The Long Term Investor

Good news....while I have been avoiding the markets today.....we have turned nicely green for the day. Totally meaningless of course since it is so early in the day. BUT.....better than the alternative.

 

This little article mentions the......dirty little secret....of the current economy. Consumers are spending like crazy.

Sentiment versus Spending

https://ritholtz.com/2022/04/sentiment-versus-spending/

(BOLD is my opinion OR what I consider important content)

"I am not a big fan of most surveys: Consumer surveys, holiday shopping surveys, election voting surveys. The primary reason is that when a random stranger asks any person about their own future behavior, the answer they receive is wholly unreliable.

There are many reasons for this, but the most significant is simple: We have no idea what our future behavior will be. I am not trying to be pedantic, but rather, state a truth about how human beings think, communicate and behave in the real world.

Case in point: Credit Card spending. In their Q1 earnings reports, all of the big banks break out their customers’ card spending. The numbers are not reflective of dour consumers, but rather, of an economy that is on fire: Citigroup credit card spending is up 23%; Wells Fargo is 33% higher; JPMorgan Chase +29%.

In fact, the WSJ reported that JPMorgan customers spending in Q1 were “37% higher than in the first quarter of 2019, and up 59% from its 2020 nadir.” Chase’s credit card customers spent $236.4 billion:

“U.S. consumers say they aren’t feeling great about the economy. But they have a curious way of showing it. Pessimism about the economy has been on the rise due to surging inflation and falling household income since pandemic-related stimulus programs expired. But the latest round of bank earnings shows that apprehension hasn’t kept Americans from reaching for their credit cards.”

Do people really feel that bad about the economy? The analysis is usually if they did feel that poorly about the prospects for the future, they would pull back on spending. The contra to this: It is part pandemic goods over services spending, and part a race before inflation sends prices higher.



But ultimately, it comes down to consumers saying one thing about the economy but behaving in an opposite manner.

Sam Ro has been beating this drum for months. Back in February, he observed the bullish contradiction between what consumers are doing and what they’re saying:

“One thing that has been made very clear over the past year is that what consumers say sometimes contradict what consumers do. Yes, it’s the case that consumers are noticing inflation in their everyday lives, and they’re not thrilled about it. According to the University of Michigan, consumer sentiment is at its lowest level since October 2011 due to “weakening personal financial prospects, largely due to rising inflation. But it’s also the case that consumers generally have the financial capacity to pay for those higher prices, thanks to a combination of rising employment, higher wages, and accumulated excess savings.”

Partisan politics, frustration, covid exhaustion, legitimate concerns, and irrational fears create a volatile mixture. When you ask people survey questions, you do not always get a simple, on-point answer. People say things for a variety of indecipherable reasons but what they do is more specific and quantifiable.

My disdain for surveys and appreciation for Emerson/Ro comes from the same place. We often do not and cannot find out what people are truly thinking. What we get instead is a mix of what they wish was true, combined with faulty recollections and good intentions. And that assumes the question is carefully worded, well understood, and does not sway the responder to an answer. Surveying is hard, and few do it well.


Thinking — when we can be bothered to even do any — is complex, nuanced, full of contradictions, and sometimes unknown, even to the thinker."

MY COMMENT

EXACTLY. This sort of survey data is totally corrupt and worthless.

The consumer spending BOOM is the greatest reason that I believe EARNINGS will be just great this time around and will BEAT all the expectations. There is a huge amount of money sloshing around out there right now.

 

Here is what is going on today.....with emphasis on the EARNINGS data.

Stock market news live updates: Stocks little changed as investors weigh flurry of earnings, downgraded IMF forecast

https://finance.yahoo.com/news/stock-market-news-live-updates-april-19-2022-222746063.html

(BOLD is my opinion OR what I consider important content)

"U.S. stocks were little changed Tuesday as investors processed a deluge of earnings reports and a revised forecast from the International Monetary Fund (IMF) indicating the global economy is set to "slow significantly" amid Russia's invasion of Ukraine.

The S&P 500 and Nasdaq each opened near the flatline after both indexes settled at one-month lows at the end of Monday's session. The Dow Jones Industrial Average also hovered around breakeven. Meanwhile, Treasury yields continued their climb, with the 10-year U.S. benchmark topping 2.9%, the highest since December 2018.

The IMF said Tuesday it expects global GDP, a measure of economic growth, to rise 3.6% in 2022 (a downgrade from January’s projection of 4.4%) and another 3.6% in 2023 (also a downgrade from the last projection of 3.8%).

“This crisis unfolds while the global economy was on a mending path but had not yet fully recovered from the COVID-19 pandemic,” said IMF Economic Counsellor Pierre-Olivier Gourinchas.

