Posts filed under ‘Uncategorized’

Heartburn Pains After Digesting Market Gains

After gorging on +9% gains in the stock market (S&P 500 index) during July, investors suffered some heartburn pain in August (-4%). The indigestion really kicked in after Federal Reserve Chairman, Jerome Powell, gave a frank and candid outlook during his annual monetary policy speech at Jackson Hole, Wyoming. His key takeaways were that further interest rate increases are necessary to control and bring down inflation. And these economically-slowing measures, coupled with the Fed’s $95 billion in quantitative tightening policies (QT), will according to the Fed Chairman, “bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

But not everything is causing stomach pains. Yes, inflation is elevated (the rate declined to 8.5% in July from 9.1%), but there are multiple signs that overall prices are peaking. For example, gasoline prices have declined for 11 consecutive weeks to pre Russia-Ukraine invasion levels around $3.81/gallon nationally. There are also signs that housing prices, rent, used car prices, and other commodities like wheat, beef, and copper are all declining in price, as well. Even Bitcoin and other cryptocurrencies are joining in the deflation parade.

And while the Fed is doing its darnedest to bring a halt to gut-wrenching inflation, the job market remains on fire (see chart below). The unemployment rate registered in at a near a generational-low of 3.5% last month, but we will receive a fresh, new figure this week to see if this trend continues.

Source: Trading Economics

The economy’s ravenous appetite for workers can also be found in the just-released JOLTS job opening data (see chart below), which shows there are 11.2 million job openings, a total that is almost double the number of available workers (5.7 million).

Source: Calculated Risk

Stimulus – Trillion Style

The subject of politics is not my strong suit, so perhaps only time will tell whether the net result of two large pieces of government legislation totaling more than $1 trillion (Inflation Reduction Act and Student Loan Forgiveness) will accelerate growth in the economy (Real GDP) or hasten the pace of inflation.

More specifically, the $565 billion Inflation Reduction Act is designed with the intent of investing in clean energy and healthcare initiatives, while negotiating lower pharmaceutical prices with drug companies, and raising tax revenues. The key measures planned in the legislation to fund the spending and forecasted deficit reduction are a minimum corporate tax, the termination of the carried interest tax loophole, and a doubling of the IRS (Internal Revenue Service) budget to hunt down tax dodgers.

With respect to the Student Loan Forgiveness Plan, the cost of the bill is estimated to be between $469 billion to $519 billion over a 10-year budget window, according to the University of Pennsylvania. The debt cancellation will apply to lower income individuals (earning less than $125,000 annually) with the potential of erasing debt of $10,000 – $20,000 per eligible person.

While the government passes various investing, spending, and tax-raising initiatives, corporations continue to crank out record results (see profit charts below), despite talks of an impending recession (see last month’s article, Recession or Mental Depression?).

Source: Yardeni.com

Pessimists point to the economic strength as only temporary, as they brace for the Fed’s interest rate hiking medicine to take larger effect on the patient. Optimists point to the durability of corporate profits, relatively low interest rates (3.13% yield on the 10-Year Treasury Note), positive Q3 – GDP growth estimates of +1.6%, and reasonable valuations (17x Forward Price/Earnings ratio), given the evidence of peaking and declining inflation.

In view of all the current countervailing factors, the near-term volatility will likely create a lot of stomach-churning uneasiness. However, in the coming months, if it becomes clearer the Fed is closer to the end of its rate-hiking cycle and inflation subsides, you might be gleefully enjoying your tasty gains rather than complaining of financial heartburn and headache pains.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in BRKA/B or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact Page.

September 1, 2022 at 5:48 pm Leave a comment

Recession or Mental Depression?

Recession is when your neighbor loses his job. Depression is when you lose yours.” -Ronald Reagan

So far, 2022 has been a volatile year in the financial markets, and as a result, investors have been on an emotional rollercoaster, questioning whether we are going into a recession, or are already in one? Rampant inflation caused by COVID, supply chain disruptions, the Russia-Ukraine conflict, monetary policy, fiscal policy, wage increases, and other factors have been contributing to all the anxiety. Economic data (GDP – Gross Domestic Product) just released last week showed the economy contracting by -0.9% in the 2nd quarter after declining -1.6% in the first quarter of 2022 (see chart below).

Source: The Wall Street Journal

Typically, economists have defined a recession by two consecutive quarters of negative GDP growth, which we have now technically achieved, as shown in the chart above. But, not so fast. The official, mutually agreed upon arbiter of a U.S. “recession” is the NBER (National Bureau of Economic Research), which defines a recession more broadly. In order to prevent recession declaration mistakes, the NBER typically waits until long after the fact before making a definitive recession proclamation, in part because the recently released data could eventually be revised higher to a positive level. Revisions, both positive and negative, are commonplace in the never-ending flood of economic data. In addition to negative GDP output figures, the NBER committee considers other factors. For example, household income and unemployment, which by many measures remains white hot and currently remains at generationally low levels (3.6% unemployment rate) are considered when classifying a recession (see the historically low unemployment claims chart below). 

Source: CalculatedRisk.com

So, this begs the question, “Does it really matter whether we are in a recession or not?” The short answer is “no”. The dynamics that really matter are the ones relating to the future. Ultimately, the stock market is forecasting how much worse or better will the economy become? And how long will the pain last? Getting correct answers to these questions is always challenging, but what we do know is that we have had 12 recessions since World War II, and our country is batting 1,000% on recoveries. And the economy has grown stronger coming out of each recession, every time. Therefore, now is not the time to get depressed and climb under a rock. Rather, it’s time to sharpen your pencil and go bargain hunting for opportunities during these corrections.

