September 13, 2021

A Different Update

Today’s media would do well to analyze the data they have, not the data they want 


The current ambition to achieve smartness is falling prey to the shortcuts that shower the consumer. From summaries of books to widely spread information that would make a skeptic lose sleep, it’s not based on what we should know, but instead what we want to know. This is where analysis from stocks to the economy to politics is too often skewed by what psychologists refer to as unskilled intuition and I call it judgmental bias. This can often come from the common challenges to the many options to choose from countless sources, from Pindudes, Wall Street bets, from the Hedgefiends that swig their opinions like they come curtesy of the grace of you know who. And what do we get? Not a guarantee, that’s forbidden in the financial services business, but using the new strategy, the strategy of a promise. 

 I bring this up because the media plays into this trap in the effort to identify many of these influencers in advance, mostly because they are often negative, and often wrong. And when it comes to valuing companies, although successful companies seem in retrospect to have performed because of their unique qualities, predicting those same qualities to find the next hit product or company is notoriously difficult. This is why following a strategy, which leads us to companies out of the spotlight, is preferable to speculating on the sources that are personally popular. The process of strategy begins with looking at the data there is, let’s try.


This month the Bureau of Labor Statistics (BLS) released the August data for unemployment and the outcome was 235K, less than the consensus expected, 720K, so what? Having tracked monthly employment growth for over thirty years, the most common assumption is that growth of more than 250K was consistent with an economy growing at 3%. That said, I’ve been skeptical of the confidence that economists seem to have when predicting the effects of reopening the economy. Part of the reason surrounds the 7.5 million workers, many who seem to be ignoring the 10.9 million job openings recorded for July. Another possible skew to the data is Amazon’s (AMZN) announcement that additional Whole food stores will allow shoppers to fill a basket that will charge, on the way out, directly to their credit card or bank account without the need for cashiers. Also, consider the impact of AI on the decisions of everything from hiring to bank loans, customer service, retail services and even medical services, and the point is what impact will all of this have in future employment?


One of my favorite charts compares long term quarterly GDP with long term quarterly Inflation, the latter calculated as Producer Prices (PPI), Consumer Prices (CPI) and my favorite, Employment Cost Index (ECI), the measure of increasing wages, which has been rising at over 2.5% annual rate for all industries. The ensuing chart shows two occurrences, when inflation is below GDP, suggesting resources in the economy are not being used, referred to as Slack, and when Inflation exceeds GDP, which currently does, fears of dangerous inflation are not without some merit. Add to that the direct impact of commodity prices, doomed to rise if an Infrastructure bill ever gets passed, food prices and semiconductor shortages, which have no definite timeline to end. In short, the questions surrounding inflation are not if there is inflation, but how long will it last. 

 Infrastructure Legislation

There is little that can be added to the well-advertised challenges the political environment brings to the table. The bipartisan Infrastructure bill has gotten lots of attention, but so has the one party drive to add a 3.5 trillion dollar social infrastructure. The interesting fact about the latter makes considering the above comment on employment make the case that there is much to be considered if the bipartisan bill doesn’t deliver the jobs it promises. Likewise, the changes to taxes make the total package even a challenge within the said party. Lastly, Treasury Secretary Yellen, is yelling to increase the debt ceiling, a pesky little procedure meant to control the amount of new money that can be printed. So far that doesn’t seem to be getting much bipartisan attention. In all, there is wide public approval for the bipartisan bill as recorded by a Harvard poll that keeps the probability of passage worth watching.  

 Much can be added to the research and analysis regarding the economy, the Fed and all of the uncertainties that deliver the amount of data these days in an endless supply thanks to technology. But in the end it shows how developing a strategy that uses data isn’t the same as looking for the data that feeds a predetermined outcome. Simply because the markets are about the future; historically go up and down and are void of precise prediction, and I’d rather be patient than rely on unskilled intuition.


August 17, 2021

It’s Not Just Afghanistan

The markets have started the week with modest selling that at first resulted in real investors “buying on the dip”, just as they said they would. Today on the other side of the table the Algochums have found a reason to see current events, Covid variants, the Fed becoming more hawkish and Washington looking like they’re out of control of the country. The trouble is, in my opinion, I don’t think any of those matters, and as the broad indexes show expected weakness the response is as much about clear moderation in the economy, the Delta variant is winning for now, and the Fed can be hawkish and patient. Also, failed efforts in foreign affairs are nothing new to Washington and with nothing more than the blame game on show, the connection on the economy is lost in translation. Here’s what I see.

The Markets

The correction taking place in the broad indexes over the past two days is not unexpected from a technical standpoint.  Overall momentum of many of the most vigorous stocks had already seen some moderation. The turnaround of tech stocks that struggled in the spring is probably ready to slow down but going into the fall the holiday season will speed up along with consumer activity, and business dependent on technology. In my opinion, all will benefit as we witness more global activity as Japan, Europe and the UK officially reopen. 