Quarterly results from 69 companies in the S&P 500 are in the queue for investors to digest through Friday. Big names on the docket of earnings set for release this week include United Airlines (UAL), American Express (AXP) and Tesla (TSLA). Netflix (NFLX), which is slated to report quarterly earnings after market close Tuesday, will provide investors insights into whether subscriber growth at the streaming service has slowed down post-COVID-19.
As of Monday, 53% of 34 S&P 500 companies (comprising 10% of index earnings) that have reported so far beat on both sales and earnings per share, Bank of America’s research team pointed out, slightly better than the typical Week 1 beat rate of 47% and last quarter's Week 1 rate of 50%. The institution expects a first quarter EPS beat of 4% but anticipates downside risks to the full year 2022 estimates, which imply earnings accelerating every quarter into next year.

“Pressure on profit margins from higher costs for virtually everything, notably labor, materials, and transportation, made this quarter difficult to navigate,” LPL Financial strategists Jeff Buchbinder and Ryan Detrick said in commentary Monday. “Add spillover from the Russia-Ukraine conflict and intermittent COVID-19 lockdowns in China, and companies’ bottom lines are getting hit from several directions.”

“Despite the tough environment, we believe the odds favor companies beating estimates as they have done historically on the back of double-digit revenue growth,” Buchbinder and Detrick added. "High inflation translates into more revenue so earnings can grow at a solid pace even with some narrowing of profit margins.”

Contrary to BofA, research from FactSet suggests that although analysts have tempered their expectations on first quarter earnings, lowering bottom-up EPS forecasts in aggregate for Q1 by 0.7% from $52.21 to $51.83, EPS forecasts for the second, third, and fourth quarters are higher. Earnings estimates for all of 2022 have also risen 2.2% this year to $228.50 per share.

“The number one takeaway for investors should be to watch how your stock reacts more than the news,” Heritage Capital President Paul Schatz told Yahoo Finance Live. “If your stock rallies on bad news, that’s a pretty good sign the markets have absorbed and digested and have priced in the bad news.”

9:08 a.m. ET: IMF says Russia-Ukraine war will cause global economy to 'slow significantly'

The International Monetary Fund (IMF) said the global economic recovery will “slow significantly” this year due to Russia's invasion of Ukraine.

The IMF downgraded growth prospects in Eastern European countries but also warned that countries around the world will be affected by the disruption to commodities markets as a result of the war. The international body now expects global GDP, a measure of economic growth, to rise 3.6% in 2022 (a downgrade from January’s projection of 4.4%) and another 3.6% in 2023 (also a downgrade from the last projection of 3.8%).

“This crisis unfolds while the global economy was on a mending path but had not yet fully recovered from the COVID-19 pandemic,” said IMF Economic Counsellor Pierre-Olivier Gourinchas.

Russia saw the largest downgrade in the IMF report, with the country’s economy now expected to contract by 8.5% this year (compared to the 2.8% growth it had projected prior to the invasion).

8:58 a.m. ET: Housing starts rise, building permits increase in March

U.S. homebuilding activity picked up unexpectedly last month, but starts for single-family housing fell amid rising mortgage rates.

The Commerce Department reported housing starts registered an increase of 0.3% in March to a seasonally adjusted annual rate of 1.793 million units last month. February data was revised higher to a rate of 1.788 million units from the previously reported 1.769 million units. Bloomberg economists had forecast starts slipping to a rate of 1.740 million units.

Permits for future homebuilding increased 0.4% to a rate of 1.873 million units last month.

The 30-year fixed-rate mortgage averaged 5.0% during the week ended April 14, the highest since February 2011, up from 4.72% in the prior week, per mortgage finance agency Freddie Mac. Further increases are expected as the Federal Reserve moves forward on its monetary tightening plans.

MY COMMENT

What matters.....right now....is EARNINGS. So far......the "BEATS" are coming in strong. Remember all the articles a month ago pushing negativity in the earnings? I do. They were WRONG as usual.

The total and constant focus of the media opinion writers is on the short term. Why? I dont know. The majority of the regular investors are investing for the long term in their 401K and other accounts. For the vast silent majority of investors.....the short term is IRRELEVANT. Yet....it is the constant focus of the financial media.

 

I like this little article........bring it on. The future that is.....not a recession.

Why a near-term recession is unlikely: Morning Brief

https://finance.yahoo.com/news/the-case-against-a-near-term-recession-morning-brief-101455569.html

(BOLD is my opinion OR what I consider important content)

"Everybody’s talking about a recession that may not come — anytime soon.

