Yay's 317, Nay's 117, C3.ai gets punched in the face, is the AI hype a bit overdone?

• The House passes the bill by a wide margin – onto the Senate now.

• Markets confused, eco data mixed.

• C3.ai gets punched in the face after the bell – down 20%

• Is the AI hype a bit overdone?

• The FED continues to talk in circles – now it’s SKIP vs. PAUSE

• Try the Soft-Shell Crabs

OMG! Stocks sold off on Wednesday….and NVDA?  That stock gave back $15 or 3.8% - What is going on? That is not supposed to happen….it can only go up! Quick someone call the NVDA police! 

Markets confused – and it has nothing to do with the debt deal…that’s really a non-event – but let’s get it out of the way -  the House passed the bill by a wide margin last night – 314 Yay’s, 117 Nay’s….creating a dramatic resolution to the ‘tense negotiations’ that has gone on now for weeks….And as you can imagine both sides taking credit for this deal – Minority Leader Hakeem Jeffries once again telling Americans that ‘MAGA Republicans tried ‘take the house’ but the Democrats ‘took it back’, while Majority Leader Kevy McCarthy is telling us that the cuts in spending are ‘historical’ suggesting sweeping changes in spending - It’s ALL comical….In any event – it is now in Chucky’s hands and it is up to him to get across the line and onto to Jo Jo’s desk….Apparently by Sunday evening otherwise the US will cease to exist according to the media.  Was that dramatic enough?

The media suggests that if Joey doesn’t sign this bill by 11:59 on June 4th – the US will just go ‘POOF’ and we’re gone…. Now the fringes on both sides are screaming and yelling about what they didn’t get…. about how it is flawed, Members of the Freedom Caucus calling for Kevy’s head…. Colorado congressman Ken Buck floated the idea of using the ‘motion to vacate’ – the rule that would allow any House member to force a vote to kick Kevy out….something that would only add to the tension in the Capitol – further dividing the GOP…..And we may continue to hear this today…...unless of course – they have taken a valium to calm down…….Now, it’s Bernie’s and Lizzie’s turn to lose their minds….

Now, back to what matters -

What we did see yesterday were a couple of things that you can use to explain the change in sentiment…. Mortgage apps continue to fall – this week down another 3.7% - suggesting that higher mortgage rates and stubborn sellers are leaving mortgage brokers with nothing to do as buyers retreat.  Chicago PMI and the Dallas FED services survey both falling even further into contractionary territory…..while the JOLTS job openings report rose….and that suggests that the labor market is NOT cooling off….At 2 pm we got the FED’s Beige Book – which is a report on the economic conditions in the 12 regional districts…..and that supposedly showed that inflation and hiring eased ever so slightly…which is in contrast to what we learned last week from the PCE – that showed rising inflation and this morning’s JOLTS report which showed a rise in job openings….So, it leaves you to ask – are we good or not?  

 And then as if that wasn’t enough – we got not 1 but 2 FOMC (voting) members come out and completely contradict what (alternate) FOMC member Loretta Mester said on Tuesday.   She suggested that there was ‘no compelling reason’ to pause rate hikes – Remember - she was the one to float the 6% terminal rate idea…..months ago….but she is an alternate member – which means she doesn’t get a vote at the June 14th meeting….which means while she has an opinion – it is not necessarily the ‘group think’ opinion. 

Now Fed Governor Phil Jefferson and Philly Fed President Patty Harker are voting members – so what they say does carry a little bit more weight because they HAVE a vote when the committee meets on the 14th.  So, what they say could more closely represent the ‘group think’ and that is somewhat important.  And what did they say? Well Phil said that he would be ‘inclined to keep rates steady at the next meeting to give the FED more time to assess the economic outlook’ – stressing that that DOES NOT mean the FED is done or that the FED is about to pivot…..It was then that Philly FED President Patty Harker ‘echoed’ those remarks saying

“I think we can take a bit of a skip for a meeting.”  

(Did you see that ‘we can SKIP a meeting’ – not a few meetings or a couple of meetings, he said A meeting, he introduced a new word and he said nothing about those fall cuts)

And this kind of falls in line with what JJ has suggested – saying that it is possible for the FED to consider a pause, but is not a guarantee…which says nothing definitive, and leaves the door wide open to interpretation…..and that is what investors, focused on….a pause (or a skip) is neither positive or negative, it’s just a pause (or a skip) – and it could be interpreted to be either – depending on your perspective….…..both of them left open the idea that rates could continue to go higher, neither one of them said anything about cuts in 2023 and that is what Loretta ultimately said too, rates can pause and go higher (think 6%) UNLESS we get some real dramatic shift in the datapoints….which doesn’t appear to be what is going to happen yet.

And so stocks sold off…The Dow lost 135 pts or 0.4%, the S&P gave up 25 pts or 0.6%, the Nasdaq gave back 83 pts or 0.6%, the Russell lost 17 pts or 1% while the transports gave up 255 pts or 1.8%....

After the bell – traders, investors and algo’s all awaited the earnings report from C3.ai (AI) – (It’s an artificial intel stock and with all of the recent HYPE – this one was in the bulls eye last night) – Now the stock is up 258% ytd…so there was a lot riding on this report…..and so the tension was high….you could cut the air with a knife, it was that thick – during the regular trading session the stock gave up $3.94 to end the day at $40.01/sh……and then the bell rang and we waited….and…..