Well, investors (at least the ones still remaining) came out of their caves this month and actually bought stocks. For the month, the S&P 500 impressively climbed by +9.1% and the NASDAQ index soared by +12.4%. How did we suddenly go from gloom and doom to boom and zoom this month? For starters, although inflation has remained stubbornly high, there are signs of a disinflation light at the end of the tunnel. Anecdotally, we see gasoline prices coming down, while housing prices are softening and various food prices are beginning to come down from the stratosphere. On the economic data front, the Federal Reserve’s inflation measure of choice (Core PCE) appears to be stabilizing as well (see chart below). Core PCE for June rose by 4.8%, but this metric was down from 5.2% in March, and it is up a smidge from the 4.7% figure reported during May.

Source: The Wall Street Journal

Another factor contributing to investor optimism this month revolves around the Fed’s monetary policy. Just last week, Fed Chairman Jerome Powell and the members of the FOMC (Federal Open Market Committee) decided to set the Fed Funds target higher by +0.75% to a range of 2.25% – 2.50%, the fourth increase this year (see chart below). For many traders, they interpreted this move as getting one step closer to a terminal rate in the 3.0% – 4.5% range by next year. In other words, a broad number of market participants are beginning to view the rapid escalation of rates this year as a way of accumulating dry powder for potential stimulative interest rate cuts in 2023, if the economy continues to weaken or stagnates further.

Source: The Wall Street Journal

There are plenty of challenging forces surrounding us, including an overhanging recession, that could push you into a depression, however the ability to invest in certain areas of the market where prices are on sale should bring plenty of happiness. As investing legend Peter Lynch stated, “I’m always more depressed by an overpriced market in which many stocks are hitting new highs every day than by a beaten-down market in a recession.” Said differently, no matter what transpires in the coming months, “This too shall pass.”

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in BRKA/B or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact Page.

August 4, 2022 at 6:29 pm Leave a comment

Even Winning Teams Occasionally Lose

The stock market has been a winning team for years, generating outsized returns for investors. But so far this year, the winning streak appears to be coming to an end. For 2022, the S&P 500 index is down -21%, including -8% last month. However, since 2008, the stock market has generally been on a consistent tear racking up a record of 10 wins, 2 losses (2015 and 2018), and one tie (2011). In recent years, the U.S. stock market has been winning by a large margin (2019: +29%, 2020: +16%, 2021: +27%) and a significant contributor to the team’s win streak has been the Federal Reserve, or the designated hitter (DH).

Jerome Powell, the Fed Chair, has been a very effective clean-up hitter for the stock market, not only leading the stock market team to victories, but also appreciation in almost all global-risk asset classes. By keeping interest rates (the Federal Funds Rate target) essentially at 0% over the last few years, since the initial COVID pandemic outbreak, many investors are blaming Mr. Powell for elevated inflation rates. If that were truly the case, then we probably wouldn’t see the ubiquitous inflation globally, as we do now. Just as you would expect with any baseball team, any single player does not deserve all the credit for wins, nor should any single player receive all the blame for losses – the same principle applies to the Federal Reserve.

Regardless, the stock market’s best hitter is now injured. In addition to pushing interest rates higher, the Fed is hurting the team through its monetary policy of quantitative tightening or QT (i.e., selling bonds off the Fed’s balance sheet). Theoretically, QT should cause interest rates to move higher, all else equal, and thereby slow down growth in the economy, and help tame out-of-control inflation.

The stock market was also thrown a curve ball when Russia invaded Ukraine, which added gasoline to an already flaming inflation fire. Globally, consumers and businesses have witnessed exploding oil/gasoline prices, in addition to escalated food prices caused by a lack of grain and other commodity exports out of Ukraine.

Lastly, a wild pitch has been thrown at the U.S. stock market by China with its zero-COVID policy, which has essentially shut down the world’s 2nd largest economy and further delayed the full reopening of the global economic game. As a result of China’s hardline lockdown stance, global supply chain disruptions have intensified and import prices have mushroomed higher.

Although this all sounds like horrible news, in the game of investing, nobody wins all the time. As history teaches us, the stock market is generally up around 70% of the time. It just happens to be that we are in the middle of a 30% losing period.

Bad News Does Not Mean Bad Stock Market

The majority of economists, strategists, and talking heads on television are forecasting a recession in our economy, either this year or next. This should come as no surprise to any experienced investor, as history teaches us that recessions occur on average about twice every decade. Long-term investors also understand that stock prices do not always just go up on good news and down on bad news. Stocks can go down on good news, and up on bad news. In fact, over the last 13 years, since the bottom of the 2008-2009 financial crisis, the stock market has increased about six-fold (even after this year’s -21% correction) in the face of some horrendously scary headlines (also see chart below):

·       Ukraine-Russia

·       COVID

·       Elections / Capitol Insurrection

·       Exit from Afghanistan

·       Impeachment

·       China Trade War & Tariffs

·       Inverted Yield Curves

·       N. Korea Missile Launches

·       Brexit

·       ISIS in Iraq

·       Ebola

·       Russia Takeover of Crimea

·       Double Dip Recession Fears

·       Eurozone Debt Crisis

S&P 500 Index (1997 – 2022)

Source: TradingEconomics.com

Despite the recent headwinds in the stock market, not all the news is bad. Here are some tailwinds:

  • PROFITS: Corporate profits remain at or near record levels.
Source: Yardeni.com
  • INFLATION: Inflation appears to be cooling as evidenced by declining commodity prices (TR Commodities CRB Index).

