July 13, 2023

Residual Uncertainties

 This week saw the release of inflation data, both production prices and consumer prices. Both showed modestly lower results than the consensus expected. Good news for the markets, to be sure, but I welcome doubt as a crucial endeavor in researching a predictable outcome. That’s because the markets are never finished, the evidence of inflation moving lower is persuasive, but my preferred approach is as written about often, what are the residual uncertainties? My top three are, in my opinion, the same the markets will listen to.

Economic Data

The data is evident of the present, but is it evidence of the future? One economist that I follow with respect has pointed to the year over year inflation data which is currently being compared to June 2022, when the data show the highest level Consumer Inflation (CPI) reached, 8.93%. By October, the level was 7.76% and has slowly dropped in line with the decline in Money Supply which has been modestly rising since April 2023. This raises an uncertainty, will the year over year data be less visually persuasive as year over year inflation data narrows? And will the rise in M2 along with recent seasonal increases in energy prices further stall the good news? In my opinion, inflation is coming down, but the Fed is the final word on that, and I’m not convinced they’re finished.


Earnings begin this week and will bring their customary bundle of uncertainties. The goal of the Fed has been to slow the economy and the recent strength of the broad indexes has suggested strengthening growth in earnings. I’ve often found this to be a curious dilemma, this is because over the past 5 years analysts have consistently taken both sides to the outcome. Namely, downgrade a stock from a buy, but raise the target price. This leaves the companies reporting to deliver numbers that will have little comparison to analyst predictions. Where the analysts have no prediction is what the CEO’s future guidance contains, which for the last three quarters has been cautious. This is what I’ll be watching for.

 External Events

In the past few weeks two events have caught my attention. The first is the Supreme Court decision to  deny the administration student debt relief package, estimated to cost the government $30 Billion a year, for ten years. Worth noting is student debt is currently on a Loan Freeze, begun during the pandemic and set to expire in October 2023. At that time, watching the changes in consumer spending, which could affect the outcome of discretionary capital by going to the government instead of the Mall. Consumer spending has seen slight moderation since 2021, and as school starts, post labor day work normalcy arrives, travel seasonally slows, the economy could see further signs of slowing that have been stubbornly elusive. Lastly, I found the addition of Sweden into NATO, and the suggestion that Ukraine is next, is probably sending a strong picture to those outside the tribe. No reason to draw conclusions, but worth paying attention to.

Some may suggest I’m being contrarian, not the first time, I was somewhat contrarian last October too. But, the current technical condition of the broad indexes, especially the Nasdaq, are overbought. This doesn’t mean the broad indexes can’t move higher, it only means, in my experience, that when markets reach this level of overbought conditions, they never stay there. What’s the trigger? I’ don’t know, I just stay the course, don’t chase the markets, and remain ready to respond when the markets come to us.

June 23, 2023

Expecting the Expected

“If you do not speak English, I am at your disposal with 187 other languages along with their various dialects and sub-tongues...”

 -Robby the Robot from the Sci-Fi movie Forbidden Planet 1956

 I was asked last week about my reference to a Holodeck. Basically, the reference to the Star Trek phenomenon and the sudden emergence of Augmented Reality and its coincidental connection. In my opinion, there was nothing coincidental about it, nor most of the technological advances we take for granted that aren’t as original as suggested. Science Fiction has fed many a geek focused on changing the world.

 I bring this up because I read a couple of articles this week and curiously none referred to the obvious, non-coincidental, technically overbought condition of the capital markets. Technical indicators, such as RSI, are one of the few resources that can’t be interfered with by either Pindudes nor Algochums. When such a condition is upon us, there are two strategies on which, in my opinion, smart investors will focus on, don’t buy, but be prepared to.

 This overbought condition, arrived at by a 14 day calculation of closes, has followed market corrections for many decades. Assumptions of the occasional 5% pullback as an annual event has followed the trail of the S&P 500 resulting in such pullbacks occurring once a year, with more notable recognition during a bull market. Averages have been tracked suggesting 10% correction every two years, and so on. So, what will trigger the decline, Inflation, Economic Data, Earnings Data? 

