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7 Stocks to Buy as Biden Picks Powell For Fed Chair

It’s official. Jerome Powell will serve a second term as Federal Reserve chairman. With that in mind, it’s a good time to consider what effect Powell’s…

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This article was originally published by Investor Place

It’s official. Jerome Powell will serve a second term as Federal Reserve chairman. With that in mind, it’s a good time to consider what effect Powell’s reappointment will have on stocks to buy as we head into 2022.

Powell’s selection didn’t rise to the level of white smoke coming out of a chimney at the Vatican. In this case, there were only two choices — and investors had signaled their preference.

That was Powell. The reason is simple enough. One of the Federal Reserve’s primary responsibilities is to limit inflation, and recent economic data show it is rising at an uncomfortable level. With that in mind, Powell has a proven tendency to move at a measured pace. He gives investors clear signals when he intends to make moves.

That’s why the Fed Chair’s announcement that he may increase the pace of tapering caught investors off guard. The sooner the Fed takes its asset purchases down to zero, the sooner it may consider raising interest rates. However, if this program goes as scheduled, it may create an opportunity for long-term investors.

That’s why, on balance, investors are probably still bullish about Powell. So without further ado, let’s take a look at seven stocks to buy with Jerome Powell leading the Fed. These picks have received a bullish 12-month price target from sell-side analysts:

  • JPMorgan Chase (NYSE:JPM)
  • PayPal (NASDAQ:PYPL)
  • Visa (NYSE:V)
  • Southwest Airlines (NYSE:LUV)
  • T-Mobile (NASDAQ:TMUS)
  • Lamb Weston Holdings (NYSE:LW)
  • Cigna (NYSE:CI)

Stocks to Buy: JPMorgan Chase (JPM)

Source: Roman Tiraspolsky / Shutterstock.com

Bank stocks will logically be a solid buy if interest rates rise sooner than expected. And if that’s the case, investors will likely seek out quality names like JPMorgan Chase. As of June 30, the bank had $3.7 trillion in assets and operations worldwide. And as the economy continues to recover, JPMorgan should see its lending revenue increase in concert with tapering slowing down.

Since the bank’s earnings report in October, several analysts have been raising their price target for JPM stock. The consensus 12-month price target suggests a modest 8% gain. However, that would likely move much higher if the Fed raises rates in the next year.

But let’s say the Fed decides to hold the line on interest rates. Well in that case, if you’re an investor who’s concerned about inflation, JPMorgan Chase’s dividend, which currently carries a 2.53% yield (that works out to a $4 per share annual payout), is certainly a nice buffer against the effects of inflation.

PayPal (PYPL)

PayPal logo and front of headquarters

The second pick on our list of stocks to buy is PayPal. Current shareholders have had a rough several months, as PYPL stock recently went from a 52-week high to a 52-week low.

There are many reasons for that. Some analysts may have been troubled when PayPal missed on revenue for the second straight quarter. But most of the issues seem to center around an overall bearish sentiment surrounding tech stocks.

I can’t speak to the latter point. However, as to the revenue miss, I can understand that analysts had become accustomed to PayPal beating revenue numbers. And some believe PayPal will be a loser as consumers begin to return to in-person shopping.

However, I think that’s overstated. PayPal already has tools in place, such as debit and credit cards, that make it possible for users to use their PayPal account for in-person purchases.

With that in mind, the selloff in PYPL stock is now looking extreme. And the analyst community seems to agree. The stock has a $275 price target, which gives it a 44.5% upside from its current price.

Stocks to Buy: Visa (V)

several Visa (V) branded credit cardsSource: Kikinunchi / Shutterstock.com

If you’re looking for a more traditional payment processor, look no further than Visa. Recent data suggests that many consumers appear ready to use their credit cards this holiday season. Specifically, a recent article in the Wall Street Journal reports that approximately one in four Americans applied for a new credit card in the last 12 months.

That means even if consumers pay their balances in full (which is still encouraged), Visa will still be able to collect a transaction fee. And that means revenue is likely to go up the next time the company reports earnings in January. This is also before Visa increases its swipe fee, which it is likely to do in 2022.

The stock has a price target of $276, which is a 33% upside from its current price.