CRB Commodities Index (2022)

Source: TradingView
  • PRICES: Valuations have come down significantly – Price/Earnings ratio of 15.9 (i.e., stock prices are on sale).
Source: Yardeni.com
  • SENTIMENT: Sentiment remains fearful – a contrarian buy indicator (an elevated VIX – Volatility Index can signal buying opportunities). As Warren Buffett says, “Be fearful when others are greedy, and greedy when others are fearful.”

VIX – Volatility Index (2021 – 2022)

Source: Macrotrends

Even though the U.S. stock market has been a long-term winner, investors have been betting against the winning team by selling stocks. As mentioned earlier, recessions, if we get one, are common and nothing new. The -21% correction in stock prices is already factoring in a mild recession, so we have already suffered near-maximum pain. Could prices go lower? Certainly. But should you quit a 26-mile marathon at mile 25 because the pain is too intense? In most instances, the answer should absolutely be “no” (see also No Pain, No Gain). Eventually, the Fed will stop raising interest rates, inflation will cool, the Russia-Ukraine war will be resolved, and solid growth will return. While many people are betting the stock market will lose this year, many long-term investors recognize betting on stock market success is a winning strategy over the long-run, especially when prices are on sale.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in BRKA/B or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

July 1, 2022 at 3:47 pm Leave a comment

The Rocket Science of Investing – Armageddon Yet to Arrive

In the face of an incredibly scary global pandemic, the stock market completed a phenomenal year (S&P 500 rocketed +27%) closing at a new all-time monthly record high, after also posting incredible results in 2020 (+16%) and 2019 (+29%). Naturally, the follow-on question I get most is, “What about next year?” And to this question, I annoyingly provide the same answer as the most successful long-term investor of all-time, Warren Buffett, “I have no idea.”

But with that said, despite lacking the skill of 100% clairvoyance, my investment firm Sidoxia Capital Management and our strategies have performed quite well over the long-run for numerous reasons. As it turns out, the power of compounding, coupled with low-cost, tax-efficient investing can produce quite spectacular results. Throw in some good stock picking, and that is frosting on a cake recipe of success. Thank you Amazon.com Inc. +5,544%, Apple Inc. +2,394%, and Alphabet Inc. 880%, among many other fruitful investments since Sidoxia’s inception in 2008.

Lessons Learned Over 30 Years

I’ve been doing this thing called investing for about three decades now and I’ve learned a few things over the years, most prominently that investing is not rocket science. Warren Buffett has correctly described investing as similar to dieting. In other words, both are easy to understand but difficult to execute because they require discipline.

If you want your investments to succeed, consider some of these investing nuggets:

  • Invest for the Long-Run: Markets move in all directions, but if you can avoid myopia and short-termism, you will be much better positioned for investment success.
  • Avoid Investment Fads: Invest where you get the most bang for your buck – stick to sound investments selling at reasonable prices. Stay away from expensive, speculative, frothy areas, or at least keep that exposure of your portfolio to a minimum.
  • Turn off the TV and Silence your Phone: Regardless of what you hear, the world is not ending. COVID, inflation, and Federal Reserve monetary policies may dominate the headlines du jour but this is nothing new. The stock market has increased more than 7-fold in value since the 2009 stock market lows, even in the face of many frightening news stories (see Ed Yardeni’s list of panic attacks since 2009).
  • Understand Stock Prices Do Go Down: We have been spoiled in recent years with above-average returns, but that does not mean you need to panic when prices do decline or that you need to try to time the market. There can be years when stock prices do not appreciate (reference the post-2000 and post-2008 periods), however, those who wisely rebalanced and dollar-cost-averaged positions in their portfolio were handsomely rewarded for their discipline and patience over the long-run.
  • Volatility Can Be a Good Thing: Periods of volatility offer you the ability to rebalance your portfolio and take advantage of opportunities that disruption creates.
  • Optimize Your Investments Based on Your Time Horizon and Risk Tolerance: At Sidoxia, we customize investment portfolios to meet our clients’ unique circumstances and risk appetite. It’s important to have your investments diversified across a broad array of asset classes in a low-cost, tax efficient manner.
  • Get Assistance: If you don’t have the time, discipline, or interest to manage your investments, find an experienced professional who is a fiduciary (i.e., someone who legally places your interests first) and implements time-tested investment strategies. Sidoxia should be able to assist you in identifying an appropriate investment manager. 😉

What Now for 2022?

As I made clear earlier, at Sidoxia, we do not attempt to predict the directions of markets, but rather we look to opportunistically take advantage of many different dynamic areas that we believe provide the best risk-adjusted return potential for our clients.

However, although we freely admit we are not Nostradamus, we do closely follow a wide spectrum of areas in financial markets to best position our investments. Here are some thoughts on some hot-button issues that are top-of-mind as we enter 2022.

Stocks Remain Attractive: Stocks are still attractively priced broadly considering where interest rates stand today. Most people don’t realize that stock prices are actually cheaper today than they were a year ago because earnings will be up roughly +50% in 2021 (see chart below) and stock prices are only up +27%. Stated differently, the price of the market as measured by the forward price-earnings ratio (P/E) has declined, even though the stock market has melted up. Under a different lens, stocks are also attractively priced if you consider bonds are generally yielding 1-2% versus the 4-5% on stocks as measured by the earnings yield of the S&P 500 index (corporate earnings/price of the index), which can be calculated as an inverse P/E ratio. Regardless, if stock prices do indeed decline this year, while bond yields remain in the same general ballpark, then stocks will only become even more attractive.