Calls for a downturn have escalated in recent months amid soaring inflation, inverted Treasury yield curves, and the specter of tighter monetary policy from the Federal Reserve. Goldman Sachs economists said they place the odds of a recession in the next year at 15%, and in the next two years at a more worrying 35%. A recession is defined as two consecutive quarters of negative growth in a country's gross domestic product (GDP).

And it’s not just the Wall Street banks. Google searches in the U.S. for “how to prepare for a recession” nearly tripled over the past week alone, said Neil Dutta, head of economics at Renaissance Macro Research, citing Google Trends data. However, this spike in interest may actually be a sign that concerns of a recession are reaching an apex.

“Indeed, when the sell-side consensus is competing to see who can pencil in rising recession probabilities fastest and ordinary people are searching about these topics on the internet, you can be sure the news is already reflected in market prices,” Dutta said in a note Monday. “The next move is lower recession risk and slower inflation rates.”

What’s particularly “unusual” about recession talk this time around, Dutta added, is how disconnected it is from the strength in economic data. Many of the most recent U.S. reports have painted a picture of an economy still firing on all cylinders, even as inflation runs at its fastest rate in 40 years. In the labor market, non-farm payrolls have increased by an average of over 550,000 per month in the first quarter this year, following average growth of more than 600,000 per month in the fourth quarter.

“That’s barely consistent with a slowdown, let alone a recession,” Dutta said.

And even consumer sentiment, which has been weighed down this year by rising prices, has shown signs of recovering from a nadir. The University of Michigan’s closely watched Surveys of Consumers index unexpectedly rose to 65.7 in early April, which while still depressed compared to pre-pandemic levels, was up nearly 11%, compared to the prior month’s more than 10-year low.

Some other strategists also suggested the lingering cushion of consumer savings and still-resilient spending would help prop up the U.S. economy.

“I would say it's probably closer to a coin toss that the economy will be moving into recession by the end of the year,” Vincent Reinhart, Dreyfus and Mellon chief economist and macro strategist, told Yahoo Finance Live.

“By some measures, households have in the neighborhood of $2 trillion of excess savings. They can start working [those] savings down — and they are,” he added. “And that will be an important buffer.”

Still, those calling for a near-term recession have drawn on a host of historically reliable indicators that have been already flashing red. As Goldman Sachs’ economists pointed out, 11 out of the 14 Fed tightening cycles since World War II have been followed by a recession within two years. And the Fed this year has already begun raising interest rates and signaling its intent to soon begin quantitative tightening (QT), or rolling assets off its $9 trillion balance sheet.

Economists at Deutsche Bank, the first major Wall Street bank to call for a U.S. recession next year, said it is “The more aggressive tightening of monetary policy that we envision will end up pushing the economy into a recession,” according to a note from the firm’s economist Brett Ryan.

“While timing the exact quarters of negative growth is never easy, we see the Fed’s tightening beginning to materially slow growth in the second half of 2023,” Ryan said in a note last week. “Our baseline forecast has negative quarters for growth in Q4 2023 and Q1 2024, consistent with a recession during that time.”

Plus, a key part of the U.S. Treasury yield curve has already inverted, with the yield on the 2-year note rising above that on the 10-year note earlier this month. Such an inversion came before each of the last eight recessions since 1969. But as many pundits pointed out, that occurrence says little about exactly how soon to brace for the downturn to begin.

“I’m going to go in the ‘no recession’ camp for this year,” Michael Antonelli, managing director and market strategist at Baird, told Yahoo Finance Live on Monday. “If you use the yield curve inversion as your signal, which we all know it’s a pretty good signal, the shortest a yield curve has led to a recession is 6 months, that was back in COVID, the longest was 33 months … the average is 17 months.”

“Unless you think the recession’s going to come faster than it did for COVID, it’s somewhere out in 2023, possibly in 2024,” he added. “Right now, companies are hiring, businesses are expanding, people are working and spending money … I don’t think it’s imminent right now.”"

MY COMMENT

The consumer economy is on fire. People are out and about and spending money everywhere. If you did not watch TV or read or see any source of information and just went by what you see in daily life......the economy is booming.

There is a SINGLE danger of recession......the FED. When you have the FED going off on......rate increase MANIA.....the danger is that they will overdo it. So far what I see from them every day is not giving me much confidence.

SO.....it will be a battle between the strength of the economy and the consumer......and.....the IDIOCY and ego mania of the FED.

 

It is nice to start out the day with a STRONG rally. Every one of my stocks is strongly in the green to start the day today. The WORST is up by 1.11%......the BEST is up by 2.53%. All the rest......range from 1.11% to 2.53%.

