Correlation is not Causation

 But that doesn’t stop AI from saying it is. Just a reminder that I’m back in the office and navigating the tidal wave of uncertainties that have captivated the markets recently. Earnings are adding to the volatility, stocks with favorable earnings curiously go down and unfavorable earnings, but positive guidance, they go up, and the rest are just earnings and the market seems too distracted to pay attention. Our investments that continue to represent a diverse strategy and are still good buffers to the volatility, and with little more than Fixed Income ETF exposure to 3mo Treasury Bills the sharp rise in interest rates has also had little impact. It’s nice that Treasury Bills are yielding 5% as well. There is also the potential for the uncertainties to be weaponized through our Algochums and Pindude armies’ day trading, and the huge amount of shorting being taken on by Hedge Funds. The latter I customarily refer to as Hedgefiends since most historically make more money on fees than profits.

 Markets

I’ve returned to the office with the same technical oversold condition that I left with. While there were some price increases of the broad indexes, as interest rates moved the 10yr Treasury over 5%, a level not seen in 16 years, impulsive selling ensued. That natural reaction was to sell technology, but not to necessarily buy anything else. Hence the oversold condition is diverse by sector, which I find curious. That’s because it’s obvious that investing decisions are being sourced through technology, clearly from the reactionary responses to external conditions such as rising rates, inciteful narratives and other charged uncertainties. And as said conditions reverse the interpretation is for markets to also reverse the impact. However, while some correlation can be taken from the data, such as rising rates, the rest have little correlation and virtually no historical causation. The only good side to all of this is the analysts are feeding off the AI data, lowering expectations, and when those expectations are better than expected, such as with Alphabet (GOOGL) today, the unsubstantiated causes are not correlating with the outcomes. I’m glad machine learning is part of the longer term aim of AI to improve interpretation; I hope analysts can learn as well.

 Economics

Just as I was leaving the office on October 11^th, the Consumer (CPI) and Producer (PPI) data showed higher than expected increases. However, much of the core data, that excludes energy and food, the outcome was fairly stable. Since that release of data, energy has stabilized, and the consumer, while still remaining active is faced with increasing interest rate obligations over credit cards, adjustable mortgages and resumption of the student debt commitment. And the price increase in food is finally getting some scrutiny in the press as being significantly higher than prevailing inflation, getting some political interest as well. In September, Retail Sales increased 0.7%, and Industrial Production increased 0.3%, both are higher over the past year. Housing Starts increased 7.0%, and Existing Home Sales declined 2.0%, both are lower over the past year, -7.2% and 15.4% respectively. This continues to perplex the Fed, who will meet on November 1^st to vote on rising rates. For now, the only data that matters is Unemployment, and if that shows any weakness, even marginal, the Fed objective, in my opinion, could materialize over the next few months.

 External Events   

For now, patience in the face of distressing narratives has never been more important than in recent memory. This isn’t a financial crisis looming, the economy is chugging along and banks are only moderately struggling due to rising interest rate exposure to balance sheets. But, with even the Fed potentially raising rates at their next meeting, most of the external dangers surrounding the potential of the US engaging in military confrontation, and the growing dangers of dissention in our own country, while plausible, are also historically prone to presenting shorter term perils to the markets, as the world settles into its future, and with any luck, with more anticipation than anger. For now, even in an oversold condition, it’s okay to refrain from being too optimistic.

Investing in History

I’ve frequently written about technical analysis as an important piece in my overall strategy, to buy low and sell high. The interest in this form of analysis began during my early years as a Treasury trader, and has never been more interesting, and important, than in today’s AI world. The reason is that AI both possesses information that it’s been fed externally and through machine learning internally. The result has been the clear driver for the trading crowd dependent on AI for trading signals and more broadly to a handful of investing giants such as JPMorgan Chase (JPM) and Goldman Sachs (GS), and including Hedge Funds such as Bridgewater, founded by worldwide influencer Ray Dalio. The bigger result is the welcome evidence that market based activity has shown clear correlation to traditional technical analysis. Indicators such as traditional Wells Wilder Relative Strength Index (RSI, >70% overbought, <30% oversold) a good indicator for intermediate and longer term investors, and the Stochastic Oscillator (low positive cross indicates oversold, high negative cross indicates overbought) are fueling short term excitement. In short, AI is capturing historical measures and applying them today to the benefit of active investing strategies, essentially, history is repeating itself, albeit without the suit and tie.

 Of course, everything depends on more than this technical analysis, fundamental analysis is the primary source of ideas to invest in. But what is fundamental analysis composed of, and where does one look in a world of markets that has over 8,000 publicly traded companies. This is where technical analysis can help focus in sectors of an economy, how each is performing and where indicators show weakness at the expense of strength. For example, in 2023 the Technology sector is up over 35% this year, while Utilities is down nearly 10%. Is this a good reason to look at Technology stocks or Utility stocks?

 The answer, in today’s market, is both.  However, the question is why is Technology going up and Utilities going down. Historically, the economy is resilient to innovation, vital to an inclusive economy, hence every revelation from fire to the internet has seen a tidal wave of consumers. But the innovation that gains traction is more often met with deference and therefore the consideration to bring to the table in today’s market, is technology going through one of its most impactive historical periods? Yes, history is repeating itself, albeit most employees might be computers.