Source: Yardeni Research

Federal Reserve Tightening Doesn’t Mean Game Over for Stocks: We have seen this movie before (see chart below). What happened the last time quantitative easing (QE) stopped and the Fed raised its Federal Funds interest rate target? Ten-year interest rate yields went down, and stock prices went up – not necessarily immediately, but ultimately investors were compensated for not knee-jerk selling.

Source: Yardeni Research

Inflation Does Not Appear to Be Spiraling Out of Control: Just take a look at the paltry yield of the 10-year Treasury Note, currently at 1.51%. And please do not just consider the low interest rates here in the U.S., but also internationally in markets like Germany with negative 10-year interest rates (-0.18%) or near-0% interest rates in Japan (0.07%). If inflation were indeed considered a systemic risk, global yields in large developed markets would not be hovering around 0%. Furthermore, COVID-related supply chain bottlenecks appear to be abating. As you can see from the chart below, the average business delivery times have been coming down in recent months as supply disruptions subside – an improving trend for overall prices.

Source: Yardeni Research

The Global Pandemic Deserves Watching: There are plenty of reasons to remain concerned, however science and natural immunity may have brought us closer to neutralizing this health crisis. A worldwide focus on creating vaccines, antiviral drugs, monoclonal antibodies, and other COVID treatments has allowed the global health community to more effectively treat those infected with COVID, while simultaneously lowering the number of related hospitalizations and deaths. There is even hope for areas that have lower vaccination rates than the U.S., for example India (see chart below), which you can see has experienced a dramatic fall-off in COVID cases in part because of the large number of previous infections and subsequent natural immunity created.

Source: Google

There are always talking heads and so-call pundits predicting Armageddon in the stock market, but as you can see from the facts presented, record highs in the stock market aren’t currently painting this picture for 2022. Profits have been gargantuan, interest rates remain near generational lows, valuations remain reasonable, and there are reasons to be optimistic regarding the COVID pandemic. Investing is never easy, but it is not rocket science, if you remain disciplined and patient. Follow this advice and your portfolio should benefit in 2022 and beyond.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (January 3, 2022). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in PFE and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

January 3, 2022 at 3:42 pm 1 comment

No Red Blood, Just Green Flood

Normally, investors equate the month of October with scary, blood-curdling screams because horrifying losses during the 1929 and 1987 crashes occurred during this month. Fortunately, for those invested in stocks, they experienced the opposite this last month – a flood of green (new all-time record highs), despite a whole host of frightening factors, including the following:

·       Inflation

·       Supply chain disruptions

·       Federal Reserve monetary policy

·       COVID variants

·       Evergrande’s impact on China and commercial real estate

·       Cryptocurrency volatility

·       Expanding government deficits and debt (stimulus/infrastructure)

·       Government debt ceiling negotiations

·       Declining corporate profit margins

·       Meme stocks

·       And more…boo!

Even though this Halloween season has introduced these many spooky fears, investors still experienced a sugar-high during October. More specifically, the S&P 500 catapulted +6.9% this month (+22.6% Year-to-Date), Dow Jones Industrial Average +5.8% (+17.0% YTD); and NASDAQ +7.3% (+20.3% YTD). With the COVID Delta variant subsiding (see chart below), economic activity rising (Q4 GDP is estimated at +4.8%), and corporate profits going gang busters (33% growth and 84% of corporations are beating Q3 estimates), it should come as no surprise that stock market values continue to rise.

Source: Calculated Risk

As I mention regularly to my readers, there is never a shortage of things to worry about when it comes to your investments, money, and savings. Emotions tend to highjack rational reasoning as non-existent boogeymen scare people into do-nothing decision-making or suboptimal choices. Investing for the long-run requires dedication and discipline, and if you do not have the time and fortitude to do so, it behooves you to find an experienced, independent professional to assist you.

Rather than getting spooked by supply chain fears and inflation plastered all over the newspapers and media outlets, the real way to compound wealth over the long-term is to do what Warren Buffett says, and that is “buy fear, and sell greed.” Unfortunately, our Darwinian instincts embedded in our DNA are naturally designed to do the contrary…”buy greed, and sell fear.” The goal is to buy low and sell high (not buy high and sell low).

Yes, it’s true that over the last year, semiconductor lead times have almost doubled to 22 weeks, and Chinese container shipping costs have about increased 10-fold to over $20,000 (see charts below). However, the economic laws of supply and demand remain just as true today as they did in 1776 when Adam Smith wrote Wealth of Nations (see also Pins, Cars, Coconuts & Chips). Chip makers are building new fabs (i.e., manufacturing plants) and worker shortages at the ports and truck driver deficiencies are slowly improving. Supply scarcity and higher prices may be with us for a while, but history tells us betting against capitalism isn’t a wise decision.

Source: The Wall Street Journal

Not worrying about all the economic goblins and witches can be difficult when contemplating your investments and savings. Nevertheless, as I have consistently reminded my investors and readers, the key pillars to understanding the health of the investment environment are the following (see also The Stool):

·       Interest rates

·       Earnings (Corporate profits)

·       Valuations (How cheap or expensive is the market?)

·       Sentiment (How greedy or fearful are investors?)