The POWER of EARNINGS.

It is nice to see stocks performing based on REAL DATA that is put out by BUSINESS.......compared to the daily gossip and speculation that constantly drives the modern markets and those that invest based on short term garbage.

 

A good day today. Every position was in the green. PLUS.....a good beat on the SP500 by 0.77%.

With the nice gain today the SP500 year to date is.......(-6.38%)

 

This is a nice, and long article on CONTRARIANISM.

Weekly Market Pulse: Time To Get Contrarian?

https://alhambrapartners.com/2022/04/17/weekly-market-pulse-time-to-get-contrarian/

(BOLD is my opinion OR what I consider important content)


"Remember, your goal in investing isn’t to earn average returns; you want to do better than average. Thus your thinking has to be better than that of others – both more powerful and at a higher level. Since others may be smart, well-informed and highly computerized, you must find an edge they don’t have. You must think of something they haven’t thought of, see things they miss, or bring insight they don’t possess. You have to react differently and behave differently. In short, being right may be a necessary condition for investment success, but it won’t be sufficient. You must be more right than others…which by definition means your thinking has to be different….


For your performance to diverge from the norm, your expectations – and thus your portfolio – have to diverge from the norm, and you have to be more right than the consensus."

Howard Marks

"That is the best description of contrarianism that I’ve ever run across. The word contrary is used to describe two things that are exactly opposite or entirely different. In the south, where I’ve lived most of my life, it is used to describe someone who argues for the sake of arguing – “He’s a contrary cuss”. In investing, it is more subtle than that; contrarian investing isn’t just about doing the opposite of the consensus because, as Keynes allegedly said, “the market can remain irrational longer than you can stay solvent”. Just to be a little contrary, what he actually said was: “There is nothing so dangerous as a rational investment policy in an irrational world”. Irrational in the investing pundit world is generally defined as any view that is contrary to mine.

So, to generate better than average returns, your portfolio must diverge from the norm – but only when the norm reaches such an irrational state that normally rational people start to think that the irrational is actually quite rational. The perfect contrarian opportunity is one where you are the last rational person in an irrational world – which is, of course, quite irrational. A tricky balancing act to be sure and something that can’t be attained without knowing what the consensus actually is at any given moment. Which is, of course, made more difficult by our own views of what is rational, irrational or just plain nuts. There are numerous ways to determine the consensus from surveys to futures market positioning to mutual fund flows to the covers of magazines. But there is no scientific way to determine the consensus or when to embrace it or fade it.

There is nothing reliable to be learned about making money. If there were, study would be intense and everyone with a positive IQ would be rich.

John Kenneth Galbraith

Personally, I think the only thing that matters in these matters is experience. There is no certain way to know when we’ve reached that point of maximum pessimism (optimism) that Sir John Templeton told us was the greatest time to buy (sell). But when you’ve been doing this a long time, you can sort of sense when we’ve reached that point. And if you’re wrong, you’ve been that way so many times across a long career that admitting it and taking a loss isn’t as painful as it was when you were young and thought you knew way more than you actually did. Of all the things I’ve learned across 40 years of investing, the most important is that an ego is a terrible thing in this business. And if you have a big one, the market will do everything in its power to make sure it is deflated, along with your net worth.

And yes, since I’m writing about being contrary, I am of the opinion that we may have reached one of those points in time that requires us to, at least, start thinking about bucking the consensus. So what is the consensus today? The monthly Bank of America fund manager survey provides some insights (from Bloomberg):

The share of investors expecting the economy to deteriorate is the highest ever, according to the April survey. Stagflation expectations jumped to the highest since August 2008, while monetary risk increased to a historic high, BofA strategists said, after surveying 292 panelists with $833 billion in assets under management in the first week of April.

It probably isn’t news to most readers that people are not exactly thrilled with the current state of the economy. Most of that has to do with inflation but also about the Fed’s response to it. Jerome Powell is about the only person on the planet who thinks the Fed will pull off the ever-elusive soft landing. You can see the same negativity in the University of Michigan survey of consumer sentiment. While there was an uptick in the preliminary April numbers, sentiment has recently been trending lower, hitting 59.4 in March of this year. Readings that low have only ever been recorded during recession. I’ve written before about the political divide within this survey and that persists today, where the current reading for Democrats is 86.5 (good but not great) while Republicans clock in at 48.7 (awful). There has always been this bias in the survey although today does look more extreme than in the past. In another recent survey, only 51% of Americans believed that jobs have increased over the last year. The actual number of jobs added is almost 6.5 million. That’s a political divide that will not be spanned by reality.