 Utilities are a sector that isn’t void of innovation, but most of it isn’t disruptive, a key component of technologic gain. Because most people are consumers of utilities such as water and electricity, utilities are also consistent in their flow of revenue, as demand tends to remain steady in strong or weak economies. Therefore, most investors hungry for risk will ignore utilities in favor of technology. To combat this challenge utilities have shared much revenue in the form of dividends, attracting those investors seeking defense over risk. However, in my opinion, we’re at a curious time for utilities, that is the challenge of climate change, and the steady growth of solar and wind electric generators. In the last few years, we’ve invested in companies that follow this trend, but as with any innovation, it has been wrought with problems, such as over use and harsh weather induced grid crashes. Therefore, it has been my aim to seek utility exposure that is both defensive, and innovative, but a different innovation, that is nuclear fusion. The total transformation from historical nuclear fission, it brings total renewal obligation and the potential for both steady income and growth. That combination is welcome, and when history repeats itself, the outcome is far more manageable.

This week the broad indexes traded lower on the back of the Federal Reserve, who decided to refrain from raising interest rates, but not from talking up future aggressive hikes should they be warranted. In my opinion, as inflation is slowly dropping, oil and gas are not. Also, unemployment is still very low and the consumer is spending and complaining about high prices simultaneously. A correction was necessary for the indexes and they’re getting what they deserve, until earnings suggest otherwise. Therefore, as the quarter ends, I’m expecting to see a more positive close to the year, and welcome a responsible Fed.     

Soft Enough?

 Markets & The Economy

This week the markets began with a bang, cleaning up much of August losses. After last week’s comments by Fed Chairman Powell at the Jackson Hole annual meeting, the markets appear to be responding to a speech, that In my opinion, seemed a bit hawkish, as suggested below.

 “Although inflation has moved down from its peak—a welcome development—it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective”

Not exactly a reason to buy. But the recent rally in the broad indexes have taken the markets away from being oversold, and for now we’re invested and I’m content to be neutral. That said, with so much technology, AI and our friendly Algochums, and some pundit narratives, the impact has been void of much economic data. And what data has come out for July, Existing Home Sales fell 2.2%, Durable Goods fell 5.2%, New Home Sales increased 4.4% and Real GDP Growth for the Second Quarter was revised lower to a 2.1% annual rate, presents a softer mix. And today the monthly Unemployment data was released and Total Nonfarm Payroll increased by 187,000 in August, and the Unemployment Rate increased to 3.8 percent. At first glance the payroll rise appears strong, however, previous months were revised down and added to today’s data suggesting a weaker number than presented. And any rise in the unemployment rate will be favorably received by the markets. Also worth noting, Average Hourly Earnings declined, consistent with yesterday’s release of data showing a month over month increase in Continuing Jobless Claims. All of this is good news, suggesting economic growth while softening but, in my opinion, still in a transition that needs more evidence. For now, the markets want to rally on slow growth data and decline on strong growth data. Hence, I’m not surprised by this week’s rally, and we did take advantage of the recent decline.

 Considerations

The future of employment is a focus of both the Fed and our portfolios. AI and robotics are being used by large hybrid (Land and Internet) retailers as warehouses are being automated with robotic movers and conveyor belt personnel. This will likely be the first noticeable impact of many corporate robotic transformations to come.

 Autonomous vehicles will be a real addition to the roads, not necessarily for consumer drivers, but more certainly for commercial drivers. The current technology is focused on Trucks, Trains and Ships, and all will have a significant impact on employment, especially Union workers.

 Inflation was an outgrowth of huge pandemic spending limits. Why, is because the United States has the largest (60% of GDP as of 01/01/23) and busiest consumers in the world, retail, leisure, hospitality sees the most activity and the largest users of natural resources. Is it coming down sooner rather than later? If we’re referring to the aggregate data (CPI, PPI) I think so, but slowly. If we’re referring to our rent, housing prices, travel, leisure, grocery’s…I don’t think so.

 Resumption of student debt payments finds a dismissive narrative as the most likely victims are the wealthier families. I disagree. The broad impact across all colleges of growing a diverse body of students serves to cover that many of those students have qualified and taken student debt. This has been especially  notable in the 19% rise in graduate school masters students and 18% doctoral students since 2010. That’s a lot of debt to assign only to the “wealthy”. Worth watching, as any slowdown in consumer spending, along with rising unemployment, the economy will soften further, keep an eye on the Fed narrative. The markets can remain strong, but a genuine second wave bull markets need a passive Fed. In the meantime, the continued cloud of uncertainty suggests to me that the markets will remain volatile, and when overbought I’ll trim and when oversold, I’ll buy.

Let’s Start Here

 It’s been over a week since my last comments, and the correction I’ve been waiting patiently for has arrived and taken the broad indexes in more interesting territory. Namely, the said indexes are no longer over bought, but they also aren’t yet oversold, but they’re getting there. So, what happened?

 Economics

In the past two weeks the economic data showed an economy stronger than the Federal Reserve probably wants. Starting with both inflation indicators (CPI, PPI) came in slightly higher than estimates, and that started to rattle some nerves. Then this week, Retail Sales came in for the month up .07%, higher when previous months were revised higher, and all over estimates. Housing Starts came in for the month up 3.9%, bringing the year to 5.9%. And this week the Federal Reserved released their opinions of economic growth and theses numbers prove their concern of a strong economy, and subsequent concern over the potential impact over inflation.

 Markets

The first change came from the long end of the Treasury Bond market. Starting last week, the 10yr Treasury was 3.98%, this week it currently trades at 4.31%, these are moves that our AI buddies don’t miss, and the natural move for the broad indexes is to move lower in response. Naturally, all this has been helped along by the pundit narrative. As of today, the technical condition of the indexes has improved to the point that reasons to buy are becoming plausible.