The good news is that a) interest rates are near historically low levels; b) corporate profits are on a tear (+33% as mentioned above); c) valuations have come down because profits have grown faster than stock price appreciation; and d) sentiment remains nervous (a good thing) as measured by the massive inflows going into low (negative) yielding bonds. If you consider all these elements, one should not be surprised that we are at-or-near all-time record highs. Obviously, these investment pillars can reverse directions and create headwinds for investors. Until then, don’t be startled if there is more green flood rather than red blood.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (November 1, 2021). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

November 1, 2021 at 4:15 pm Leave a comment

Cash Is Trash

The S&P 500 stock market index took a breather and ended its six-month winning streak, declining -4.8% for the month. Even after this brief pause, the S&P has registered a very respectable +14.7% gain for 2021, excluding dividends. Nevertheless, even though the major stock market indexes are roaming near all-time record highs, FUD remains rampant (Fear, Uncertainty, Doubt).

As the 10-Year Treasury Note yield has moved up to a still-paltry 1.5% level this month, the talking heads and peanut gallery bloggers are still fretting over the feared Federal Reserve looming “tapering”. More specifically, Jerome Powell, the Fed Chairman and the remainder of those on the FOMC (Federal Open Market Committee) are quickly approaching the decision to reduce monthly bond purchases (i.e., “tapering”). The so-called, quantitative easing (QE) program is currently running at about $120 billion per month, which was established with the aim to lower interest rates and stimulate the economy.  Now that the COVID recovery is well on its way, the Fed is effectively trying to decrease the size of the current, unruly punch-keg down to the volume of a more manageable punch bowl.

Stated differently, even when the arguably overly-stimulative current bond buying slows or stops, the Federal Funds Rate is still effectively set at 0% today, a level that still offers plenty of accommodative fuel to our economy. Although interest rates will not stay at 0% forever, many people forget that between 2008 and 2015, the Fed Funds Rate stubbornly stayed sticky at 0% (i.e., a full punch bowl) for seven years, even without any spike in inflation.

Because the economy continues to improve, current consensus projections by economists show the first interest rate increase of this cycle (i.e., “liftoff”) to occur sometime in 2022 and subsequently climb to a still extraordinarily low level of 2.0% by 2024 (see “Dot Plot” below). For reference, the projected 2.0% figure would still be significantly below the 6.5% Fed Funds Rate we saw in the year 2000, the 5.3% in 2007, or the 2.4% in 2019. If history is any guide, under almost any scenario, Chairman Powell is very much a dove and is likely to tap the interest rate hike brakes very gently.

Source: Seeking Alpha

Low But Not the Lowest

In a world of generationally low interest rates, what I describe as our low bond yields here in the United States are actually relatively high, if you consider rates in other major industrialized economies and the trillions of negative-interest-rate bonds littered all over the rest of the world (see August’s article, $16.5 Trillion in Negative-Yielding Debt). Although our benchmark government rates are hovering around 1.5%, as you can see from the chart below, Germany is sitting considerably lower at -0.2%, Japan at 0.1%, France at 0.2%, and the United Kingdom at 1.0%.

Source: Yardeni Research & Haver Analytics

Taper Schmaper

As with many government related policies, the Federal Reserve often gets too much credit for successes and too much blame for failures, as it relates to our economy. I have illustrated the extent of how globally interconnected our world of interest rates is, and one taper announcement is unlikely to reverse a four-decade disinflationary declining trend in interest rates.

Back in 2013, after of five years of quantitative easing (QE) that began in 2008, investors were terrified that interest rates were artificially being depressed by a money-printing Fed that had gone hog-wild in bond buying. At that time, pundits feared an imminent explosion higher in interest rates once the Fed began tapering. So, what happened after Federal Reserve Chairman Ben Bernanke broached the subject of tapering on June 19, 2013? The opposite occurred. Although 10-Year yields jumped 0.1% to 2.3% on the day of the announcement, interest rates spent the majority of the next six years declining to 1.6% in 2019, pre-COVID. As COVID began to spread globally, rates declined further to 0.95% in March of 2020, the day before Jerome Powell announced a fresh new round of quantitative easing (see chart below).

Source: Trading Economics (annotations by Sidoxia Capital Management)

Obviously, every economic period is different from previous ones, and fearing to fall off the floor to lower interest rate levels is likely misplaced at such minimal current rates (1.5%). However, panicking over potential exploding interest rates, as in 2013 (which did not happen), again may not be the most rational behavior either.

What to Do?

If interest rates are low, and inflation is high (see chart below), then what should you do with your money? Currently, if your money is sitting in cash, it is losing 4-5% in purchasing power due to inflation. If your money is sitting in the bank earning minimal interest, you are not going to be doing much better than that. Everybody’s time horizon and risk tolerance is different, but regardless of your age or anxiety level, you need to efficiently invest your money in a diversified portfolio to counter the insidious, degrading effects of inflation and generationally low interest rates. The “do-nothing” strategy will only turn your cash into trash, while eroding the value of your savings and retirement assets.

Source: Calafia Beach Pundit

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (October 1, 2021). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

October 1, 2021 at 1:34 pm 1 comment

Rising Tide Lifts All COVID Boats

While COVID cases have been sinking here in the United States, new jobs are rising (559,000 in May), corporate profits are rising, housing prices are rising, commodities are rising, consumer confidence is rising, the economy (i.e., GDP) is rising, and stock prices are rising. More specifically, the S&P 500 was up +2.2% last month (+14.4% for the year), the NASDAQ climbed even faster +5.5% (+12.5% for 2021), and the Dow Jones Industrial Average was flat (+12.7% year-to-date).

