Fractious Markets & Inflation Fears
“Full fathom five my father lies…”
Fraxious markets as stocks wobble, fears rise, energy prices spike; what’s to worry about? Preparing for inflation would be one thing – but being ready for opportunity is another!
Running into an old chum at Waterloo Station this morning we shared quick notes on markets – our conclusion is… “fraxious”. Excellent…
There are certainly plenty of reasons to… be concerned. Yesterday’s tumble in tech stocks, Facebook being singled out for a particular gubbing later today in Washington, the ongoing weakness in stocks as buyers absorb the news out China (Evergrande is not the only property firm being crushed), oil prices hitting a seven year high with no sign of downside, and even as the US continues to flirt with a potential default the week after next, Democrat leaders are gunning for the Fed. And let’s add a bit of climate panic as extraordinary rains blocked London roads – it’s the end of the world… again. Knightsbridge is flooded! Unheard of!
Fraxious markets? We love them…! When all around are running scared, starting to panic, losing their heads, liquidity has dried up, Harrods is sodden, and further downside seems inevitable… that’s when opportunity is screaming out!
As the fears escalate, remind yourself:
Markets are never as bad as you fear, but seldom as good as you hope.
The trick is picking the winners and losers…
This morning’s John Authors column on Bloomberg makes a fascinating observation: its only in the UK we’re getting really worried about stagflation. He quotes the current energy fears, the deepening logistical crisis, the lack of Europeans to drive our lorries, and concludes its no wonder the Brits are convinced we face galloping inflation and a crushing recession. The only thing that’s booming in the UK is fear!
It’s a fascinating perspective. He might be right. I’m very aware, from doing US podcast guest slots and chatting to US clients that there is a global concern about “stagflationary headwinds”. In the UK the stagflationary gale is very tangible. It affects our mood. At the moment… the classic “We’re doooomed Captain Mainwaring…” vibe dominates our thinking.
Let’s get honest. The imminent collapse of everything in the UK is massively over-hyped, which is probably due to the ruling Conservative Party having their conference this week. The easiest way not to panic about the UK is to not read any UK newspapers or watch the BBC. There is nothing guaranteed to make the nervous more nervy than our media battering ministers with leading questions. (Generally I like UK media – especially when they are fulfilling their proper role of goading and riling self-important politicians. It’s the hours of endless wokery and faux concern that’s so annoying.)
What we need to do is recognise reality.
There is a new spike in gas prices underway this morning as the scrabble for winter fuel continues. One of my colleagues sagely pointed out the price of oil has reached a seven year high, but supply is still far below demand. He pointed out the number of drilling rigs looking for oil is less than half the level it was in 2014 when Oil last skirted with $80. He pointed out demand for petrol is rising – because people haven’t been sharing cars due to the pandemic. The only area where demand for oil is below pre-pandemic levels is Jetoil – airlines have still not recovered. Shipping lanes are at their busiest in decades!
The reality is energy prices are not in a temporary state of shortage – demand will consistently outstrip supply across most energy products through the coming winter and as economies recover. Oil production is still 40% below pre-pandemic peaks. So, let’s stop worrying if energy inflation is real or transient, and figure what we are going to do now it’s here. It was oil prices that triggered the massive stagflation of the 1970s, and this time oil is further constrained by ESG and Climate Change.
When inflation strikes:
Conventional wisdom says buy linkers. Tick.
Conventional wisdom says buy real assets. I love the story of a German businessman taking a wheelbarrow load of cash to the bank. He turned away for a second, and someone nicked the wheelbarrow, leaving the cash on the pavement.
Conventional wisdom says bonds are not a great option under inflation – but, hey, you get your principal back… how much less its worth in relative terms is the question. Corporate debt, Junk and EM is going to lose – returns will be selective.
Conventional wisdom is be selective on equities… Consumer incomes take time to catch up inflation, so demand for goods and services will fall. But, real non-financial correlated assets are in demand. There will always be some bugger wanting to drink Chateau Lafitte with coke…
Inflation is as destructive to companies as it is to people. Demand becomes increasingly less stable and difficult to predict. Many companies which loaded up high debt levels will see that debt inflated away – but Zombie companies which have only survived due to ridiculously low interest rates will struggle with higher rates – at last freeing up the market niches they’ve been blocking.