 Outcomes

The reason come in two packages. First, is that economic growth will always have a degree of inflation following it.  For the last 60 years inflation has moved around a lot, but on average has been around 3%. This, in my opinion is a far better goal than the 2% pushed by the Fed. But the point is that inflation has improved, will continue to show improvement as the Fed continues to raise interest rates and even if the economy at worst, slows down and avoids recession, which is also a plausible argument in my opinion, these are events that the markets like.

 Bears will continue to battle Bulls, but the current correction has exceeded 5% for the NASDAQ and that’s typical. As new data is released, comments from the Fed voters become public, Washington stays out of trouble and interest rates get tired of moving higher, the markets will pay attention to the clues of the future. That’s because markets are forward looking, and from my point view, the horizon looks more promising each day.

Snapshot of This Week

 Most weekends, I confess to engaging in self-composed homework. It’s usually updating my technical analysis research platforms, putting the puzzle of economic data into perspective, and researching the globe for new ideas and any connection those ideas may have to our investing interests. This is what I stumbled on.

 Last week earnings results continued to surprise on the upside. Some narratives indicated it proves that higher rates have not been hurting the bottom line as much as expected. However, in my opinion, the result of what was “expected” is a subtle reference to the analysts who lowered their expectations due to the previous three quarters of earning results providing weak guidance on future earnings. Worth noting, S&P earnings are down -5.2% for the year, however recent surprises have taken them up from down -7.0% in June, and in my opinion, this suggests the coming months could further reduce the year over year number, and that will be good for the market.

 As far as the technical condition of the broad indexes are concerned, the market is no longer over bought, but still not yet oversold. For now, uncertainties such as last week’s downgrade of the US debt by Fitch Ratings Inc. from AAA to AA+, first meant nothing to the market and then, in my opinion, was responsible in bringing a robust market on Friday to a loss. These are the kind of events, that when more fully analyzed render a more adequate judgment, rather than a simple, no big deal. I was pleased however, with Fitch’s comments regarding “erosion of governance” behind their decision. Personally, I would be more focused if the downgrade were brought by S&P Global Ratings, which happened in 2011 and resulted in a market downturn, albeit a temporary one.

 Ideas that have come out of the weekend are further research on the new addition to the models that focus on renewable energy production in general, and storage in particular. I’m also interested in the growing innovations in semiconductor technology. And as to be expected, the growing number of companies that are adapting to AI and machine learning technologies to their businesses, such as Salesforce (CRM), Amazon (AMZN), JP Morgan (JPM), and one that is curiously interesting to me, the move of Pfizer  (PFE) into what is described as AI Pharma.

 This week will see further earnings releases, many from less followed companies, but two from the industrial sector, that we’re invested in. As earnings settle down, the economy will come into focus as this week will see both Consumer (CPI) and Producer (PPI) inflation data released. The outcome could keep the market at bay, as the biggest inflation move could come from the energy sector, which, as I write this, shows US West Texas Oil trading at $82.25, nearly $10 dollars higher than a month ago. Perhaps to be expected, as there is a seasonal component to the rise. As that data rolls out, and interest rates remain at their lofty levels (10yr Treasury 4.08%) in time for quarterly refunding auctions this month, the markets will have time to digest and hopefully reach the moment of opportunity I’ve been waiting for. Therefore, I’m optimistic, because the markets are forward looking and valuations, in my opinion, aren’t as overextended as the narrative would like us to believe.

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

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.

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 2^nd Quarter 2023 ends on June 30^th. 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.

When Fighting is a Good Thing

 Much of the media rhetoric yesterday focused on the fighting between democrats and Republican, and I couldn’t help wondering if that circumstance is what partisan politics is all about, no side gets what they want, maybe, except us? Today the Senate takes up the vote and, in my opinion, it will be more contentious. Whereas the House didn’t really debate the Debt Ceiling Bill, but rather argued over its contents. In the Senate, suggestion of amendments will come up, probably to no avail and 60 votes will need to happen to pass the bill on to the President. Not sure which politician is willing to upend a process this important, but I’m confident that history will repeat itself and the bill will pass.

 I bring this up because the markets have spent most of year rising with the help a few big name stocks. Names you’re familiar with such as NVIDIA (NVDA), Microsoft (MSFT) and Alphabet (GOOGL) are all the new stars of the AI show. But for those watching closer, the rest of the sectors such as Healthcare, Industrials and even within technology, only adequately performed. This has left the technical condition of the broad indexes around neutral, and in my opinion, not a bad place to be.

 Tomorrow the Unemployment Data will be released and then the inflation and other economic data in the weeks to come. What was curious this week was the release yesterday of the Fed Beige Book, which is a collection of commentary on recent economic conditions, accompanied by any suggestions regarding a rate hike at their next meeting on June 13^th thru 14^th. For now, there is chatter from various voting members of the Fed that there is a likelihood of “skipping” this meeting, but not evading any upcoming challenges should it need to raise rates. Most of the focus this week has been on the word “skipping” and therefore the consensus appears that there is a 25% chance the Fed will raise rates. I find this curious since beginning in early April the interest rate market led by the 13week Treasury Bill saw rates increase 23.3%, 14%% for the 5yr Treasury Note, 10% for the 10yr Treasury and 9% for the 30yr Treasury Bond. I bring these up for two reasons. The first is my often written observation over 30yrs, which is the bond market has never needed the Fed to rase rates. Everything form mortgages to credit cards are all based on treasury rates and these changes have shown up in data suggesting, in my opinion, that a pullback in excessive spending is gaining some momentum. That would slow the economy from the consumer and justify the Fed skipping a rate hike at the next meeting. My second point is, the bond market has already dictated the increase in rates, so even for extra security, why shouldn’t the Fed increase their rate measure which will have almost no impact on the taxpayer? After all, the issue is all about inflation and while it may have peaked, which I agree with, it shouldn’t be ignored.