But what does a low reading on consumer sentiment actually mean to an investor? Forget whether the survey provides any information about the future economy; what does it mean for markets? Other dates with readings this low were February 1975 (57.6), May 1980 (53.6), April 1982 (64.7), December 1990 (65.1), December 2008 (57.7), and October 2011 (58.7). The lowest reading in 2020 during the worst of COVID was 74.1 in June 2020. While those were not all ideal times to buy stocks, the downside risk on most of those dates was pretty minimal. Some of them were great – not good – times to buy. The lone exception was December 2008 when stocks still had another 25% to fall before making the final low in March 2009. But if you bought at the end of 2008, you were on the plus side by May 2009. In other words, consumer sentiment, which is very negative right now, is a contrarian indicator for investors. I’m not saying you should back up the truck but your inner contrarian ought to at least be doing some window shopping right now.

What else is consensus? The most obvious next choice is commodities which have gone straight up since the April 2020 lows. From the B of A survey:

Investors are very long cash, commodities, healthcare and energy, and materials while they shun bonds, discretionary and euro-area stocks…Investors are now the most net overweight ever for commodities; long oil and commodities is the most crowded trade, followed by short U.S. Treasuries and long tech stocks

That’s pretty much the consensus right there. Investors seem to be scared of inflation and also worried about recession. I guess there is some possibility of stagflation – some would say we’re already there but I’m not one of them – but it isn’t a high probability event. In fact, I’d say we’re missing a pretty key ingredient – a weak and weakening dollar. The primary driver of inflation/stagflation in the 1970s was the weak dollar in the post-Bretton Woods era. The commodity bull market that ran from 2002 to 2008 was also driven by a dollar that fell nearly 40%. That isn’t the case this time and I think that makes the commodity bull market quite vulnerable. With real rates rising recently, the commodity bull may be getting long in the tooth. Anything that brings supply and demand back toward balance could change the dynamic pretty quickly.

Bonds just had their worst quarterly loss since at least 1980 and have continued to fall in Q2. The aggregate bond index is down nearly 9% YTD while 7 to 10-year Treasuries are down nearly 10%. The 20+ year Treasury ETF (TLT), the favorite trading vehicle for the deflation camp, is down 18% while corporate bonds (LQD) are down over 12%. Historically, buying after a drawdown like that has been a pretty successful strategy. Looking at annual T bond returns, there have only been two back-to-back yearly losses since 1928 (1955 and 1956, 1958 and 1959). All other yearly losses were followed by gains. And by the way, during that supposedly awful time for bonds, the 1970s, there was only one down year (1978), and that by a fraction of a percent. So, it probably makes sense to start looking at bonds for some future positive returns. We recently extended the duration of our bond portfolio modestly. Why not extend it more? Well, that consensus negativity about the economy is one reason. If the consensus on the economy is wrong, if the economy isn’t awful and getting worse, then looking for a big gain in long-duration bonds is probably not a great idea. Another reason is that despite that nearly 20% loss in TLT, the fund has continued to draw inflows. There was $19.76 billion in the fund on 12/31/21 and after an 18% drawdown, current AUM is $18.55 billion. Investors are still strongly buying the dip in long-term bonds. That isn’t true of the corporate bond ETF by the way. Just something to consider, especially if the negativity about the economy turns out to be overstated.

The other crowded trades are a mix of commodity-related (energy, materials) and defensive (cash, healthcare, utilities). Both energy and materials stocks look cheap based on current earnings but energy stocks are dependent on crude oil and natural gas prices while materials are more economically sensitive. Utilities look quite vulnerable trading at over 20 times earnings and single-digit earnings growth. I suspect a lot of people are buying electric utilities in anticipation of rising demand from EVs but I think there is considerable room for disappointment on that front. Healthcare, on the other hand, trades for a cheaper multiple than utilities (and the market) with higher earnings growth. And within that sector, pharma and biotech stocks (we own some of both) still look cheap in a field that is still spending considerable dollars on R&D. Consumer discretionary stocks are down over 12% YTD and yet still look overpriced but Euro area stocks might be worth a look if the Euro stabilizes. The Eurozone ETF trades for 13 times earnings (but who knows what they’ll be next year) with higher historical earnings growth. For a more diversified approach, the EAFE value index (EFV, we own) trades even cheaper and reads like a who’s who of non-US multinationals (Top 10: Shell, Novartis, BHP, Toyota, HSBC, Sanofi, Nestle, Total, Glaxo SmithKline and BP). No one wants to own international right now and I understand that with the strong dollar but these stocks are cheap.