Conventional wisdom says Gold is a good inflation hedge – which is not necessarily proven, but over time looks to hold.
Unconventional wisdom includes crypto. As I am sitting in our London office writing this one of our nippers (the very smart, clever young people running our funds, and running rings round our prehistoric thinking) has just suggested cryptos must be a good inflation hedge. If he thinks so… My view remains Cryptos are nothing to with hedging inflation – they are speculative pixelated-bollchocks based entirely on the premise there will be a greater fool to buy them.
(That said – I am thinking about a crypto-currency based on a real asset – which I will explain when I’ve got my head around the concept.)
Energy Continues To Lead US Equity Sectors By Wide Margin In 2021
The reboot of energy stocks rolls on in the year-to-date sector horse race, based on a set of ETFs through Tuesday’s close (Oct. 26). The rebound in…
The reboot of energy stocks rolls on in the year-to-date sector horse race, based on a set of ETFs through Tuesday’s close (Oct. 26).
The rebound in the previously faltering energy sector began a month ago. In late-September, CapitalSpectator.com reported that Energy Select Sector SPDR Fund (XLE) regained the lead for the major equity sectors in 2021. That lead has subsequently strengthened through October.
XLE is up an astonishing 61.3% so far this year, or roughly twice the year-to-date gain in our previous report from a month ago. Lifting the fund is a combination of surging oil and gas prices, which in turn is driving bullish earnings expectations amid mounting evidence that higher inflation may persist for longer than previously expected.
Not surprisingly, current conditions have triggered a bullish attitude adjustment for the sector’s outlook, reports Barron’s:
About 80% of all analysts’ profit forecasts for this year and next have been increased, higher than the 74% seen in September, according to Citigroup. That means more profit projections have been increased than reduced in the past month.
The strength of energy’s year-to-date rally is no less conspicuous when you consider that the second-best sector performer this year is far behind. Financial Select Sector SPDR (XLF) is up 39.5% — a strong gain in absolute terms, but nowhere near XLE’s surge.
The US stock market overall is posting an impressive rise this year via SPDR S&P 500 (SPY). But the ETF’s 23.2% increase so far this year pales next to XLE’s advance.
The weakest sector performer this year: Consumer Staples SPDR (XLP), which is higher by a relatively moderate 7.9% year to date. The sector, traditionally considered one of the more resilient, defensive corners of the market, is struggling to keep pace with equities overall (SPY), as this chart of relative performance history shows:
When the line is rising, the broad US equity market (SPY) is outperforming XLP. ON that basis, XLP’s defensive features have remained out of favor for much of the time since the market began recovering from the coronavirus crash in the spring of 2020.
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Investors Brace Themselves for a Flood of Earnings & Fed
Volatility is picking up as investors brace themselves for a flood of earnings announcements this week and the Fed meeting next week. The VIX volatility…
Volatility is picking up as investors brace themselves for a flood of earnings announcements this week and the Fed meeting next week. The VIX volatility index closed up 5.60% on Tuesday even though the S&P was up 0.15%.
Facebook (FB) fell 5% on Tuesday despite better than expected earnings. Dragging on the stock is weaker than expected revenues and reduced expectations for Q4 revenues. The political scrutiny on FB is also not doing shareholders any favors.
FB is down over 20% since September and is close is flirting with the 200-dma. It is currently repeating its price action from March, where it found support and rallied to all-time highs. However, investors may want to be more cautious about the stock for now until price action improves.