 Essentially, I’ve written about a number of different situations, external or otherwise, over the past few years. Those mentioned above have been with us for over a year and now they share a much more transparent certainty today than even six months ago. The markets love certainty, when it comes and for now the economy, inflation and everything that distracts is reaching, in my opinion, an endpoint. Patience still helps, but so does being prepared. And we are.

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.

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.

Closer to Certainty

 Some people are intuitively negative. This is driven by the same trends in history, politics, economics, international relations and popular culture. Check negative to each of these trends and naysayer predictions go wild. The problem, in my opinion, is the common trap relying solely on memory and hindsight without accounting for judgmental bias, is the basis of self-proclaimed expertise, designed to be a common distraction for investors. Fortunately, they are wrong more often than right. Let’s look at some common dilemmas set to grab our attention

 Debt Ceiling

The upcoming challenge to congressional approval to increase the debt ceiling is being hailed as the next crisis. This might be true, but why is anyone surprised by this? After all this argument has been around since managing the debt ceiling was introduced over a century ago. The problem today is the same, that is both parties want to raise the ceiling, and both want to add some extras into the bill. But there is also a difference, that when the customary threat of government closure is near, confidence of the even tempered heads has always been that the Fed coming to the rescue should that happen. But as outlined in a recent commentary written by a long followed chief economist at First Trust, Brian Westbury, gives a clear outline on how in the past few years the Fed has used its balance sheet capital, raised from Treasury and MBS interest and interest earned from bank deposits. The problem, interest rates aren’t as high as they used to be, and a recent slowdown in bank deposits, resulting from recent bank disruptions, have both left he Fed with less money than usual. Perhaps too complicated to be grappled by the media, but important to pay attention to nonetheless. This is because this particular problem could well have a negative impact on Treasuries, and will likely encourage some volatile corrective activity in equities. In the meantime, the broad indexes are technically overbought and if this is the trigger to bring it on, so be it. But I’ll focus on the primary goal, which historically has always been the outcome.

 Inflation

This week the data for the consumer price index (CPI) and Producer Price Index (PPI) were released and both were impressive on face value, declining on a yearly basis to 5% from 6% and 2.7% from 4.9% respectively. While the market has responded favorably, in my opinion, the data shows inflation is down from its highs, but still high enough for the Fed, which raises the likelihood of another rate hike at the meeting in early May. As previously mentioned here, the year over year data is likely to continue its current trend lower. However, at some point, the year over data will be low enough to rise due to post recessionary growth or further growth in energy and industrial costs. What this implies is that further increases beyond May might have to occur even as spot economic data appears to show a slowing in retail, new home sales, durable goods and wage growth, the core fuel for inflation.

 Overall, markets go up and they go down, a correction is worth considering given the technicality overbought condition of the broad indexes. Maybe the debt debate could trigger that, maybe strong declines in economic data. The key to any impact on the markets is that for now inflation is losing its attraction for the naysayers, and both politics and economics have data to provide the kind of certainty the market likes. And time will tell, the Fed has a job, the economy has to prove itself over time, and in my opinion, it will, as it always has. 

The Proverbial Hook

 Having spent most of my career working on the institutional and corporate side of asset management, organization and focus have been handy skills. However, since I’ve come into a more retail setting, I’ve observed another skill, monetizing the hook. The hook is the one idea to hang the direction of the capital markets on, for a single day. I’ve also observed that this skill has created a bit of a quandary lately. Strong indicators of economic growth, employment growth, wage growth and consumption growth all suggest, in my opinion, the Fed isn’t finished raising interest rates. So why have the broad indexes started the year in a rallying mode, and can it continue?

 Markets

A commonly heard narrative is the markets are overbought and need to correct. This is currently true, in my opinion, however it’s important to stay focused on what that means. At this moment in time, a welcome start to the year is where some correction is being correlated. But where is the cause of that correlation within the broad indexes, is the Dow Jones correlating, yes, the S&P500, yes, the Nasdaq, not so much? First of all, last year the most beloved stocks helped the Dow Index perform substantially better than both the S&P500 and the Nasdaq. And the S&P 500 finished last year 10% better than the Nasdaq. So, what does this mean? In my opinion it means that the Dow needs to correct more than the S&P, and the S&P needs to correct more than the Nasdaq. And because the S&P500 and the Nasdaq share a number of influential stocks in the Technology Sector, and the Nasdaq has been the best performer starting 2023, its strength won’t keep the S&P from a necessary correction, but, in my opinion, it will keep it from collapsing, the probable hook the narrative is looking for.

 Economics

The usual mixture of data that has been released recently suggests the economy is slowing, but not the entire economy. For example, the U.S. Manufacturing Purchasing Managers Index (PMI) and the U.S. Services Purchasing Managers Index both came in at 46.6 and 46.8 respectively. I focus on any number below 50, which suggests a contracting sector of the economy. In the case of these two indicators, both have been below 50 since November 2022, a condition last observed in 2008. In addition, recent releases in Retail Sales falling 1.1% and Industrial Production falling .07%, in December, there is definitely some economic moderation taking place, and this explains, to some extent, why the markets interpret inflation as having peaked already. I agree with this interpretation, but I also need more proof. Today the Unemployment data for January showed very strong growth in Non-Farm Payrolls (517K) and the Unemployment Rate declined (3.4%) and naturally this was the hook for the opening day’s narrative. And while the numbers are concerning, wage growth, Average Hourly Earnings and Average Weekly Hours all came in static from the previous month. Another interestingly favorable outcome was the U6 Unemployment Rate, which includes a wider range of the unemployed that includes underemployed and discouraged participants, which came in slightly higher (6.6%). While a number of economists view the U6 data and more comprehensive, my takeaway is, it tells us the story isn’t over.