Finally, we come to cash which is finally throwing off some return after years of zero. No, it isn’t much and it is a loser on a real (after inflation) basis. But it doesn’t go down and has been an addition to returns this year because of that. But with short-term rates up considerably, it pays to extend the maturity of your cash holdings some. Six-month T-bills currently yield around 1.2% while 1-year paper yields 1.7% versus less than 0.5% for money markets (and considerably less than that at the major brokerage firms). Do you really need overnight access?

I obviously can’t say for sure that we are at a turning point, that the consensus is so consensus that it must be faded. But there are parts of the market today where a dissenting voice is hard to find. The negativity about the economy is pervasive and not supported by the economic statistics, at least for now. The last time “recession” was more searched on Google was in March of 2020. Prior to that, the last time recession surged as a search term was in August of 2019 which you might remember was the month the yield curve inverted. That is probably no coincidence either and I am still wondering how much the publicity about the yield curve will affect its usefulness. Other than that, since 2004 the only other time it was so popular was in 2008. Needless to say, today’s economy is nowhere near as stressed as it was in 2020 or 2008.

Environment

The rising rate, rising dollar environment remains intact. The yield curve steepened more last week as the 10-year yield continued to rise as the 2-year stalled. Since the inversion on April 1, the 2-year yield is up just 3 basis points while the 10-year is up 45 basis points. The 10-year was up 17 basis points in just 4 trading days last week while the 2-year yield was unchanged. This is not the rapid steepening we see just prior to recession when short rates collapse in anticipation of Fed rate cuts. All this means right now is that expectations for the Fed’s rate hiking this year appears to be fully priced into the short end of the market. The fact that the long end continues to rise would seem to indicate the market also thinks that might not be enough. TIPS yields were up last week too but the 10-year was only up 9 basis points so inflation expectations rose slightly.

The dollar had another good week and the Dollar Index closed over 100. We are right at the top of that seven-year trading range and traders are quite long but with ECB last week sounding a tad more dovish, the Euro may take the torch from the Yen and keep the index rising. One good thing is that the EM dollar index isn’t yet following the major currencies. As I said last week though, if Chinese economic weakness continues, the Yuan seems destined to fall. How that impacts other EM currencies will be interesting, to say the least. For now, the rising dollar is primarily a developed market phenomenon and is acting as a headwind for investments in Europe and Japan.



Markets

Stocks were mostly lower last week with small and mid-cap value the exceptions. Commodities resumed their run higher but are still below the high set in early March in the wake of the Ukraine invasion. Energy was the big winner with natural gas and crude oil both up double digits on the week. The rally was broad-based though with metals and ags up too. Gold rose a little over 2%. The continued strength of commodities and gold in the face of a higher dollar is impressive but I do wonder how long it can last. If peace breaks out we could get a rapid reversal but that seems unlikely in the short term.



Energy, materials, and defensive stocks are the crowded trades and they continued to work last week.









It always feels good to be in the consensus and it works a lot of the time. That’s what momentum is and why it works. But all trends come to an end and the biggest ones end when the consensus reasoning is overwhelming and obvious. It can take a long time to finally break the true believers in a long-term trend. You might have noticed in the B of A survey above that technology is still an area considered a crowded trade on the long side. The sector is down 15% YTD and nearly 20% at the lows and yet the ETF continues to attract new money. Ark Innovation ETF is down 37% for the year and is still attracting new money. I doubt the underperformance of tech is over.

You can’t outperform if you are doing what everyone else is doing. But you also can’t just buck the consensus, be contrary for the sake of it. Some consensus trades will continue to outperform and continue to be the consensus. Separating the two is how you generate those better than average returns. It isn’t easy though which brings me to one last quote for this week:

It’s not supposed to be easy. Anyone who finds it easy is stupid. – Charlie Munger

I’d just add that those who find it easiest at any given moment are the ones who are about to find out exactly how hard it really is. I’d say that the guy who bought the NFT of Jack Dorsey’s first tweet falls in that category. He bought it just about a year ago for $2.9 million. He put it up for sale recently asking for $48 million. Top bid as of last week? $6800. Personally, I think that is still too pricey."

MY COMMENT

YES.......we are in strange times. Well actually we always are. I do believe that the negativity has gotten too extreme lately. Even though I STILL put the odds of a recession at 50/50.......due to the incompetence of the FED.......I am seeing way too much negativity in the markets and in the market soothsayers.

The emphasis on inflation is now off the charts. I believe that it is likely that it has at least peaked......and.....perhaps will start to fall. Take inflation out of the short term news and all the equations.......and......the vast majority of the negativity will disappear. All the other issues are really....NOTHING.....without the inflation kicker.

