January 13, 2022

Corrections are not All Bad

  The markets are entering the new year with stories galore and little to back them up. Inflation continues to be the primary topic of conversation, including the projected responses from the Federal Reserve Board. But, supply chains are starting to ease, along with the current variant of covid-lite both have taken, in my opinion, some of the punch away from the inflation argument. So, what’s fueling inflation?

    While the increase in the demand for commodities coming from both industrial the technology sectors is real as expressed in the demand for infrastructure and semiconductor stocks, even that will eventually ease. The Employment Cost Index, which tracks wage compensation inflation, has been steadily rising to levels not seen since before the financial crisis. More money earned, more money to spend. And that spending as a Percentage of GDP, has been steadily rising to the highest level, 69% in 2021, in over 70yrs. Add to that, supply chain challenges to demand, and it’s easy to understand where some concern is coming from.

    So, in my opinion, the more aggressive tone from the Federal Reserve regarding interest rate hikes as the weapon of choice to fight inflation is one of genuine concern, with one caveat. The concern comes from the historical precedent that began in the 1980’s when Paul Volker, the then current Fed Chairman, raised interest rates in order to slow the economy and thereby curb inflation. Essentially, people spend much less during a recession. However, it was not as smooth as expected as interest rates needed to rise not by a quarter (.25%) percent four times as projected in 2022, but by over 5% in 1980 alone taking the 10yr Treasury to over 15%, currently 1.71%. Hence the fears that are infecting the markets.

    So, the recent declines in the broad indexes are a product of both those aforementioned fears and a condition that was by definition overbought. But the overbought condition is beginning to ease with each sharp decline and it’s especially the growth sectors, such as Consumer Discretion and Technology, that are taking the brunt both fundamentally and technically. In my opinion, the current volatility is buffering the models, with both cash and some favorable sector exposure in addition to the less favorable. Overall, the diversification is keeping the performance in line with benchmark targets and for now, only patience and some opportunity buying makes more sense than listening to the self-proclaimed experts. 

    My reason is simple, if the markets correct enough, it would be the first time since the beginning of the pandemic, and many of the Pindudes, namely the newcomers and other recently brainwashed speculators who got very lucky in the thick of the pandemic and its variants, will likely lose some enthusiasm and two things may happen, they will have less discretionary capital to spend, good for inflation, and they may actually look for a real job, also good for inflation. In the meantime, when the market goes to oversold, Algochums and Hedgefiends will buy, Maybe it’s not the best road to get there, but an outcome that would make a recession, in my opinion and I hope the Fed’s opinion, an unnecessary option.   


December 31, 2021

Our Year 2021

Looking back at 2021
Dissonance was stable
But so was the fun
Markets entertained
Not much else changed
Sure, Pundits enticed
And misguidance sufficed
From pandemic uncertainty
To media acerbity
But fears dissolved
New Normal evolved
The Markets moved
Inflation disapproved
Investors came alive
A new army thrived
Pindudes took charge
Fantasies grew large
Algochums churned
Hedge funds burned
Speculators ruled
Cautiously schooled
Passing the test
From WallstreetBets!
GME rocked
AMC chopped
NVDA cruised
AMZN snoozed
AAPL ascensive
TSLA expensive
BABA defeated
SPACs retreated
Bitcoin zoomed
Regulators fumed
Politicians were moot
Journalists followed suit
Trump haunted
Biden taunted
While Congress dithered
The Senate withered
Yellen dreamed to tax
Powell preferred to relax
And Markets kept rising
Bulls rolled the dice
Bears craved respite
What could go wrong?
That’s next year’s song
So, I leave with what fit’s
That is this year’s wish

Thanks for reading and I Wish all Followers a 

Healthy, Happy, Peaceful and Winning 2022!


December 20, 2021

Uncertainty We Can Do Without

Markets

It’s a challenging beginning to the week with the broad markets losing value in the face of uncertainty.  While US Treasury exposure and cash are helping to offset some volatility, the ongoing narrative of rotations to value from growth seems to tell people to sell tech and buy Proctor & Gamble (PG). This is attractive to many who feel income is more important than growth, but since when does tech, as we know it, only produce the products of growth? Is Amazon (AMZN) a technology company, or is it a consumer discretionary company, think buy, buy, buy? Is Apple (AAPL) a technology company or a consumer staples company? Would we be happier defaulting on rent in favor of keeping our cell phones active, think toothpaste and soap? And there is also healthcare technology. The point here is many of the technical innovations of the past thirty years have been neatly integrated into everyday life and it would be pointless to think culture would abandon many of them simply because they are only technology companies in name. Second is seasonal selling, Required Minimum Distributions for IRAs, and other retirement plans, rebalancing of Defined Benefit plans, and lots of insider selling by company executives and board members who see their generous options holdings currently are in the money and set to expire. Add to that the speculative activities of Pindudes and Algochums and there is enough selling to justify the narrative and keep the markets on edge, for now.

Economics

Then there is inflation, producer inflation and consumer inflation has shown steady increases this year and concern surrounds the actions that will be taken by the Fed to get ahead of it. But the markets’ reaction to the moves both currently implemented and forecasted, is reflected in ending bond buying (tapering) and raising the federal funds rate three times in 2022. Fed chairperson Powell also restated the position of the board that the current spate of inflation is less to do with traditional supply and demand directly, but the impact thereof coming from supply chain and employment cost disruptions. This is important in that the statement challenges the chatter that sees a repeat of inflation in the 1980’s. There is also the growing agreement among corporate economists to reduce expectation for 2022 GDP due to the above issues. This is worth noting because if the economy slows down as Goldman Sachs (GS) projects, down to 2.2%, it is resulting from either a stall in employment growth, or supply chains resuming normal deliver and return procedures. Both would directly cool some existing inflation. The market’s overall reaction that day last week when the Fed gave its speech was amply positive, why? Because when it comes to inflation, the fed gave the market what it wanted. 

External Events

Which brings us back to the uncertainty that is pressuring the stock market. This is not, in my opinion, a reason to be concerned over how, but concerned as to why there is uncertainty. First is the concern regarding the recent rise in covid infections stemming from the new omicron variant. The concerns over the effectiveness of the vaccine came first, followed by school closings, mask requirements, steps leading to potential global shutdowns, vaccine mandates, and all of the demands feeding the narrative aimed at keeping everyone cornered and concerned, without a reason why. Vaccine effectiveness has showed positive results in lowering the overall levels of deaths due to covid. The UK government initiated lockdown measures before even one death was recorded seven days ago. US cities are ramping up mandates warning of school closings, mask mandates and possibly even cancelling year end events. Who is to say the politicians are not doing the right thing? I’m not in full agreement, but the stock market is, and only an outcome that invalidates the claims of imminent danger presented by the current narrative, will placate current efforts to normalize and all that comes with it.