 External Events

In the past few weeks, the new majority in Congress has engaged its political agenda and the first legislation on the docket will likely be the Debt Ceiling. For now, In my opinion, the Debt Ceiling will likely be raised, but with some concessions, namely the promise of no further spending packages that got us into this problem in the first place. This week, the Federal Reserve raised interest rates again and the speech given by Chairman Powell reiterated that inflation is moderating but still too high and the Fed is intent to keep raising rates. While he gave no hint of today’s Unemployment report, I take the Feds actions and statements at face value. And for now, that’s my proverbial hook to hang my strategy on.

Tech Is Waking Up

 Employee layoffs have been growing more frequent, especially from companies in the Technology Sector. Some may recall, during the pandemic I wrote about a growing incentive to reimagine the corporate responsibility. The narrative was aggressively pushed by Marc Benioff of Salesforce (CRM), highlighting the goal to hire aggressively, pay handsomely and provide added capital to the working conditions and the needs of the community that hosts the business. The statements being released by companies leading the recent layoffs are the same ones that followed a narrative that was projected with sound intent but ended up creating more problems than benefits to the economy and the capitalism that feeds it.

 I bring this up because another familiar phenomenon is occurring as stock prices of these companies are going up, essentially rewarding them for preserving the future needs of the company and the balance sheet, over the present high Operating Expenses. In the case of Alphabet (GOOGL) and Microsoft (MSFT) the CEO’s each gave an unexpected apology for being too aggressive with the pandemic agenda. Now the economy is weakening to the impact of higher interest rates in the calculation of earnings per share (EPS) and the challenges to growing nationalization of infrastructure and technical select needs to fight ongoing supply trade disruptions, and a more serious focus on the balance sheet is needed.

 While this is happening, the economy as also measured by housing, retail sales and broad manufacturing, is experiencing multi month weakness. The offset that comes from strong employment is a nuisance observed by the Fed and that is a current uncertainty. Until the next meeting on February 1st, and their forecasted .25% rate increase, it’s the speech by Chairman Powell that follows that I’ll be focused on. As the Fed concerns become clearer, so to can the overall market takeaway. There is no reason yet, in my opinion, to not expect a recession in the second quarter, but it will take evidence from incoming employment data and its broader impact to feed the agony Chairman Powell has promised.

 The good news, in my opinion, is that the equity markets are opening the year moving higher. But the strength, and incoming investment, is clearly focused on technology, and not just the familiar names. To some extent this could be a short term shift from the more stable sectors that have been the recent winners in the markets, and in need of some pause.  But with much of the forementioned employment data dependent on continued cost cutting, coming from the Technology sector, the outcome is clearly good for the sector as a whole. In my opinion, this is an early sign that Technology is closer to the end of a very difficult 12 months. As far as where investment is focused, the growth in Artificial Intelligence, Robotics, Cybersecurity and Cloud Services, covers a lot of ground and we have some exposure to all. With that, the goal is to take advantage of volatility, probably from upcoming earnings reports, to increase our holdings.  For now, the overall technical condition is still overbought and when the markets work off some present steam, then it can move towards rising on a favorable outlook instead, and that’s the kind of market we like.

The Light Is Getting Closer

“When I look at the market behavior today, I'm a pessimist … but when I look at market behavior over history, I’m an optimist”

The opening of the year has been a good one for the markets. Rallies, even modest ones, are welcome, and the reason is the focus on inflation. The problem as I see it, ignores the fact that the markets left the previous year oversold, and a rally can be expected, just as they had infrequently occurred last year. To hear a narrative the concludes that inflation is under control and the Fed will have to slow down are still, in my opinion, too premature. However, I’m also not pessimistic, and push aside those in our industry who dispense a narrative that all too easily pervades individual thought and, in my opinion, mutates doubt into blind certainty. Here’s what I’m becoming more certain about.

Economics

Today the Data for the Core Consumer Price Index (CPI) was released and showed a modest December decline of .01%. The overall inflation number for the full year came in at 6.5%, a clear decline from the high of 9.1% last July. Without going over the other calculations, such as removing the more volatile food and energy data, it’s worth noting that the data clearly shows a slow decline in the overall inflation rate, but a number that would still have the focus of Fed concern as well.  This is important to me because I live a reasonably simple life and can experience inflation first hand. So, the question I keep asking myself is has the linear data that is reflected in the numbers already peaked, and my answer is yes. Now, will inflation at the grocery store continue per diem, my answer is also yes. In short, the data that reflects the monthly and yearly changes in inflation will continue to slowly move lower, but my favorite Pistachio Gelato is still going to be $9 a pint.

 Markets

The markets are definitely seeing some buying that is as much about short covering as it is about genuine buying. But the volume is good, going into a holiday weekend, and the only thing to wait for is what’s next. First of all, the markets finished the year marginally oversold in the short term. Hence, the rally we’ve been experiencing in the beginning of this year. As of today, that technical condition is starting to show the market somewhat overbought. Therefore, while the overbought condition could continue into next week’s Producer Price Index (PPI) release on Wednesday, it is also the start of earnings for the fourth quarter, and that could impose some relief on the rally. I bring this up because in the recent overall rebalancing of accounts the available cash will continue to find opportunity, and the reckless interpretation of earnings from our Algochums and Analysts should prove useful. Until then, the economy and inflation suggest, in my opinion, that the bear market is nearing an end and, sorry for the redundance, patience and focus are still the best strategy at hand. 