What To Watch Today
- 7:00 a.m. ET: MBA Mortgage Applications, week ended Oct. 22 (-6.3% during prior week)
- 8:30 a.m. ET: Advance Goods Trade Balance, September (-$88.3 billion expected, -$87.6 billion in August)
- 8:30 a.m. ET: Wholesale Inventories, month-over-month, September preliminary (1.0% expected, 1.2% in August)
- 8:30 a.m. ET: Durable Goods Orders, September preliminary (-1.1% expected, 1.8% in August)
- 8:30 a.m. ET: Durable Goods Orders, excluding transportation, September preliminary (0.4% expected, 0.3% in August)
- 8:30 a.m. ET: Non-defense Capital Goods Orders, excluding aircraft, September preliminary (0.5% expected, 0.6% in August)
- 8:30 a.m. ET: Non-defense Capital Goods Orders, excluding aircraft, September preliminary (0.5% expected, 0.8% in August)
- 6:00 a.m. ET: Hilton Worldwide Holdings (HLT) to report adjusted earnings of 78 cents per share on revenue of $1.7 billion
- 6:55 a.m. ET: The Coca-Cola Company (KO) to report adjusted earnings of 58 cents per share on revenue of $9.72 billion
- 7:00 a.m. ET: CME Group (CME) to report adjusted earnings of $1.56 per share on revenue of $1.15 billion
- 7:00 a.m. ET: McDonald’s (MCD) to report adjusted earnings of $2.46 per share on revenue of $6.03 billion
- 7:00 a.m. ET: Bristol-Myers Squibb (BMY) to report adjusted earnings of $1.92 per share on revenue of $11.55 billion
- 7:00 a.m. ET: Kraft Heinz (KHC) to report adjusted earnings of 58 cents per share on revenue of $6.07 billion
- 7:30 a.m. ET: Boeing (BA) to report adjusted losses of 17 cents per share on revenue of $16.49 billion
- 7:30 a.m. ET: General Motors (GM) to report adjusted earnings of $1.00 per share on revenue of $26.45 billion
- 4:00 p.m. ET: Align Technology (ALGN) to report adjusted earnings of $2.60 per share on revenue of $977.67 million
- 4:05 p.m. ET: Ford (F) to report adjusted earnings of 27 cents per share on revenue of $31.56 billion
- 4:05 p.m. ET: eBay (EBAY) to report adjusted earnings of 89 cents per share on revenue of $2.46 billion
- 4:10 p.m. ET: ServiceNow (NOW) to report adjusted earnings of $1.39 per share on revenue of $1.48 billion
- 4:15 p.m. ET: United Rentals (URI) to report adjusted earnings of $6.73 per share on revenue of $2.59 billion
- 4:20 p.m. ET: Xilinx (XLNX) to report adjusted earnings of 91 cents per share on revenue of $891.69 million
- 4:30 p.m. ET: O’Reilly Automotive (ORLY) to report adjusted earnings of $7.18 per share on revenue of $3.30 billion
Courtesy of Yahoo
Waste Management (WM) Earnings
WM third-quarter GAAP EPS is short of the consensus at $1.28 versus an expected $1.33. Revenue of $4.7B (+21% YoY) topped expectations of $4.55B, driven by volume growth and increased yield. Management raised guidance for FY21 revenue growth to 17%-17.5% from 15.5%-16% previously. The new guidance is above the consensus of 16% YoY. Accelerating cost inflation was mentioned as a headwind, but the company remains on track to meet its full-year targets according to the CEO. The stock was down .86% yesterday following the release. We hold a 1% position in the Equity Model.
Below is the technical overview from RIAPRO.NET
Raytheon Technologies (RTX) Earnings
RTX third-quarter GAAP EPS of $0.93, is just above the consensus of $0.91. Revenue of $16.2B (+8.1% YoY) came in short of expectations of $16.36B. Guidance for FY21 revenue is now $64.5B from a prior range of $64.4B-$65.4B. This is slightly below the consensus of $65.2B. Guidance for FY21 adjusted EPS is now $4.10-$4.20 from $3.85-$4.00 previously; the consensus is $4.06. Management commented that a rebound in air travel was the impetus for raising earnings guidance. Despite the upbeat guidance, the stock traded 2.15% lower yesterday due to gloomy forecasts from its competitor, Lockheed Martin (LMT). We hold a 1.5% position in the Equity Model.
Seasonality Still In Play
Seasonality is still playing as stocks continue their upward advance. As we noted previously, with the Fed announcing “taper” next week, inflation running hotter than expected, and stocks back to more extreme overbought conditions, the upside is likely limited near term. Some risk management is likely wise.
