May 19, 2023

Phase One

 Today’s resources are starting to shrink as AI comes to rescue us from chaos. Or so goes the narrative, depending on your source. I bring this up because in my opinion, the 2006 introduction from Google (GOOGL) of the algorithm aimed at aggregating the news to accommodate, peoples wants over their needs, has carved out division as the outcome. And given its suitability towards monetization and political manipulation, has it also become the new norm? In my opinion, if we let it. I consider this worthy of note as AI becomes the new debate, or rather division of opinion. Some see it as the end of humanity as we know it, sounds a lot like climate change arguments. Anyway, my focus is less about what AI will disrupt, and more on what It will change. That’s because it’s change the correlates with that outcome.

 Where change is happening and where the introduction of AI is, in my opinion, is more useful. For example, I’ve written about the current use of a technology used in Industrial and manufacturing called Digital Twin. Digital Twin technology places sensors on everything from oil rigs to wind turbines and collects data that can then be used to virtually duplicate the machines and analyze both current and projected outcome using AI and machine learning devices. Companies investing in this important technology are our usual FANG buddies, old and new such as Cisco Systems (CSCO) and Microsoft (MSFT). Another area that I’ve been observing lately is still in early stages although, I’m not sure why. I’m referring to Vertical Farming. Vertical Farming introduces a method of farming using both ground and hydroponic methods that are placed within a contained environment and rather than scaled out, it is scaled up. The overall outcome is the ability to farm in rural, urban, any climate or geography, including underutilized land and vacant buildings. There are companies that are investing in this technology, such as agricultural supply chain manager and processor Archer-Daniels-Midland Co. (ADM) and multi-channel retailer Walmart Inc.  (WMT).

 Distraction is the aim of our news sources. Anything mentioned above is rarely discussed with enthusiasm. But the same can be said about other aspects of the current economic environment, such as the slowdowns in retail spending suggested by recent data coming in below consensus estimates. Other signs of slowdown are shown in recent growth of Industrial Production and Housing Starts. And Existing Homes Sales showed continued weakness, all housing was followed by outside spending as well. This week Home Depot (HB) and Restoration Hardware (RH) released weaker than expected results and provided guidance that the rest of the year may be no better. My takeaway was more focused on the pullback in spending that is clearly impacting the higher cost durable products and DIY expenditures. The former also being seen in the sharp declines in automobile purchases, new and used. In, my opinion, this could be phase one in the ultimate slowdown in overall economic activity as measured by GDP. Unfortunately, in my opinion, job gains that the Fed is focused on curtailing, are more likely to stall. This would be good for keeping inflation in check, but still open to it being enough for the Fed to still raise rates in June.

 It important to recognize that singular strategies have not fallen victim to divisive Algochums volatility, it’s just on hold until uncertainties can show resolve and the economy can return to something like a norm, although I don’t expect the political environment to follow anytime soon. In the meantime, focusing on the future to achieve growth and the present to maintain defense, I look forward when the time comes when I can begin to dismantle the latter.

May 5, 2023

Monetizing Events

Total nonfarm payroll employment rose by 253,000 in April

February was revised down by 78,000, from +326,000 to +248,000 (-24%)

March was revised down by 71,000, from +236,000 to +165,000 (-30%)

 The broad indexes showed welcome relief this past week and while much can be attributed to the Fed increase in interest rates it was the stronger than expected unemployment data that triggered a rebound in stock prices at the end of the week. This outcome for the week was not because of the strong growth in payrolls, but rather the revisions made to the previous two months, signaling that job growth isn’t as strong as it appears. The suggestion that the Fed needs to continue to raise rates is also, in my opinion, not without merit. Last week I drew attention to my opinion that the markets are too efficient to be predictable, and that’s simply because most predictions are built in hindsight, always obvious after the fact, as opposed to unpredictive before that fact. That’s why I choose to state, in my opinion, because unlike a casual belief, it’s my opinion, therefore, I own it. So, I’ve looked at hindsight, not without some skepticism, and concluded that whatever the future holds for employment payroll growth, I prefer to focus less on what hindsight tells me and more on what the present is telling me, I focus on events. What are events?

 There’s been plentiful discussion on AI, a little less, but still ample, on robotics, electric vehicles, have I missed anything that aren’t real events? Does the demand of markets provide predictable consideration or is it more of taking advantage of an event in process? Sometimes tracking an event leads to an outcome that is challenging. For example, AI is a worthwhile investment from the software to the hardware, but what about the applications? Healthcare companies are using AI to accompany vascular related blood tests with a second diagnostic opinion. In the realm of electric vehicles, AI is being used to introduce the efficient management needed for autonomous driving. Robotics, currently filling positions in warehouses, all the way to hospital operating rooms. These are some of the applications that in my opinion have future potential, and present application supports that.