It hit the tape….4th qtr. loss of 13 cts vs the estimate of a 17 ct loss – so that’s better, Revenues of $72.4 million – vs estimate of $71.4 million – so a beat….subscription revenue of $56.9 million which is up 1.1% but below the estimate of $59.2 million – that’s not so good…but the real news was the guidance….(as it always is) and that was not so good (and in my opinion NOT a disaster – but I am just one man with one voice)…..2024 total revenues are now expected to be somewhere between $295 million - $320 million – vs. the prior estimate of $317 million…..1st qtr. revenues of $70 - $72.5 million vs. the estimate of $72.1 million….and so – the algo’s and traders were not happy and took 20% out of the stock in the afterhours session – leaving it down $7.80 at $32.22….which still leaves it up 238% ytd…..so, let’s not overreact – unless of course you bought it yesterday in anticipation of the earnings that you expected to be like NVDA’s…..if that is the case – you would be a tad disappointed…..

Expect all kinds of commentary about these results and what it means for anything AI – as if this one report is going to change anything at all….If it does, it might cause a realignment of thought over all the recent hype about AI and anyone that includes it in their name, or mentions it more than 20 times in an earnings report!  Do not be surprised to see further pressure on all of the names that have shot higher over the past couple of weeks…. because of the AI hysteria as relative calm returns.

Eco data today – ADP employment which is supposed to show an increase of 170k new jobs, Initial jobless claims of 235K and Cont. Claims of 1.8 million.  We are also getting S&P Manufacturing PMI of 48.5 (contractionary), ISM Manufacturing PMI of 47 (deeper into contractionary territory) and Construction Spending of +0.2%,

US futures which were weaker overnight have moved mostly into positive territory…. Dow futures are +30 pts, the S&P is + 7 pts, Nasdaq is down 5 pts, while the Russell is +5. The turnaround in the futures is being credited for the debt deal….which I think is ridiculous but, the media keeps telling us it’s important and that a failure to pass by 11:59 pm Sunday,  WILL cause ‘widespread economic issues across the GLOBAL financial markets’  - well then, I guess that must be true, I mean the media is telling us that so we better hurry up.   Expect to see some drama in the Senate (just to keep up appearances) but this bill will NOT fail to pass…. The Senate does not want to be seen as the ones who caused the US to go ‘POOF’!  LOL…. 

Treasury yields rose a bit yesterday as the passage of the deal became more of a reality.  The 1 month is now yielding 5.1%, the 3 & 6 months are both yielding 5.4% while the 2’s and 10’s are at 4.4% and 3.67% respectively.

Oil got crushed again yesterday……falling 2.7% or $1.90/barrel to end the day at $67.57! The API reported that US crude inventories ROSE by 5.2 million barrels – a big surprise (apparently) since the expectation was for a decline of 1.4 million barrels. In addition, gasoline inventories also rose by 1.9 million barrels vs. the drawdown of 500k barrels.  And then we had that China story (weaker PMI’s – suggesting demand destruction - but today we learned that Chinese Factory Orders are UP suggesting rising demand – Do you see this????)  and then there appears to be a brewing fight between the Saudi’s who want to see oil in the $80 range, while the Russians are ok with it anywhere above $40…and the OPEC+ meeting is on Sunday in Vienna – so what happens now????  Just a note – $40 is production cost breakeven for Vlad, $6 is the breakeven for the Saudi’s BUT the Saudi’s need oil to be in the $80’s to balance their budget. So, a further cut in production causing cuts in supply should force oil higher, but Vlad doesn’t want to cut his production – he has a war to finance!  Let the games begin!

Gold – remains hugging the trendline…. We remain solidly in the $1880 (long-term support) and $2000 range.

European markets are all higher…. with Germany, Spain, and Italy up more than 1% while the UK and France are up by about 0.6%.  …Flash inflation figures from Germany, France and Spain all show easing inflation…. while Italy’s latest reading showed an increase over the estimate but is still lower than prior….and the Eurozone inflation figure is also in decline…. So, that is all good data…thus markets rise…

The S&P closed at 4179 down 25 pts after trading as low as 4166 and as high as 4195…. S&P futures are suggesting a slight push higher as we move into the opening bell. Remember, I have been saying that the market feels tired and that a pullback would not be out of the question at all – Investors need to focus on the FED and not let the debt news cloud their judgement – The odds are now 72% for a pause or ‘skip’ on the 14th…..but that could change over the next week as we get more eco data….. Is inflation ‘stickier’ than they hoped….is the terminal rate going to 6% or are we good at 5.25%?  If it stays here, then we could see stocks stabilize in here, but if they raise and keep the door open, then expect investors to re-assess what valuations should be….and that reassessment will cause prices to decline – not crash, just pull back…. We remain in the 4100/4225 trading range. A breach of 4100 would put 3800 back in play…a test of 4100 without a breach will give investors the support they need for the markets to advance. 

Soft shell crabs

It is that time of year again.... The old adage says that you eat soft shell crabs during any month that does not have an "R" in it...Thus - May - August is always a good guide.  There are many ways to prepare them and many different sauces to serve them with.  Today's recipe is simple and always a winner.

You need: The crabs (have the fish guy clean and trim for you), flour, s&p, butter, drained capers, fresh lemon juice, sliced garlic clove and chopped parsley.

Dredge the crabs in seasoned flour…. (Flour, s&p).  shake off the excess. 

In a large nonstick pan - heat up the butter until it starts to foam. Add the crabs – shell side down (do not overcrowd) – cook for about 3 mins…. Flip and cook belly side down for another 3 mins. (You want the shells to be browned and crusty) Remove – transfer to a wire rack and hit them with a bit more salt…. just a bit…. Repeat until you’ve browned all the crabs. 

Then – add more butter to the pan – let it foam and get that nutty brown color…. (2 or 3 mins) – add the sliced garlic, drained capers, sauté and then add the lemon juice – 2 or 3 tblspns….

Serve the crabs on a bed of arugula and spoon the sauce on top.  Enjoy with a chilled glass of Pinot Grigio – Santa Margherita.