Although the economic tide may be lifting all boats, there is a small leak spreading in the boat in the form of inflation. Rising prices can slowly sink all boats by eroding away income and wealth creation. Fortunately, Jerome Powell, the Federal Reserve Chairman is doing his best to patch the inflation hole by signaling an end to Quantitative Easing and eventually initiating interest rate hikes by 2023. Inflation is currently running hot at 5% over the last 12 months (see chart below), but the long-term trajectory remains consistent with 2% trendline growth (see Calafia Beach Pundit).

Source: U.S. Inflation Calculator

Gas prices certainly have not gone down as you can see from the gasoline data below from GasBuddy.

The Fed still perceives inflation as temporary (i.e., “transitory”) due to short-lived, supply-related bottlenecks caused by a surge in demand after the broad, post-COVID economic reopening. Restaurants are filled; hotels and flights are packed; cruise ships are back out at sea; and workers are returning to the office. All these factors are causing a big swell in demand for goods and services, while suppliers are finding it difficult to hire workers fast enough to meet the flood of orders. Just last week, American Airlines (ticker: AAL) canceled 950 flights in part due to its short-staffing and inability to meet the avalanche of demand.

Infrastructure Spending Serves as Life Jacket

The U.S. economy has been anchored by increased federal debt but Congress has opened the spending spigots with trillions of dollars in additional stimulus spending. Most recently, President Biden has coalesced an agreement on a $1.2 trillion bipartisan infrastructure bill with the goal of further aiding the economic recovery from the 2020 recession. But as you can see from the chart below, there still remains a multi-trillion dollar deficit between spending and tax revenues. If the gap does not narrow from more measured spending and/or accelerated tax revenues, then the debt issue will only become greater.

Source: Calafia Beach Pundit

Fortunately for the government and Americans, interest rates are near historically low levels – the monthly yield on the 10-Year Treasury Note closed at 1.44%. Given these dramatically low interest rates, the government is able to shoulder larger amounts of debt just like an individual is able to hold a larger mortgage on his/her house if the interest rate is at 1% rather than 10%. The chart below illustrates that despite record debt levels, the interest payments being made on this debt is at 60-year low levels.

Source: Calafia Beach Pundit

The post-COVID recession recovery continues, and this rising tide is lifting most sectors of the economy that were sinking 15 months ago. To meet this rising tide of demand, employers continue to hire. Even with millions of new jobs added in recent months, there are a multi-decade number of job openings (9.3 million) – see 2000-2021 chart below. The expansion won’t last forever, but until the next slowdown, investors are “all aboard!”

Source: Bureau of Labor Statistics

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (June 1, 2021). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in AAL or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

July 1, 2021 at 9:48 am 1 comment

Consumer Confidence Flies as Stock Market Hits New Highs

As the economy starts reopening from a global pandemic that is improving, consumers and businesses are beginning to see a light at the end of the tunnel. The surge in the recently reported Consumer Confidence figures to a new one-year high (see chart below) is evidence the recovery is well on its way. A stock market reaching new record highs is further evidence of the reopening recovery. More specifically, the Dow Jones Industrial Average catapulted 2,094 points higher (+6.2%) for the month to 32,981 and the S&P 500 index soared +4.2%. A rise in interest rate yields on the 10-Year Treasury Note to 1.7% from 1.4% last month placed pressure on technology growth stocks, which led to a more modest gain of +0.4% in the tech-heavy NASDAQ index during March.

Source: MarketWatch

Comeback from COVID

With a combination of 150 million vaccine doses administered and 30 million cumulative COVID cases, the U.S. population has creeped closer toward herd immunity protection against the virus and pushed down hospitalizations dramatically (see chart below).

Source: Centers for Disease Control (CDC)

Also contributing to investor optimism have been the rising values of investments and real estate assets thanks to an improving economy and COVID case count. As you can see from the chart below, the net worth of American households has more than doubled from the 2008-2009 financial crisis to approximately $130 trillion dollars, which in turn has allowed consumers to responsibly control and manage their personal debt. Unfortunately, the U.S. government hasn’t been as successful in keeping debt levels in check.

Source: Calafia Beach Pundit

Spending and Paying for Infrastructure Growth

Besides focusing on positive COVID trends, investors have also centered their attention on the passage of a $1.9 trillion stimulus bill last month and a new proposed $2.3 trillion infrastructure bill that President Biden unveiled details on yesterday. At the heart of the multi-trillion dollar spending are the following components (see also graphic below):

  • $621 billion modernize transportation infrastructure
  • $400 billion to assist the aging and disabled
  • $300 billion to boost the manufacturing industry
  • $213 billion to build and retrofit affordable housing
  • $100 billion to expand broadband access
Source: The Wall Street Journal

With over $28 trillion in government debt, how will all this spending be funded? According to The Fiscal Times, there are four main tax categories to help in the funding:

Corporate Taxes: Raising the corporate tax rate to 28% from 21% is expected to raise $730 billion over 10 years

Foreign Corporate Subsidiary Tax: A new global minimum tax on foreign subsidiaries of American corporations is estimated to raise $550 billion

Capital Gains Tax on Wealthy: Increasing income tax rates on capital gains for wealthy individuals is forecasted to raise $370 billion

Income Tax on Wealthy: Lifting the top individual tax rate back to 39.6% for households earning more than $400,000 per year is seen to bring in $110 billion

Besides the economy being supported by government spending, growth and appreciation in the housing market are contributing to GDP growth. The recently released housing data shows housing prices accelerating significantly above the peak levels last seen before the last financial crisis (see chart below).