The Economy

Industrial production is up .9% in July and Retail Sales is down 1.1% in July. This makes sense since the industrial sector is short on materials that indicate genuine activity that has been consistent for over a year, in part in anticipation of a legislated infrastructure deal. Given the decline in manufacturing activity in June, July represents exactly the reversal of that moderation I’ve been writing about. The same goes for Retail Sales, as it should come to no one’s surprise that the consumer has stepped back a touch not only due to the concerns around the potential severity of the Delta variant, but the clear signs of inflation in food and other consumer items can also keep people thinking twice about going out to shop. But as mentioned before, the consumer currently makes up over 50% of GDP (Gross Domestic Product) and confidence to spend can turn on proverbial dime. That may be the waning of the variant, the passing of FDA approved booster shots, and maybe even a slowdown in recognizable inflation.

It's worth remembering that in the recent employment data, both the Employment Cost Index (ECI) which track wages and salaries was up .7% for the July and 3.2% for the 12 month period. This means more cash for the consumer to spend on the economy, and no consumer is better at that than the American consumer.

External Events

Although the ongoing narratives continue with all of the issues facing the economy and capital markets, the same narrative has been disrupted by the events that took place in Afghanistan. Not because of anything specific about the event, but that the event has taken the attention away from all of the chatter surrounding the colliding infrastructure deals, and even to some extent less media conversation on the Delta variant. I think that’s especially important, because the economic stats referred to above suggest that the public knows how to take care of themselves and continued lecturing from the “experts” may be losing some momentum.  All this is probably too early to see as a true benefit, but as I’ve felt from the beginning of the summer, the challenges facing the markets needed to see follow through with some results. In my opinion, that hasn’t happened yet, but external events are beginning to set the strategy in motion that favors the outcome. We can wait.


August 13, 2021

ESG and Me

    Everything is inflated these days, food, energy, technology, pharmaceuticals and best not to forget, egos and other desperate drives for mental pleasure. I bring this up, because in my study of behavioral finance over the past two decades the focus has been less on popular culture as an industry, but a conduit for industries that feed it to monetize. A good example is the pandemic driven focus of the financial industry, and others, to embrace a future where investment will focus on ESG (Environmental, Social, and Governance) analysis. However, the one drawback to this approach, in my opinion, is that the analysis of ESG is non-financial, and hence a lot of stocks and especially ETF’s have both soared and bared the brunt of that fact.

  I don’t want to suggest that ESG isn’t important. For many years the investment industry has rewarded companies that had CEOs, hired for the sole purpose of breaking up a company, selling its remaining parts while also announcing significant layoffs. Albert Dunlap was the most revered, even happily referred to as “Chainsaw Al” because of his particularly misguided passions.  And speaking of layoffs, there was a time when, in general, a company with market challenges would see their stock rewarded when 15% of the workforce was laid off, solely to improve the balance sheet. Now fast forward to last year’s pandemic when companies within the Fortune 500 had to layoff millions of employees in the face of a crashing economy, many smaller businesses serving the quarantined consumer had only a little time before closing was the only option. The changes and responses on the back of something other than profit taught the business community that employees are more than just a number on a balance sheet, and the communities are more than just a piece of land to build office space. In short, as the technology industry saved the day with massive hirings, the healthcare industries and their employees moved with unparalleled speed to find a vaccine, even the government came through with a package aimed at stimulating the economy by sending money to the unemployed and struggling businesses. And although the government could easily be accused of seeing people as nothing more than numbers, or votes, the impact on the investing community has been a huge influence on investing patterns that exist through today. Last Friday was the big day in the labor markets and the follow through in the capital markets further serves as a welcome reminder that the reopening of the economy is inevitable, variant or not.

  So, the new platform for analysis, which has been mine for some time, is including the governance of the company’s management and social values of the companies’ responsibilities and products. Unfortunately, much has to be done to guide our focus on what the political and social media influence is on what constitutes adequate governance. Something other than the usual, such as what products are accepted in typical fashion of appeasing the few at the expense of the many.  And most of all recognizing genuine corporate actions of setting targets for reductions in carbon emissions, investing resources to develop new products, and choosing suppliers that are better prepared for the transition to a low (not zero)-carbon economy, over those companies and social institutions that are simply pandering to the narrative. The challenge theses days is not to cease analyzing both, but to take the lead away from the Algochums that can exploit volatility for only so long until professionals realize it’s shortcoming on genuine fundamentals, genuine ESG ambitions, and what the presence of genuine skepticism can bring to finding a good investment with a great future.