Southwest Airlines (LUV)

a southwest airline stocks (LUV) jet flying above the cloudsSource: Carlos E. Santa Maria / Shutterstock.com

The next two stocks to buy may fall under the category of, “if you could only buy one.” The first is Southwest Airlines. Among the airline stocks, LUV stock has a $61 price target, which gives it a 32.6% upside from its current price.

Of course, as I write this, the country is trying to determine how serious the threat of the Covid-19 omicron variant will be. At this time, President Joe Biden’s administration is saying there will be no mass lockdowns. But in the short term, there may be some turbulence in a sector that was hoping for clear skies.

Southwest has not been immune to the staffing problems that have led to flight cancellations. And with oil prices back on the rise, the company is experiencing higher costs for jet fuel. However, one reason I’m partial to Southwest is that the airline does not rely on international travel, which is likely to remain a mess for some time yet.

Stocks to Buy: T-Mobile (TMUS)

the exterior of a T-Mobile (TMUS) branded storeSource: Tupungato / Shutterstock.com

T-Mobile was one of the strongest recovery plays of 2020. TMUS stock climbed approximately 80% from its pandemic low. But it’s been a different story in 2021 with the stock down 13.6% year-to-date (YTD). And there are some that believe wireless carries may continue to face tough conditions in 2022.

However, analysts expect T-Mobile to continue to add subscribers, particularly as it continues to benefit from its merger with Sprint. This merger has given the company access to the all-important mid-band 5G spectrum. Not only is this a “Goldilocks” solution of sorts from a technology standpoint, but it’s allowed the company to build out its 5G network while its competitors are still stuck on the starting blocks.

T-Mobile is also hoping to boost revenue by limiting some device promotions to its high-end service plan. The goal is to give customers an incentive to upgrade their plans.

Early results suggest the plan is working. That’s part of the reason that the company has a 12-month price target of $168, which is an upside of 45%.

Lamb Weston Holdings (LW)

LW stock: a bag of potatoes open with potatoes spilling outSource: Shutterstock

Lamb Weston Holdings has been one of the companies most affected by inflation. The purveyor of frozen potato products has seen its stock price drop nearly 29% YTD. And much of that drop has occurred since June. Not helping matters is the company’s October earnings report, in which the company missed on both the top and bottom lines.

However, analysts are optimistic about the company’s fortunes in the next year. LW stock has a price target of $71, which would be a gain of 26.8% and would recover much of what the stock has lost in the last year.

That recovery may be underway. The stock appeared to hit a level of support on Dec. 1 and has started to bounce higher. Investors will want to see additional confirmation, but for now Lamb Weston looks ready to move higher.

Stocks to Buy: Cigna (CI)

mobile phone screen with the cigna (CI) logo on it. representing healthcare stocks to buySource: Willy Barton / Shutterstock.com

Cigna closes out our list of stocks to buy. Buy-and-hold investors have watched CI stock move to a 52-week high only to lose all those gains and start trading near its 52-week low. The trend continued even after the company recorded a double beat in their most-recent earnings report.

This seems overdone. Cigna is one of the largest global health insurance companies, and it has contracts with 99% of U.S. pharmacies. It also has a significant presence in the pharmacy benefits manager (PBM) space, which gives it leverage when it comes to drug pricing.

However, like Lamb Weston, it appears that CI stock has hit a level of support and it could be ready to move significantly higher. In fact, analysts forecast that Cigna will hit a 12-month price target of $268, which would be a 28.4% gain from the stock’s current level.

On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for InvestorPlace since 2019.

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interest rates

Author: Chris Markoch

Economics

Lacy Hunt: Negative Real Rates Are A Strong Recession Warning

Lacy Hunt: Negative Real Rates Are A Strong Recession Warning

Authored by Mike Shedlock via MishTalk.com,

In his 4th Quarter Review and Outlook,…

Lacy Hunt: Negative Real Rates Are A Strong Recession Warning

Authored by Mike Shedlock via MishTalk.com,

In his 4th Quarter Review and Outlook, Lacy provides some interesting charts on negative real rates and recessions.