Other events, right or wrong, I’ve been favoring the energy sector. Not just renewables, we have plenty of exposure to that, through energy storage and more commercial renewables such as Hydrogen fuels. But the importance of companies engaged in production and distribution of fossil fuels is also in my focus. Not because of the current platform, but where that platform is going, what event has been triggered. The revival of liquid natural gas (LNG) has met the demand of the global market, has been cleaned up to produce less than half the carbon of oil, all easily captured and stored for other industrial uses.  Oil companies have been pandering to an overly idealistic vision, in my opinion, suggesting their commitment to a future of safe energy, but are actually doing little in response. Except a few that are investing in the future of nuclear energy, such as Chevron (CVX), thanks to the introduction of nuclear fusion, a new technology, not to be confused with historically unclean nuclear fission, to fully meet unlimited renewable demands. Still too early to go all in, since most of the companies perfecting the process are private. But definitely an event space I’ll be watching.

 My ambition is to keep looking at technology, keep following the claims of change, and keep focused on interpreting the outcome of currently proven innovations as opposed to predicting the future of old ideas. Especially in this day and age, when the politization of the debt ceiling brews, the threats of nuclear war, the fear mongering over claims of a coming banking crisis.  By the way, I’ll cover the finance sector at another time, definitely a lot of potential events there, but for now too much from unpredictable distractions such as those external events just mentioned.   

April 27, 2023

Navigating the Noise

 Ten years ago, I first read about UBI, a welfare proposal that had gained some academic, and even political interest until the pandemic introduced a better method of wealth distribution, stimulus. In my opinion the concept of the wealth effect as a tendency to spend more when an individual feels financially secure, is at the core of our current inflationary environment. I bring this up because I’ve frequently expressed my opinion that an economy designed to fuel consumer activity is always at risk of some degree of inflation. And the wealth effect has been observed through data since 1870 suggesting a close correlation between inflation and money growth. That’s why I’ve often tracked the behavior and data set called M2 that tracks the Federal Reserve’s estimate of the total money supply, such as money in consumer pockets, checking and saving accounts for example. And M2 is where I’ve followed inflation and concluded that inflation appears to have peaked in September 2022. But there’s no shortage of narrators, including Modern Monetary Theorists who question that conclusion. Hence, volatility rules.

 Markets

The broad markets finally let off some steam this week, and while not technically oversold, neither are the primary indexes still overbought, as the volatility is keeping it all neutral. The change in conditions can be attributed, in part, to a mixed earnings season and concerns brewing over the upcoming debt ceiling debate. Interest rates resumed their rise to prepare for the upcoming Fed meeting and international markets are having their own positive year, even in the face of continued weakness of the US dollar. For now, in my opinion, there is enough left for the narrative to digest, that could push the broad indexes to a more oversold, and desirable, condition.

 Economics

Last week saw additional declines in economic activity, including Housing Starts (-0.8%) and Existing Home Sales (-2.4%), both likely to see additional declines as interest rates revert closer to their recent highs, and with a Fed rate hike around the corner. One area that is showing some increased activity is Manufacturing tracked by the Manufacturing Purchasing Managers Index, which went above 50 for the first time since October 2022, but is still down over the same period. This week saw some additional pickup in manufacturing thru New Orders, and New single Family Home Sales (different from Existing) saw an increase (9.6%), but still down 3.4% from a year ago. Today, the first release of the First Quarter 2023 GDP come in at 1.1% down from the previous quarter of 2.6%. Interesting enough was the Core Personal Consumption Expenditure (PCE), which came in at 4.9%, higher than expected and the GDP Price Index, otherwise referred to as the GDP price deflator, came in at 4%, higher than economic consensus of 3.7%. In short, all the GDP data was, in my opinion, enough to keep the Fed on track next week to increase interest rates at least .25%. Whether they see reason to continue, will be in their customary post meeting comments.

 External Events

The big headwind, in my opinion, facing the capital markets, is the debt ceiling debate. So far, the House Speaker has stated the debt ceiling will be raised when the legislation includes a pause in government spending, and the house voted in favor. The Administration says no extra deals, lots of political food for the fight to follow. And the pundits will throw a bone to our Algochums to brew up a little volatility. In the meantime, patience is still the best strategy, as markets are too efficient, in my opinion, to be predictable. So, in my future, opportunities will reach more desirable entry points and the overall picture should become ever clearer.