broth and a pinch of salt - be careful here - the chicken broth has salt - so do not overdo it.   Stir and bring to a boil over high heat. Cover the pan with a tight-fitting lid, turn the heat down to low and simmer for about 10 or 15 mins - stirring once after 5 mins, you want the rice slightly undercooked, but all the liquid absorbed.
 
Pour the rice into a large bowl and cool to room temperature, stirring occasionally. When cool - stir in the parmesan cheese and the eggs mix until well combined and set aside.  The rice needs to be cooled - otherwise you will cook the egg when you combine - you do not want to do this.  
 
Meanwhile, using a medium saucepan add in a splash of oil and turn the heat to high.    Add the sausage the hot oil and brown - breaking it up with the back of a wooden spoon as it cooks.  Season with s&p.   Using a slotted spoon, remove and place in a bowl and set aside.
 
In the same pan - reduce the heat to medium and add the shallot, garlic.  Cook, stirring constantly for 1 minute or until the shallots are soft. Add the tomatoes, fresh basil and parmesan rind and bring to a boil. Reduce the heat to low and simmer, stirring occasionally with a wooden spoon, for 15 to 20 minutes. Season with s&p.  Remove the cheese rind.  Now add 2 cups of sauce to the meat.  Set aside.  
 
 Preheat the oven to 350 degrees F.
 
Butter the inside of a bundt pan - making sure to coat it very well. Dust the inside of the pan with bread crumbs. Make sure it is evenly coated.
 
Now - add the peas and diced mozzarella to the sausage mixture and mix well.
 
Next - Spoon 2/3 of the rice into the prepared bundt pan. Using damp hands, press the rice evenly over the bottom of the pan and up the sides and middle of the pan.
 
Carefully spoon the sausage meat filling into the well of rice and press gently to make sure it is evenly packed.
Now cover the sausage with the remaining rice mixture and, again, using damp hands, press the rice mixture evenly over the filling being sure to press along the edges to seal.
 
Sprinkle some more bread crumbs on top and dot with butter. Place in the preheated oven and bake for 45 minutes or until lightly browned on top. Remove from the oven and allow to rest for 15 minutes.
 
Using a large enough decorative dish - that is larger than the bundt pan - place the dish on top of the bundt and flip it over to release.  Now you can place a bowl of the remaining sauce on the side or you can fill the hole in the center of the Timbale di riso and serve.


Buon Appetito.