Please consider the Hoisington Management Quarterly Review and Outlook Fourth Quarter 2021Emphasis Mine

Real Treasury Bond Yields

Real Treasury bond yields fell into deeply negative territory in 2021. In elementary economic models, this event, taken in isolation, would qualify as a plus for economic growth in 2022 and would be consistent with the strength indicated by fourth quarter 2021 tracking models.

Lacy a different view however. His analysis shows that negative real yields are associated with recessions. 

Debt overhang and demographics make the matter worse.

History

Since 1870, the starting point of reliable data, only 24 full yearly averages were negative, or just 16% of the 152 readings over this time span.

Detailed parsing of the series reveals that 12 of those occurrences fell in the spans from 1914 to 1920 and 1939 to 1953, both of which were dominated by major military engagements and their subsequent demobilization – World Wars I and II and the Korean War.

Excluding the 1914-20 and the 1939-53 periods from the post 1870 sample still leaves a robust sample of 130 readings. During this lengthy span, cyclical and secular economic conditions resulted in a negative yearly average for real Treasury bond yields twelve times, or just 8% of the time. In the eleven cases prior to 2021, nine of the negative real yield periods coincided with recessions – 1902-03, 1907, 1910, 1912, 1937, 1974-75, and 1980.

Real long maturity yields were negative in 1934, which while not a recession year, happened during the horrific conditions of the Great Depression (1929-1939). In only one case, 1979, does the negative real yield happen during an economic expansion when the economy is not in a highly depressed state.

Debt Overhangs and Real Interest Rates

The level of indebtedness of the economy is another of the critical moving parts in assessing future economic growth. Based on empirical evidence, theory and peer reviewed scholarly research, the massive secular increase in debt levels relative to economic activity has undermined economic growth, which has in turn, served to force real long-term Treasury yields lower. This pattern has been evident in both the United States and the more heavily indebted Japanese and European economies.

Real 10-Year Government Bond Yields 

Economic research provides additional insight and evidence as to why interest rates fall to low levels and then remain in an extended state of depression in times of extreme over-indebtedness of the government sector. While differing in purpose and scope, research has documented that extremely high levels of governmental indebtedness suppress real per capita GDP. In the distant past, debt financed government spending may have been preceded by stronger sustained economic performance, but that is no longer the case.

When governments accelerate debt over a certain level to improve faltering economic conditions, it actually slows economic activity. While governmental action may be required for political reasons, governments would be better off to admit that traditional tools would only serve to compound existing problems. For a restless constituency calling for quick answers to economic distress and where inaction would be likened to an uncaring and insensitive attitude, this is a virtually impossible task.

Carmen Reinhart, Vincent Reinhart and Kenneth Rogoff (which will be referred to as RR&R), in the Summer 2012 issue of the Journal of Economic Perspectives linked extreme sustained over indebtedness with the level of interest rates. In this publication of the American Economic Association, they identify 26 historical major public debt overhang episodes in 22 advanced economies, characterized by gross public debt/GDP ratios exceeding 90% for at least five years, a requirement that eliminates purely cyclical increases in debt as well as debt caused by wars. They found that the economic growth rate is reduced by slightly more than a third, compared when the debt metric is not met.

Persistent Global Weakness

Advanced Economies (AD)

In 2021, the Japanese, Euro Area and Chinese economies, in comparative terms, underperformed the U.S. economy. This pattern should continue this year. Due to more massive debt overhangs and poorer demographics, real GDP in Japan and the Euro Area in the third quarter of 2021 was still below the pre-pandemic level of 2019. The U.S. in this time period managed to eke out a small gain. The dispersion between the U.S., on the one hand, and China and Japan, on the other hand, may be even greater. Scholarly forensic evaluations have found substantial over-reporting of GDP growth in China and now, similar problems have been revealed in Japan.

Prime Minister Fumio Kishida said on December 15, 2021, that overstated construction orders had the effect of inflating the country’s economic growth figures for years. Consequently, the marginal revenue product of debt is even lower than reported therefore so is the velocity of money for both Japan and China. Interestingly, Bloomberg syndicated columnist and veteran Wall Street research director Richard Cookson makes a strong case that “China looks a lot like Japan did in the 1980s.”

Emerging Market Economies (EM)

The sharp surge in inflation in 2021 has resulted in far greater damage to the EM economies than the U.S. for three reasons. First, a much higher proportion of household budgets are allocated to necessities than in the United States since real per capita income levels are much lower than in the U.S. Second, numerous EM central banks increased interest rates in 2021.