  • Inflation, specifically core inflation (ex-food & energy) is running at 5.3%, comfortably below the October 2022 high of 6.6%. Comfortable is not enough for Fed Chairman Powell, who testified in Washington this week and doubled down on the Fed’s goal to raise interest rates at least twice, before the end of the year, to reach the goal of bringing inflation down below 2%. While a number of pundits are predicting success, even going so far as to suggest reaching a level of deflation. 
  • Economic Data, after a brief rise in May 2023, the U.S. ISM Manufacturing Purchasing Managers Index (PMI) above 50 (suggesting economic expansion) has remained below 50 (suggesting contraction) for the rest of the previous 8 months including June 2023. While the U.S. ISM Non-Manufacturing Purchasing Managers Index (PMI) has hovered just above 50, likely due to a stronger work force, that level has been mostly flat for the last three months. Worth noting is a less advertised piece of data referred to as the Leading Indicator, declined in May 2023. Historically, when this indicator has declined 3 months in a row, it suggests a coming economic slowdown. Curiously, as with much these days, the index has declined every month since June 2021. 
  • Earnings will emerge as newsworthy when the 2nd Quarter 2023 ends on June 30th. Last quarter most analyst forecasts were off, due to expectations being lowered following negative guidance from CEO’s last quarter. This year the markets have moved aggressively higher and forecasts have been conveniently increased. In my opinion, this could be a set up for another disappointment, therefore worth paying attention to the CEO guidance, rather than the results.

 One last thing to note is the recovery of the broad indexes since the lows in October of last year have yet to outpace their previous 52week highs, and any correction as described above would be taking back already achieved gains. Sad, but not the worst case scenario, in my opinion. Just a condition that makes being patient easier. In the meantime, sector diversification is serving us well.

June 9, 2023

Welcome to the Holodeck

An occurrence that has historical precedence is that the economy has slowed down, or slid into recession 6-7 months after the Fed has stopped raising interest rates. Therefore, the optimism that is projected in the media knows that even if the economy slows down, the outcome would signal a near end of the bear market experienced over the las 18 months. In short, the markets, in their tendency to look forward, will take notice of the proverbial light at the end of the tunnel and begin to show genuine strength. The question is, what will be the driver of that strength?

 Well, so far, we know AI is going to be a big contributor. But this week a new product entered the picture, that would be Augmented Reality. Some will recall my comments on the difference between Virtual Reality and Augmented Reality, and how the latter technology will find use within a broad number of sectors, including Industrials and Energy. But what really got me thinking was an article in the National Library of Medicine outlining the emerging use of Virtual Reality as a therapy to treat Post-Traumatic Stress Disorder (PTSD).  I bring these ideas up because this week Warren Buffett’s favorite company, Apple (AAPL), introduced a new product called Vision Pro designed to introduce the user to the world of the internet, not from the outside, but from the inside. This is what Augmented Realty is all about. And with existing technologies such Digital Twin, Machine Learning Robotics, all driven by AI, just looking at a statue online, you will be able to walk up to it and touch it. Sounds like an episode out of Star Trek, it is. One problem, drove the narrative, it’s expensive at $3,500.

 First of all, I agree. But Apple has a history of catering to a loyal tribe of users, and high prices contribute to the pride in owning an Apple device. Whether an iPhone, iPad, Mac, MacBook, Air pods, Watches, the list goes on and it’s all comparatively expensive. But when I did research, it was curious to find the number of companies, some familiar, that sold their VR products at a much lower price, and some less familiar, at prices over $10,000, and it occurred to me that Apple was onto something new.

 As most investors know, Apple has created products, mostly from the technical modernization of existing products. But sometimes, as with iPhone. the new product is revolutionary. Over the years Apple has built up grand loyalty among its personal users and among academic institutions, filmmakers and other creative users. But one area that has never been drawn to Apple in meaningful way has been the corporate side of the economy. Industries such as Manufacturing, Transportation, Finance and Energy, have mostly connected to Microsoft Office products. But what if Manufacturing uses Augmented Reality to provide maintenance, as described above, transportation to more closely navigate global shipping challenges, Finance to produce an environment where meetings can take place, in a real office environment as real people, not the goofy avatars that meta introduced last year?

In my opinion, the introduction of Augmented Realty Headwear, has a genuine purpose that goes beyond it most obvious use. I think this because in the world of Digital Twin technology, when an industrial factory can be recreated on the internet to be examined to the last screw, Augmented Realty will allow the user to walk up to the factory door, go inside, find the screw, and replace it. I Think Apple is on to something unique to its history, when the competition begins to justify this prediction, which in my opinion will happen, further investment in Technology will see its next great historical wave. That’s why I like to be prepared, I love this stuff.