Source: Calculated Risk

Although the economy appears to be on solid footing and stock prices have marched higher to new record levels, there are still plenty of potential factors that could derail the current bull market advance. For starters, increased debt and deficit spending could lead to rising inflation and higher interest rates, which could potentially choke off economic growth. Bad things can always happen when large financial institutions take on too much leverage (i.e., debt) and speculate too much (see also Long-Term Capital Management: When Genius Failed). The lesson from the latest, crazy blow-up (Archegos Capital Management) reminds us of how individual financial companies can cause billions in losses and cause ripple-through effects to the whole financial system. And if that’s not enough to worry about, you have rampant speculation in SPACs (Special Purpose Acquisition Companies), Reddit meme stocks (e.g., GameStop Corp. – GME), cryptocurrencies, and NFTs (Non-Fungible Tokens).

Successful investing requires a mixture of art and science – not everything is clear and you can always find reasons to be concerned. At Sidoxia Capital Management, we continue to find attractive opportunities as we strive to navigate through areas of excess speculation. At the end of the day, we remain disciplined in following our fundamental strategy and process that integrates the four key legs of our financial stool: corporate profits, interest rates, valuations, and sentiment (see also Don’t Be a Fool, Follow the Stool). As long as the balance of these factors still signal strength, we will remain confident in our outlook just like consumers and investors are currently.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 1, 2021). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in GME or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

April 1, 2021 at 2:10 pm Leave a comment

Investors Ponder Stimulus Size as Rates Rise

Stock prices rose again last month in part based on passage optimism of a government stimulus package (currently proposed at $1.9 trillion). But the rise happened before stock prices took a breather during the last couple of weeks, especially in hot growth sectors like the technology-heavy QQQ exchange traded fund, which fell modestly by -0.1% in February. As some blistering areas cooled off, investors decided to shift more dollars into the value segment of the stock market (e.g., the Russell 1000 Value index soared +6% last month). Over the same period, the S&P 500 and Dow Jones Industrial Average indexes climbed +2.6% and +3.2%, respectively.

What was the trigger for the late-month sell-off? Many so-called pundits point to a short-term rise in interest rates. While investor anxiety heightened significantly at the end of the month, the S&P 500 dropped a mere -3.5% from all-time record highs after a slingshot jump of +73.9% from the March 2020 lows.

Do Rising Interest Rates = Stock Price Declines?

Conventional wisdom dictates that as interest rates rise, stock prices must fall because higher rates are expected to pump the breaks on economic activity and higher yielding fixed income investments will serve as better alternatives to investing in stocks. Untrue. There are periods of time when stock prices move higher even though interest rates also move higher
Take 2013 for example – the yield on the benchmark 10-Year Treasury Note climbed from +1.8% to 3.0%, while the S&P 500 index catapulted +29.6% higher (see charts below).

Similarly to now, during 1994 we were still in a multi-decade, down-trending interest rate environment. However, from the beginning of 1994 to the middle of 1995 the Federal Reserve hiked the Federal Funds interest rate target from 3% to 6% (and the 10-Year Treasury yield temporarily climbed from about 6% to 8%), yet stock prices still managed to ascend +17% over that 18-month period. The point being, although rising interest rates are generally bad for asset price appreciation, there are periods of time when stock prices can move higher in synchronization with interest rates.

What’s the Fuss about Stimulus?

One of the factors keeping the stock market afloat near record highs is the prospect of the federal government passing a COVID stimulus package to keep the economic recovery continuing. Even though there is a new administration in the White House, Democrats hold a very narrow majority of seats in Congress, leaving a razor thin margin to pass legislation. This means President Biden needs to keep moderate Democrats like Joe Manchin in check, and/or recruit some Republicans to jump on board to pass his $1.9 trillion COVID stimulus plan. If the bill is passed as proposed, “The relief plan would enhance and extend jobless benefits, provide $350 billion to state and local governments, send $1,400 to many Americans and fund vaccine distribution, among other measures,” according to the Wall Street Journal.

Valuable Vaccines 

Fresh off the press, we just received additional good news on the COVID vaccine front. The U.S. Food and Drug Administration (FDA) approved the third vaccine for COVID-19 by Johnson & Johnson (JNJ). This J&J treatment is also the first single-dose vaccine to be distributed, unlike the other two vaccines manufactured by Pfizer Inc. (PFE) and Moderna Inc. (MRNA), which both require two shots. Johnson & Johnson expects to ship four million doses immediately and 20 million doses by the end of March.

So far, over 50 million doses of the COVID vaccines have been administered, and the White House believes they can go from currently about 1.5 million injections per day to approximately 4 million people per day by the end of March. The combination of the vaccines, mitigation behavior, and a slow march towards herd immunity have resulted in encouraging COVID trends, as you can see from the chart below. However, the bad news is new COVID cases, hospitalizations, and deaths still remain above peak levels experienced last spring and summer.

Revived Recovery

Thanks to the improving COVID trends, a continued economic recovery driven by reopenings, along with fiscal and monetary stimulus, business profits and revenues have effectively recovered all of the 2020 pandemic losses within a year (see chart below).

Source: Dr. Ed’s Blog

But with elevated stock prices have come elevated speculation, which we have seen bubble up in various forms. With the rising tide of new investors flooding onto new trading platforms like Robinhood, millions of individuals are placing speculative bets in areas like Bitcoin; new SPACs (Special Purpose Acquisition Companies); overpriced, money-losing cloud software companies; and social media recommended stocks found on Reddit’s WallStreetBets like GameStop (GME), which was up +150% alone last week. At Sidoxia Capital Management, we don’t spend a lot of time chasing the latest fad or stock market darling. Nevertheless, as long-term investors, we continue to find attractively valued investment opportunities that align with our clients’ objectives and constraints.