 

Dont even get me started on the FED........as we begin what will be about five different comments from the FED as the week proceeds. Thank goodness we avoided any impact from the FED BLATHER today.

Fed’s Bullard Says 75 Basis-Point Hike Could Be Option If Needed

https://finance.yahoo.com/news/fed-bullard-says-75-basis-205723957.html

NOT even going to post the whole thing......read it if you are interested. YES.......it still seems like individual members of the FED are trying to intentionally tank the markets......as usual. They pop up every time there is a good day or two in the markets.

 

And while talking about the government and incompetence..........NO......the site was never down on tax day......all the people trying to use the site and pay their taxes and saying that the site was down are LIARS.

Tax Day 2022: IRS website experiences major slowdown
Frustrated taxpayers complained of site crashing, inability to log in on agency's busiest day of the year

https://www.foxbusiness.com/personal-finance/tax-day-2022-irs-website-experiences-major-slowdown

(BOLD is my opinion OR what I consider important content)

"Monday is Tax Day, the deadline for U.S. taxpayers to file their return or request an extension from the Internal Revenue Service.

But many frustrated taxpayers reported outages on the IRS' website on its most important day of the year, lashing out at the federal tax collection agency online.

It's a black eye for the agency on what's arguably its most important day of the year. According to the most recent data available, the IRS spent over $2 billion dollars in the 2020 fiscal year on taxpayer filing and account services.

Service outage tracking site Down Detector indicated an increase in outage reports about the IRS website that surged mid-morning and remained elevated into the afternoon.

Several users said they received a message on the IRS site that stated, "We are unable to complete your request due to technical difficulties." One user who posted out of more than 5,000 comments wrote on Down Detector, "I can't even revise my extended payment or anything. They better own up to their site problems and not penalize taxpayers. This is B.S."

Other taxpayers reporting not being able to log in to the site, and a number of other users said they received error messages when attempting to make payments for estimated taxes.

Complaints of outages also poured over onto social media, with one Twitter user asking the IRS if its site was down, explaining, "Trying to pay but (so far) site has crashed, reloaded, then failed to allow me to log in."

Another extended choice words for the agency, tweeting, "Thank you #IRS for having such a poor system in place that I can't pay you the money I owe and will likely be fined for it because your system is down. After spending 4 hours trying to verify my identity through your new login process...get bent. #TaxDay."

The IRS told FOX Business that its site was never down on Tax Day.

"The IRS Online Account tool is seeing high demand, and taxpayers may experience short delays or wait times to access some features," the agency said in a statement late Monday. "For taxpayers trying to make a payment, you can select the payment option in the waiting room of the Online Account tool or go directly to Direct Pay, the Electronic Federal Tax Payment System, and options to pay by credit card. Taxpayers can find those tax payment options on our website. The IRS apologizes for the inconvenience.""

MY COMMENT

The most PATHETIC, mismanaged agency in the entire Federal government.....and....that is saying a lot. I LOVE their response........."our site was never down on Tax Day".

 

Another day where the markets dont seem to have much direction. So....as a result....we are mixed so far today. I am waiting for the TESLA earnings later today. Not that I give them much importance. With the Berlin and Austin plants opening recently.....what will really be important for the company is how they are doing in about 12 months once those plants are pumping out the vehicles.

 

OK......Zukodany and Emmett.....you guys have the markets Thursday and Friday and Monday. I am going to be tied up with shows till late Monday. Fire up the old Technical Analysis machine Emmett. Zukodany will take care of the Fundamental Analysis.

I know the markets are in good hands with you guys. Make me some BIG MONEY while I am distracted from the markets.

 

This is a COOL article on the history of INFLATION for any that want to get down into the weeds on this issue. I said........"weeds"......not "weed". Although either one might apply. Just a nod to Elon.

A Brief History of Inflation
With rising prices comes economic instability, which may be on the horizon once again.

https://www.city-journal.org/brief-history-inflation

(BOLD is my opinion OR what I consider important content)

"Last month, the Federal Reserve increased its targeted federal-funds rate by 0.25 percent to counter rising inflation in the U.S. economy, while signaling that this was the first step in a month-to-month sequence of rising rates that could extend into next year. Fed chairman Jerome Powell hopes that modest increases of this kind will slow surging inflation, currently running at between 6 percent and 8 percent per year, the highest since 1981, when the Consumer Price Index rose by 10.1 percent. Even with this increase, the federal-funds rate remains low by historical standards: between 0.25 percent and 0.50 percent.

