November 26, 2021

Is It Happening Again?

Hard to say, but for now my opinion is to wait and take advantage of opportunity. Wait, because most major news resources, and many politicians have been explicit in saying “a good crisis should never go to waste”, hence, I’ll listen, but with ample skepticism. On the opportunity side, a decline, such as the markets experienced today, will have a constructive impact on the technical indicators we watch closely. This is especially important since the markets had already shown some encouraging signs.

As equities go, the companies, such as Abbott Laboratories (ABT) and Costco (COST), that persevered during the heat of the virus are showing some light, and the normalizing companies in the Industrial and Consumer sectors are taking predictable heat. Cash and US Treasury exposure can soften the blow for now, leaving patience as the best strategy.

 

November 17, 2021

Something Else

The narrative that are swirling around the media regarding the timeline of inflation seems to be at odds. As someone who doesn’t remember the inflation of the seventies, I do remember the outcome of Fed activity to fight it the day I started my career as a bond trader. It was April Fool’s Day 1982, the Fed Funds Rate (the rate banks lend to each other) was 14.92%, and the 10yr Treasury Rate was 14.1%. Get where I’m going here? It’s hard to imagine the lack of true comparisons that the media seems bent on regurgitating that are nearly nonexistent, such as Oil, which was a primary contributor to inflation in the heat of the industrial age, but today is a dying art. Or the little attention paid to gold, which was removed early in the decade as the standard for the value of the dollar leaving gold prices to rise and leaving the dollar lower (weak dollar is inflationary, strong is disinflationary) throughout the seventies. Add to that certain consumer product price fixes initiated by the Nixon administration to  meet  the challenges of trade disparities, and the ingredients for inflation were complete, with or without the consumer who’s contribution as a percentage of GDP has stayed steady even through the decades of historically low inflation. I guess the point I’m making is that in today’s world of choosing the data we want over the data there is has left many issues unresolved, foremost, that many of us who remember those days of excruciating high inflation are overshadowed by those, younger, who often only rely on what they’ve lived through to decide the same. 

So, where does this lead to something else? Most people who know me know that I’ve not been fan of Janet Yellen for numerous decades but especially since she, in my opinion, recklessly increased interest rates starting in the fourth quarter of 2015, leading to a decline in the S&P 500 and the NASDAQ Composite of nearly 11.9% and 18.9% respectively, through the first quarter of 2016. This is worth noting because in the next few days the President is going to name a either a new Fed Chairperson, or reappoint the existing Chairperson, Jerome Powell, who in my opinion, has done a good job. The probability to that choice favors someone new, and Janet Yellen has been vocal of her disagreement with Mr. Powell reticence to act more aggressively to current inflationary conditions.

The capital markets have had an interesting ride during this quarter’s earnings results that has shown further evidence that the American consumer is working hard to return to normal. The interesting part is many of the reopening stocks contained within the Consumer Discretion and Technical sectors are also technically overbought. My expectation is the continuation of the current favorable price action to last through the end of the year. As we near that I intend to rebalance and tactically allocate cash into the new year, if necessary.

 

November 2, 2021

Inflated Expectations

     Last quarter Real GDP came out at a 2.0% annual rate, lagging the consensus expected 2.6%, and the lowest since the beginning of the post pandemic recovery. This follows a second quarter release of 6.7% and the question, for me at least is, why will this have no impact on the long term predictions of inflation? After all, first it was the delta variant, that kept the consumer out of the market and kept the sources of consumption out as well. That wasn’t exactly a lockdown, but it was obviously an influence on the wider economic growth. And now it’s the supply chains disruptions that should be examined more closely.

    As we find ourselves in the middle of an earnings season that has seen widespread corporate growth, some of it impressive, the overall growth was overshadowed by the future guidance that the CEO’s presented to the analyst community. Most guidance fell short of a full estimation of further growth and the reason has been the inability to hire employees and the impact that circumstance has had on the ensuing disruptions in the supply chain. Hardest hit from theses disruptions has been the challenges to the technology industries and the demand for advanced semiconductor chips, particularly those used by the rapidly growing global interest in the development of electric vehicles. This is worth noting, because it’s representing real inflation, demand exceeding available supply, and when the supply begins flowing again the demand will pick up where it left off. But according to the Census Bureau’s Small Business Pulse Survey, other industries affected by the supply chain disruptions include 64.6% of Manufacturers, 59.8% of Retailers, 58.5% in Construction and last but not least 51.4% of Accommodation and Food Services. The point is the rest of the disruptions will eventually see some form of the supply chain reopening, but does that mean the current demand will remain active. Retail and the consumer services industries will most likely, in my opinion, not remain active. This is especially true as we enter the holiday season, and the customary slowdown in activity that occurs in the first quarter of the new year. 

    Economic data is still feeling the pressure as recent Personal Income declined 1% in September, the ISM Manufacturing Index declined to 60.8 in October, New orders for Durable Goods (washers, dryers, refrigerators, etc.) declined .04% in September. The impact on the consumer, over 65% of GDP, from the Delta variant that impacted the economy by cutting the previous quarters growth rate in half, so why not the supply chain disruptions on the consumer, a source for intense demand and subject mood and cultural distractions, find their way into consumption habit. In short, if the consumer can’t find what they want, thanks to the digital age, they can easily find an alternative that’s available. Hence, a sum zero game, and that isn’t inflation. 

    There is a lot going on in the US and a lot going on in the world. Some of it impacts our individual investments but none of it evades our strategy. Infrastructure, the real stuff, consumer products, including iPhones and iPads, from the resources to the retail services, and all with a technical edge. The goal is to be prepared for the incoming return to normal, new or otherwise, and at present, the markets seem to think so too.