Yesterday we noted that Tesla’s market cap increased by approximately $100 billion. To put the gain in context, consider yesterday’s increase in market cap is worth about 1.5x the total value of Ford and about half of the entire domestic auto industry. Also interesting, Elon Musk added nearly $30 billion of personal wealth yesterday. He is now supposedly worth more than Exxon.
The graph below shows Tesla is valued at 42% of the entire auto industry despite having a very small fraction of total sales/revenue. Ford and GM recently reported annual sales of $137 and $139 billion respectively. Tesla’s latest report shows $46 billion in sales. Simply, the market is betting heavily that TSLA will be the dominant leader in auto sales over the next five to ten years. Anything short of 50% market share will likely be a disappointment for shareholders. If you do not buy into the prospects we offer caution. Tesla is one of the hottest stocks in the market, so selling or shorting the company may be painful in the short run.
Consumers Are Fretting
The Langer Consumer Comfort Index is a high-frequency confidence index. While lesser followed than the University of Michigan survey or the Conference Board’s consumer survey, it provides another data set to assess consumer attitudes. Given personal consumption traditionally accounts for two-thirds of economic growth, this measure is essential to follow.
In its most recent October 21st report, Langer notes: “Consumer sentiment continued down this week, dropping to nearly a seven-month low as Americans’ assessments of their personal finances and the buying climate extended their largest declines since early in the coronavirus pandemic.”
At 49.7, the Index is well above its March 2020 lows of 35 but a ways off its pre-pandemic highs near 70. For context, the Langer Index looks similar to the Conference Board Survey, sitting between post-pandemic highs and lows. On the other hand, the University of Michigan Sentiment Index is now at its lowest level since the pandemic and the lowest level in ten years. The importance of consumer confidence is not just economic. As their graph below shows, there is a strong correlation between the changes in stocks prices and consumers’ sentiment. Recently, stocks have soared despite weakening confidence.
The post Investors Brace Themselves for a Flood of Earnings & Fed appeared first on RIA.
Gold price outlook with November Fed meeting in focus
Gold price is still below $1,800 after dropping below this crucial level in the previous session. Investors’ focus is on Fed’s meeting in the coming…
Gold price is still below $1,800 after dropping below this crucial level in the previous session. Investors’ focus is on Fed’s meeting in the coming week.
November’s Fed meeting
In the ensuing sessions, gold price will likely record subtle movements as investors avoid huge bets ahead of the FOMC meeting scheduled for the first week of November. Fed officials are set to taper the $120 billion monthly asset purchases as inflationary pressures persist. November’s meeting will be the beginning of a path to end the bond-buying program by mid- next year.
Since the beginning of the year, the US central bank has downplayed concerns of the economy overheating by indicating that the rise in prices would be temporary. However, the officials appear more concerned about the persistent rise in inflation.
During a virtual conference held in the past week, the Fed Chair, Jerome Powell acknowledged that supply constraints have worsened. As a result, there are “more-persistent bottlenecks” that are pointing to higher inflation. Subsequently, Powell noted that the Fed needs to be flexible in coming months in order to position its policy to suit the various possible scenarios.
Notably, investors are evaluating the prospects of interest rate hikes. Based on the CME Group-tracked futures market prices, the likelihood of at least two rate hikes by the end of 2022 surged to 75% in the past week. The figure is a considerable rise from 20% after September’s FOMC meeting.
Ahead of November’s Fed interest rate decision, $1,800 will remain a crucial level for gold price. Typically, precious metals have an inverse correlation with the value of the US dollar. The dollar index has held steady above the major resistance-turn-support zone of $93.50 since the beginning of October. The index tracks the value of the greenback against a basket of six currencies.
With a steady dollar, the precious metal will likely have its gains curbed at October’s high of $1,814.13. Besides, eased stimulus and rise in interest rates is bound to boost Treasury yields. This would further exert pressure on the non-yielding bullion.
However, gold price downward movements may be limited. With the ongoing economic risks, its safe-haven appeal and status as a hedge against inflation will probably boost it above September’s low of $1,720.
The post Gold price outlook with November Fed meeting in focus appeared first on Invezz.
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