 

Two Views

     Today the markets received data on the Producer Price Index (PPI) and without going into detail the result was, to say the least, open to interpretation. Expectations were for the month over month data to increase .2%, but came in up .4%. The year over year number was expected to be 5.9%, but came in at 6.2%. Well, the markets took the data to show that inflation has increased, and I disagree. First, last month’s year over year inflation data was 6.8%, this month came in lower at 6.2%. In my opinion, this shows that inflation, although still high, may have peaked and is experiencing bounces along the way down. As far as the monthly data goes, the increase in energy prices last month and the continuing challenge of inflated prices to seasonal shoppers, fills in the blank as to why the month over moth data increased. But the increase was higher than the consensus (prediction) and once again the economic analysts got it wrong, and that’s what the markets like to ignore these days.

     Unfortunately, this is also what is taking place in the equity markets. Over the last 30 days a number of companies such as retailer of lifestyle athletic apparel Lululemon (LULU), CRM software provider Salesforce (CRM) and a number of other technology and consumer discretionary companies, each reported earnings that beat top down expectations, but the stocks went down. The reason has been simple, the analysts, pundits and our favorite algochums are all focused on the guidance provided by the companies. That guidance has unsurprisingly inferred caution going into the first quarter of next year. Why not? There are many indications that there will be some economic slowdown, and I’m not just referring to the economic expectations resulting from a yield curve inversion, a phenomenon that has been going on since April. The outcome of the ISM Manufacturing Index and the ISM Services Index are both trading under 50, which is a direct sign of economic contraction. For now, the only uncertainty is Unemployment, and that’s where the Fed comes in. Recent comments by the Federal Reserve members show frustration with the continuing strong employment data, even in the light of well advertised layoffs, and hiring freezes. In the meantime, they still expect to increase interest rates, and continue with aggressive Quantitative Tightening (QT) into year end. QT could have an especially sobering effect on the economy.

     Next week, the Fed is expected to increases interest rates by .50% at their December meeting, and data for the Consumer Price Index (CPI) will be released. There is reason to be constructive in today’s environment. Not because the markets are going to rally into year end, that may happen once the Fed decision and the economic data are out of the way. But, because if there is any sign that the economic environment is showing signs of weakness, that is the time when the markets will find a true reason to rally. When that happens, first or second quarter, remains to seen. In the meantime, we’ll continue to watch the data, taking opportunity when markets decline, stay invested, and remain patient until we get this year out of the way.

Don’t Fight the Fed

When I entered the asset management arm of my career, I was focused on the bond markets. The process of research and analysis that accompanies the bond market is different than that which covers the stock market. This is because when researching and analyzing a stock one focuses on the fundamentals of the that company, with bonds, the focus is on interest rates and the economic fundamentals are the best source to search for the right investment. Most of the time, bond yields tend to stay relatively lower to modest economic growth and inflation, which has been the case for the last 20 years. But now, as inflation has risen to the concern of the Fed, the impact has been to drive bond yields markedly higher and stocks markedly lower. This is what the Fed has wanted since beginning the fight to end inflation, are they winning?

 I bring this to light because after three days of the broad indexes working off some overbought conditions, Fed Chairman Powell then gave a speech that triggered a quick turnaround, leaving the broad indexes, in the black for the week. Why did this happen, and is the Fed’s work nearing the end? In my opinion, no. As a lifelong interest rate follower, there is long followed advice, if you think the Fed is wrong in being less aggressive with rate hikes, then you’re fighting with the Fed. The more reliable posture has always been, “don’t fight the Fed”. Why?

 This week revealed data showing a slight decrease in home prices. Also, GDP for the 3^rd Quarter was revisited and remained modestly strong at 2.9%. The more positive news in the data was the GDP Price Index that came in at 4.3% further suggesting some deflation occurring in process. Consumer Spending showed slightly stronger data than the consensus of economists was expecting. Less welcome news was the data on national holdings of oil and gas which showed depleted inventory levels in need of resupplying. Although both fuels have been steady, they have also nonetheless remained historically high on average (Oil $80, Gas $7). Finally, today saw the release of monthly Employment data that showed stronger than expected Non-Farm Payroll Growth (263K), a steady, and low, Unemployment Rate (3.7%), Higher Average Hourly Earnings (5.1% vs 4.6% last month) and a slight decline in the overall Participation Rate (62.2% to 62.1%). By any measure, the Employment data showed a much stronger economic condition than suggested by Fed Chairman Powell. The economy is not weak, but slowing, inflation is still high, but peaking and until both conditions are realized to a measurable degree, the broad indexes will trade in a silo, waiting to break out.

 The humorous part of the narrative lately has been to talk about what the market wants rather than what the economics is telling us. The data this week undermines the arguments that recession is imminent. In my opinion, a recession is nonrandom, but not necessarily predictable. The reason for this is that prices in freely traded markets are determined by the economic principles of supply and demand.  Prices discount everything and as with the markets they impact, tend to travel in observable trends. The Fed is watching those trends, the market is watching those trends and this week, both got it wrong. But as behavior and history in the marketplace will tend to repeat itself, while the narratives will fail to embrace accountability, the Fed has always found it easy to change their mind. Therefore, in the meantime, in my opinion, best not to fight the Fed. 