Another problem emerges as most of the EM debt is denominated in dollars. When EM currencies slump as in 2021, the external costs of servicing and amortizing debt add an additional burden on their borrowers.

Growth Obstacles

In 2022, several headwinds will weigh on the U.S. economy. These include negative real interest rates combined with a massive debt overhang, poor domestic and global demographics, and a foreign sector that will drain growth from the domestic economy. The EM and AD economies will both serve to be a restraint on U.S. growth this year and perhaps significantly longer. The negative real interest rates signal that capital is being destroyed and with it the incentive to plough funds into physical investment.

Demographics continue to stagnate in the United States and throughout the world. U.S. population growth increased a mere 0.1% in the 12 months ended July 1, 2021. This was the slimmest rise since our nation was founded in the 18th century, along with two other firsts: (1) the natural increase in population was less than the net immigration, and (2) the increase in population was less than one million, the first time since 1937. The birth rate also dropped again.

Inflation

Inflation has been one of the most widely reported and discussed economic factors in the past year. Surging energy, rents, building materials, automotive, food and supply disruptions have boosted the year-over-year rise in the inflation rate to the fastest pace in decades. While some see this increase as a good economic sign, its increase actually had the effect of reducing real earnings by 2%. Even though unemployment fell in 2021, consumers became more alarmed by the drop in real wages according to surveys.

With money growth likely to slow even more sharply in response to tapering by the FOMC, the velocity of money in a major downward trend, coupled with increased global over-indebtedness, poor demographics and other headwinds at work, the faster observed inflation of last year should unwind noticeably in 2022.

Due to poor economic conditions in major overseas economies, 10- and 30-year government bond yields in Japan, Germany, France, and many other European countries are much lower than in the United States. Foreign investors will continue to be attracted to long-term U.S. Treasury bond yields. Investment in Treasury bonds should also have further appeal to domestic investors, as economic growth disappoints and inflation recedes in 2022.

Thanks to Lacy Hunt 

Thanks again to Lacy Hunt for another excellent Hoisington quarterly review. The above snips are just a small portion of the full article. 

As of this writing, the article is not yet posted for public viewing but should be available at the top link soon.

When Does the Sizzling Economy Hit a Recession Brick Wall?

I addressed many of the same points on January 17 in When Does the Sizzling Economy Hit a Recession Brick Wall?

I discuss productivity, demographics, and unproductive debt.

Something Happened

Something has happened in the last 30 years, which is different from the past,” says Minneapolis Fed president Neel Kashkari.

Yes it has and the Fed is clueless as to what it is.

The answer is unproductive debt is a huge drag on the economy. And the Fed needs to keep interest rates low to support that debt. 

When Does Recession Hit?

If the Fed does get in three rate hikes in 2022, then 2023 or 2024. And it may not even take three hikes.

Also, please see China’ Central Bank Cuts Interest Rates As Consumer Spending Dives

Few believe China GDP statistics.

China posts a GDP target and generally hits it despite questionable economic reports, electrical use, etc., and with a property sector implosion.

Slowing Global Economy

China did not decoupled from the global economy in 2007 and the US won’t in 2022.

For discussion, please see US GDP Forecasts Stumble Then Take a Dive After Retail Sales Data.

Finally, please see The Fed Expects 6 Rate Hikes By End of 2023 – I Don’t and You Shouldn’t Either

*  *  *

Like these reports? If so, please Subscribe to MishTalk Email Alerts.

Tyler Durden
Thu, 01/20/2022 – 19:10



Author: Tyler Durden

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Economics

Target CEO Says Consumers To Shop Less, Stay Home Amid Inflationary Storm

Target CEO Says Consumers To Shop Less, Stay Home Amid Inflationary Storm

Consumer prices soared the most in 40 years in December, a stunning…

Target CEO Says Consumers To Shop Less, Stay Home Amid Inflationary Storm

Consumer prices soared the most in 40 years in December, a stunning 7% from a year earlier that is crushing real wage gains and sending President Biden’s polling numbers to a new record low. The Federal Reserve is expected to embark on an inflation-crushing mission with the first-rate hike expected in March to tame inflation.