Overall, the outlook for the end of this pandemic looks promising as multiple COVID vaccines get administered, and the economic recovery gains steam with the help of reopenings and stimulus. If rising interest rates and potential inflation accelerate, these factors could slow the pace of the recovery and limit future stock market returns. However, if you follow a systematic, disciplined, long-term investment plan, like we implement at Sidoxia, you will be in a great position to prosper financially over the long-run.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (March 1, 2021). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in MRNA, PFE, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in GME, JNJ, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

March 1, 2021 at 12:20 pm 2 comments

The COVID Comeback

Rocky Balboa (“The Italian Stallion”) the underdog boxer from the movie, Rocky, was down and out until he was given the opportunity to fight World Heavyweight Champion, Apollo Creed. Like the stock market during early 2020, Rocky was up against the ropes and got knocked down, but eventually he picked himself up and rebounded to victory in his rematch with Creed.

The stock market comeback also persisted last month as the COVID-19 pandemic health situation continued to stabilize and the broader economy accelerated business re-openings. For the month, the Dow Jones Industrial Average increased +4.3% (+1,037 points to 25,383), while the S&P 500 index bounced+5.3%, and the NASDAQ catapulted the most by +6.8%.

How can the stock market (i.e., the Dow) rebound +39%, or more than 7,100 points, from the March 2020 lows? The large move is even more surprising once you consider 41 million people have lost their jobs since the epidemic hit American soil (see chart below), and COVID-19 related deaths have climbed to over 100,000 people.

Source: PBS

Getting Back to Fighting Shape

By the time we reached Rocky VI, Rocky Balboa was retired and recovered from brain damage. But Rocky is no quitter, and he trained himself into championship fighting condition and got back into the boxing ring. With unemployment rates approaching Great Depression levels, the U.S. economy has been experiencing challenging circumstances as well – a self-induced coma (shutdown). Fortunately, our country has been slowly recovering day-by-day, and week-by-week. The economy may not be back to peak fighting shape, but activity is slowly and consistently getting better.

There are many different perspectives in looking at this extremely complex, unprecedented coronavirus pandemic. The speed and pace of selling stocks during February and March reached radically-high panic levels, as measured by objective indicators like the Volatility Index (i.e., the VIX – or Fear Gauge). However, like a coiled spring, the stock market sprung back up during April and May as stay-at-home orders and quarantine measures around the world significantly bent the curve of COVID-19 infections and deaths (see chart below). As you can see, with the exception of a few countries globally (e.g., Brazil and Russia), the number of daily confirmed deaths has been broadly declining for many weeks.

Source: Our World in Data

Estimated infections have been coming down as well, according to the Institute for Health Metrics and Evaluation (IMHE). IMHE estimates also show the number of daily infections has consistently been coming down over the last couple months.

Source: IMHE

In addition to the stay-at-home orders and social distancing protocols, what has also contributed to the declines in COVID-19 deaths and infections? Two words…”increased testing.” Although, arguably COVID-19 testing got off to a rough start, as seen in the chart below, nevertheless daily tests have risen dramatically over the last couple months from about 100,000 per day to roughly 500,000 per day (see chart below). Increased testing capacity has and will continue to help better control the spread (or lack thereof) of the virus.

Source: Calculated Risk

Not only has the spread of the coronavirus been substantially mitigated, but the fighting economy has also received an adrenaline shot in the form of trillions of dollars of fiscal and monetary support as I described in my previous article ( see also Recovering from the Coma).

Investors Need to Keep Guard Up

Like Rocky Balboa, the U.S. is a strong, respected fighter but even though strength is being regained, the economy and stock market is susceptible to a surprise upper-cut punch or hook. What could potentially hurt the financial comeback?

  • Flare Ups & Second Wave: As cities, counties, and states carry on with expanded business openings, we could experience “flare ups” of COVID-19 infections or a “second wave.” But the good news is, we should be in much better shape to handle these scenarios thanks to expanded stockpiles of ventilators; larger supplies of PPE (Personal Protective Equipment) for frontline workers; increased production of therapeutic drugs like remdesivir from Gilead Sciences Inc. (GILD); and improved contact tracing from the magnified number of tests. And this analysis doesn’t even contemplate the more  than 100 vaccines being developed (i.e., a potential cure) for COVID-19, which could be available in limited quantities as early as the end of this year.
  • Social Unrest: The death of George Floyd, an African-American man who died after a Minneapolis police officer forcefully restrained George by keeping his knee on his neck, which triggered lethal complications to the victim. As a result, nationwide racial injustice protests and disruptive violence have erupted, thereby forcing government intervention with the hope of limiting violence and damage caused by non-peaceful protesters.
  • Strained Relations with China Due to Actions in Hong Kong: Recent political actions mandated by the Chinese government to strip autonomy from Hong Kong has strained relations with the United States, and progress made with the previous U.S. – China trade deal could erode.
  • Inflation: Despite no near-term evidence of rising prices, the unparalleled increase of trillions of dollars in fiscal debt and deficits has the credible long-term potential of creating incendiary inflation that could burn through consumers’ buying power.

Rocky Balboa faced many formidable foes in the boxing ring, including Clubber Lang (Mr. T) and Russian Ivan Drago, but Rocky survived and persevered. The stock market is bound to face future punches from unforeseen challengers in the form of impending known and unknown threats, but the alarmist calls for a COVID knockout appear to be overstated.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (June 1, 2020). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in GILD and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

June 1, 2020 at 1:26 pm 1 comment

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