Don’t Give Up on Tech

Way back in the 1990’s when I was managing capital for a corporate pension department, I used to enjoy reading the annual reports that companies, whose stock was held by our firm, would mail to us as a hard copy. One particular report that stood out to me was from the Microsoft company (MSFT) whose products, especially Office, have been central to my desktop organization to this day. What captured my attention though, had to do with the customary picture of the top executives and board members, that appeared in all annual reports. This particular picture had two differences that stood out. The first was the number of executives that weren’t wearing a tie, and the second was one executive holding a basketball. My takeaway, was that picture was an oracle into the future of technology, focused on skill over style and organization over fraternity. Now we come to 2023 and the narrative is to attack the major tech firms even as they have done more to enrich this country than at any time since the industrial revolution enriched the middle class in the 20^th century. I bring this up, because those same major tech firms are beginning to layoff employees for the first time in recent memory, is this a good thing?

 Beginning last week, the release of Consumer and Producer price inflation data showed modest change lower. Likewise, the impact from the midterm elections still presently leaves the Senate runoff to complete the expectation, but in the meantime the House has modestly flipped, giving the markets some comforting gridlock. The war in Ukraine is currently an ongoing uncertainty, although its impact is diminishing as it fades from the global narrative. And Europe and China continue to harvest the impact of internal headwinds that are influencing any commitment to those markets, a difficult choice. Only the US has shown some promise, not necessarily reason for a happy dance, but as economic growth manages to show further weakness, and the macro inflation picture continues its trend lower, the overall picture needs to be closely watched.  

 The big change that I’m watching for will be the release of the Unemployment Data on December 2^nd. In the meantime, yesterday’s data on Continuous Jobless Claims showed a modest increase, which is not surprising. As mentioned in the first paragraph, the tech layoffs, being explicitly advertised, have an impact that has the potential to alter, in my opinion, the frequent reckless perspectives from analysts. The first is while the numbers are not extreme, Amazon (AMZN) announced the layoff of 10,000 employees, curiously low since Amazon hosts over 1,500,000 employees globally.  The same can be said for Meta (META), which cut 11,000 people on November 9, and Twitter (TWTR), where 3,700 people lost their jobs on November 4. The number of employees being laid off, compared to the number of employees globally, suggests, in my opinion, that the changes are more focused on the reduction of expenses, rather than a response to pubic inflation. This is worth noting, because the most familiar tech companies have respectable Gross margins (>50%), and low Net margins (<20%). This is because their Operating expenses tend to be split between ongoing reinvestment and traditional compensation. And with the spike in growth of post pandemic hiring based on virtues such as community obligation and nearly invisible pay scales, even Google stated college diplomas were no longer necessary to apply.  And the salaries by most measure have outpaced previous generations, and between recent multiyear growth in wages and benefits, the tech balance sheets might be facing the first reduction in Operating expenditures, which could show a marginal increase in net profits. Neither a common occurrence for tech.

 Does that make the large cap tech sector a better investment than the analysts are suggesting lately? In my opinion, it’s compelling in relative value, but right now the evidence will be in the employment data and the earnings results, when they arrive. In the meantime, there is definitely good news in the air, and while the technical condition of the broad indexes suggests some correction lower from recent consolidation, the light at the end of the tunnel isn’t yet shining bright, but at least it’s starting to become visible. 

Waiting for Certainty

A lot happened this week as the stock market, led higher by the Dow Jones Industrials was followed by the quarterly earnings data from big tech. Not all of it good for the market as the familiar technology names, Alphabet (GOOGL), Microsoft (MSFT) and Amazon (AMZN) released earnings that weren’t what was expected by the analysts. Even our friend Apple (AAPL) came in slightly weaker, but managed to eke out a rally. What’s curious to me is when the Bond Market and Fed interest rates began to rise into the new year, both pushing up the dollar, the initial dialog focused on the direct impact on high growth companies with bloated P/E’s and subsequent compression on EPS and Cash Flow. Add to that consumer activity was focused more on Leisure and hospitality, then durable and non-durables. My point is why was anyone surprised at this week’s results? In my opinion the results show an uncertainty of the prediction giving way to a certainty of outcome, time to move on.

 In fact next week, the Fed will likely vote to raise rates (expected to be .75%), monthly Unemployment will be released (expected to see some slower job growth) , and Midterm elections where a customary swap of party control has historically occurred (expected to result in gridlock), see the pattern? If the economy is slowing, and an increase in the unemployment rate would confirm that, gridlock should also create a pause in excess government spending, or at least moving away from the Modern Monetary Theorists. All of these events are pushing the market away from uncertainty, adding more certainty. However, a lot continues to depend on consumer, and the ultimate result on inflation. Therefore, the volatility isn’t over anytime soon, leaving the Pindudes and Algochums busier than ever. So, what am I looking for.

 The outcome of the Fed is to be expected as the increase in interest rates is have some clear effect on the economy. This week both the Manufacturing PMI (Oct) and the Services PMI (Oct) came in at 49.9 and 46.6 respectively, both under 50 represent a contracting economy. That’s why it’s so important to pay attention to Fed Chairman Powell’s comment after the November 2^nd meeting as I’m confident they will see the Unemployment data before we do. When the Unemployment data is released on November 4^th it will be important to see smaller growth in payrolls and some increase in the unemployment rate, to further confirm economic activity slowing. The last piece of news will be the midterm elections, that could result in the kind of gridlock that in the past required actual bipartisan cooperation, although I’m not especially confident that will happen.

In my opinion, our modest exposure to both Fixed Income and overall, Tech exposure in favor of Healthcare, Financial and Industrial sectors have been beneficial offsets. Going forward, the careful increase in Consumer Discretionary, with focus on income and recession friendly products and services should see some new names in the portfolios.  Either way, the three events mentioned in the above paragraphs will introduce some certainty into the markets and offer an opportunity to generate some optimism, not yet to be confused with being bullish, but definitely a good place to start. 