According to Target’s top executive, high inflation eating into wage gains is expected to directly impact US consumers who will be forced to drive less, eat at home, and reduce their shopping habits. 

Chief Executive Officer Brian Cornell told attendees at a National Retail Federation event in New York on Sunday that high inflation will derail consumer spending patterns. Many will resort to cheaper generic-brand goods to save money. 

“Some of the historical ways consumers react to inflation will play out again in 2022,” Cornell said.

He noted consumers would “drive fewer miles, and you’ll consolidate the number of times and locations where you shop. You’ll probably spend a little more eating at home versus your favorite restaurant, and you might make some trade-offs between a national brand and an own brand.”

Compared to the last two years of stimulus-fueled retail spending, Cornell expects spending patterns to change. He said a lot about the consumer would be understood in the next “60, 90, 120 days” in adapting to the high inflation environment. 

As part of the rapid recovery, fueled by trillions of dollars in monetary and fiscal aid, prices for cars, gas, food, and furniture rose sharply in 2021. As consumers increased spending, supply chains became snarled, and prices increased further. 

In the new year, US inflation pressures show very little easing, and some economists predict the peak could be nearing. The high inflation problem has led rate markets to price in 4 rate hikes by December, with the first live meeting expected in March. 

Many consumers have never seen anything like this because they weren’t around in the 1970s and early 1980s of high inflation. It only took then-Fed Chair Paul Volcker to increase interest rates to double digits to tame inflation which sent the economy into a deep recession. 

High inflation has put Biden on the spot ahead of midterms. The latest polling data shows the president’s popularity sunk to a new low this week. 

Consumers feel the pinch around them, from the supermarket to the gas station. Cornell’s outlook for the consumer is gloomy, suggesting they might go in hibernation mode to weather the inflationary storm. 

Tyler Durden
Thu, 01/20/2022 – 18:50






Author: Tyler Durden

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Precious Metals

Oklahoma to Consider Holding Gold and Silver, Removing Income Taxes

Legislators in Oklahoma aim to protect state funds with physical gold and silver and remove capital gains taxes from gold and silver transactions  ?…

(Oklahoma City, Oklahoma — January 20, 2022) – An Oklahoma state representative introduced legislation today that would enable the State Treasurer to protect Sooner State funds from inflation and financial risk by holding physical gold and silver.

Introduced by Rep. Sean Roberts, HB 3681 would include physical gold and silver, owned directly, to the list of permissible investments that the State Treasurer can hold. Currently, Oklahoma money managers are largely relegated to investing in low-yield, dollar-denominated debt instruments.

Other than Ohio, no state is currently known to hold any precious metals, even as inflation and financial turmoil accelerate globally. Yes, Oklahoma’s own investment guidance prescribes safety of principal as a primary objective for investment of public funds.

“Currency debasement caused by federal monetary and fiscal policies has created an imminent risk of a substantial erosion in the value of Oklahoma’s investment holdings,” said Jp Cortez, policy director of the Sound Money Defense League.

“With most taxpayer funds currently held in debt paper carrying a negative real return, Oklahoma would be prudent to hedge today’s serious inflation risks with an allocation to the monetary metals.”

HB 3681 simply adds the authority to hold physical gold and silver bullion directly – and in a manner that does not assume the counterparty and default risks involved with other state holdings. Rep. Roberts’ measure does not grant authority to buy mining stocks, futures contracts, or other gold derivatives.

Additionally, HB 3681 prescribes safekeeping and storage requirements. The State Treasurer would hold the state’s bullion in a qualifying, insured, and independently audited depository, free of any encumbrances and physically segregated from other holdings.

Oklahoma has become a sound money hotspot, already earning 11th place on the 2021 Sound Money Index.

The Sooner State ended sales taxes on purchases of precious metals long ago. This week, Sen. Nathan Dahm introduced SB 1480, a measure to remove Oklahoma state income taxes from the exchange or sale of gold and silver sales.

The Sound Money Defense League and Money Metals Exchange strongly support these pro-sound money measures in Oklahoma and are actively working to ensure their success. Tennessee, MississippiKentucky, and Alabama are just a few of the other states fighting their own sound money battles in 2022.

      

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