Negative is the New Positive

 This week saw the broad indexes rise enough to take us in the direction of being overbought. Much of the activity has been on the back of economics, the Fed, and earnings. While we welcome favorable earnings where we share them, overall, this earnings season has been mixed, with current data being good alongside of cautious future guidance. Likewise, analysts are okay with maintaining buys on many stocks, Afterall most stocks are down this year more than the S&P 500 (as of today -21.9%), but they’re careful on predicting a target price. In my opinion that translates into what is impacting most of us, namely, if the economy slows down, markets will rally, if unemployment goes up, markets will rally, and if companies do well, well, that feeds volatility. What does that mean?

The Federal Reserves is going to meet on November 2^nd and reveal their actions to increase interest rates. The narrative surrounding that decision is meeting curious pushback. For example, the UN recently decided to ignore the genuine threat of inflation to instead focus on the threat of economic slowdown and its impact on the less developed countries. This is not unusual, although in my opinion, strong economic growth in leading developed countries has historically been the best medicine to relive stress on many underdeveloped economies. There is also the narrative of Fed governors with voting privileges, contradicting one another about how much to increase interest rates at the next meeting. Infighting is not uncommon within the overall board, in fact is there any good reason why there shouldn’t be? Another headwind, that has been discussed here, is the potential for the Fed to be careful not to be too aggressive in the face of upcoming midterm elections. That would be true if Fed Chairman Powell was a loyalist, but his recent speeches over the year have frequently quoted Paul Volker, the Fed Chairman that last faced an inflation crisis to raise rates without the permission of politicians. Today, CNBC noted a poll that suggested civilians were less confident with Fed than with Congress. I’m not sure that’s possible, but I’ll go with Powell doing the right thing.

 The war in Ukraine is a changing uncertainty, just as the confirmation that Chairman Xi of China will maintain his rule for the unforeseeable future, and is even recently being compared to the infamous Chairman Mao Zedong. What this means for quicker focus on Taiwan is also a real uncertainty. Likewise, North Korea wants to join the bad guys and has recently sent missiles to the South Korean border, maybe for some much needed attention, maybe not. All these events would be initially unfavorable for the global markets, but not necessarily catastrophic and eventually negative news would likely be construed as positive news. But, in the meantime, not to be ignored.   

 The best focus, in my opinion, is that on inflation, The Fed and the Economy. For now, there is evidence that economic growth is slowing, albeit in specific sectors. With next month’s Unemployment data coming out after the Fed meeting, it’s likely the Fed action will give the markets some insight into what that data will reveal. As the economic negatives add up, the markets will adjust away from the prevailing economic cycle towards the future economic outcome. In the meantime, it’s worth noting that consumers aren’t stupid, being fiscally disciplined is both an outcome of ability and that of necessity, and managing through a recession is something most citizens have lived with at some point in our lives. That outcome will reverse the current dynamic and then positive will become the new negative. Good times outweigh bad times, and the last few years should create a future well worth being prepared for.

Hot or Not

Yesterday and today current data for the Producer Price Index (PPI) and the Consumer Price Index (CPI) was released, the outcome year over year showed 8.5% vs 8.7% for the previous month and 8.2% vs 8.3% respectively. So why all the fuss? Unfortunately, the financial narrative is broken, no longer engaged with a strategy to inform, but instead with a motive to influence.

The consensus numbers, namely the expected outcome of the inflation data, were too optimistic and easily beat by the actual data. This has been surprising given the recent track record, but the focus unfortunately was on the consensus rather than the difference between the current level of inflation and the past data levels. In my opinion, the focus is missing the point, namely, that inflation may not be going down, but it’s also not going up. What does that mean?

 Well, it doesn’t mean the Federal reserve isn’t going to stop raising rates. In fact, the Chairman has doubled down on the goal to beat inflation, which can only be accomplished if the economy goes into recession. Moving forward the likelihood of some softer employment data and the ongoing rise in the dollar, which is economically unfavorable to inflation are the only positives in our focus. The strong dollar also bringing up the thought that there has been a strong increase, post pandemic of course, in international tourism. Afterall, with comparatively weak local currencies buying strong dollars, the incentive is to travel and spend. So, one asks, inflation is the outcome of consumption versus demand, but is there a difference if that consumption isn’t coming from here, but rather from over there? Either way, the aggressiveness of the Fed and the likelihood of another .75% increase in rates on Nov 2^nd and another .75% by year end will increase the realization of economic slowing and should set the new year up as a when, not an if the economy goes into recession. What does that mean?

 Well, today the broad indexes have moved from a frightening drop to a respectable rally. And with the exception of the technical conditions that have been slightly oversold there has been no other reason than perhaps investors have come to their senses. Today, that may be true, but the idea that this morning’s inflation was called out to be hot, but as described above, that wasn’t actually true. Also, the idea that inflation is going away anytime soon is also an uncertainty that can’t be ignored. The Fed will keep on being aggressive until they reach their goal and that’s a good reason to be cautious. Adding to existing positions when the market is down makes sense to me, because there is a reason and we all know it, and when the market is up it pays to look for a reason before acting. The broad indexes have come down a lot this year, balance sheets have been rattled, familiar measures and ratios have compressed and there will be a time when the Fed begins to play nice. When that happens the markets will rally for what I call the first stage. What I prefer to focus on as well are the longer dated technical conditions that persist and until those conditions are reversed, we remain in a bear market. But when the reversal happens, we begin to experience stage two and there is plenty of time to be prepared. And as experience has taught me, being prepared for the future is better than playing pinball with the present.