If modest rate hikes don’t work as hoped, then the central bank may have to continue rate increases until they exceed the rate of inflation—which would undoubtedly slow economic growth and perhaps induce a recession while causing distress in the stock and bond markets. That has happened before. In the late 1970s and early 1980s, then-chairman Paul Volcker raised the federal-funds rate to 17 percent to rein in out-of-control inflation. Those policies led to a deep recession in 1982, but they brought the price level under control and set the stage for a 40-year period of declining inflation and interest rates, along with a long bull market in stocks and bonds. As Powell and his colleagues work to reach a soft landing, the looming question is whether their new policy signals the end of an era of declining interest rates and inflation that began in the early 1980s.

Interest rates in the U.S. economy tend to follow extended historical patterns, and a 40-year period of declining rates is not all that unusual when one takes the long view. Alexander Hamilton’s plan to fund the federal debt in 1790 called for a 6 percent rate of interest on ten-year government bonds, which was thought to be the prevailing rate of interest at the time. Nevertheless, interest rates generally declined throughout the nineteenth century (though they rose during the War of 1812 and the Civil War) and reached a low of around 4 percent in 1898. Rates increased again to around 6 percent by 1920, owing in part to World War I, at which point they embarked on a long decline that lasted until 1946, when they averaged less than 3 percent. Rates steadily increased for a full generation thereafter until interest on the ten-year bond peaked at 15 percent in 1981, a level previously unheard of in U.S. financial history. That peak was followed by 40 years of broadly declining rates. The chart below traces the yield on the ten-year bond from 1961 to today:

(see article for chart)

The same pattern holds true for the federal-funds rate, the target interest rate set by the Federal Reserve for overnight borrowing and lending among commercial banks. In 1954, it was less than 1 percent, but it rose steadily through 1969, when it reached almost 9 percent. Inflation was also increasing, buoyed by Great Society spending and the Vietnam War. The federal-funds rate bounced up and down through the 1970s, reaching a low of 3.3 percent in 1972 and a high of 12.9 percent in the midst of the recession and inflation of 1974. It then gradually rose through the late 1970s and into the early 1980s, reaching a high of 19 percent in August 1981, with a steep recession soon following. The secular decline in rates began at that time, declining to close to zero from 2008 through 2016 (as the Fed responded to the financial crisis) and again during the pandemic.

Chart II: Federal Funds Rate, 1954-2022


(see article for chart)

The historical pattern on inflation runs parallel to that of interest rates. This series, compiled by the St. Louis Federal Reserve Bank, measures change in the CPI for urban consumers for both headline inflation (all consumer items) and core inflation (consumer items, except food and energy prices) from 1960 to 2022. During the first half of the 1960s, inflation remained low and stable, with increases in both core and headline inflation of between 1 percent and 2 percent per year. That pattern allowed the Fed to maintain a stable interest-rate policy, notwithstanding President John F. Kennedy’s experiments with Keynesian fiscal policies. Inflation then increased fourfold, from 1.5 percent in 1966 to 6.5 percent in 1970, owing to spending on President Lyndon B. Johnson’s Great Society programs and the war in Vietnam. The rise in inflation led to a steady rise in interest rates as well, along with President Richard Nixon’s ill-advised steps to control rising prices through wage and price controls. Those controls did not work, except perhaps from a short-term political point of view. Once they were removed, inflation surged again, with the headline figure reaching 12.5 percent in 1975. The embargo imposed in 1973 by several oil-producing countries contributed to the surge in prices, but the CPI for core inflation still reached 11.8 percent in early 1975. Like today, inflation then was not driven solely by oil prices.

Those were years of unstable fiscal and monetary policy. Inflation stabilized in the late 1970s at around 6 percent per year (still high by postwar standards), before rising to 13.6 percent in early 1980. Fed chairman Volcker began his campaign in 1979 and 1980 to reduce inflation with tight monetary policy and rising interest rates, which played a role in President Jimmy Carter’s defeat in the 1980 election. Those policies also contributed greatly to the steep recession of 1982–83. But those policies quickly and finally brought inflation down, reducing it to between 3 percent and 5 percent per year from 1983 until 1990. It declined further still, to 2.5 percent per year, by the late 1990s. That era has continued for more than two decades, with core inflation hovering around 2 percent per year until 2020. But headline inflation this year is running at close to 8 percent and core inflation at more than 6 percent.

Chart III: Percentage Increases in the Consumer Price Index, 1969-2022

(see article for chart)

The four-decade period of declining inflation and interest rates has rewarded investors, entrepreneurs, homeowners, and consumers. It stands in sharp contrast to the 1965–1980 period, when erratic and ineffective policies were the norm. Yet the U.S. has flirted with some of those former policies, with federal deficits running at $3 trillion per year in 2020 and 2021 and the central bank seemingly behind the monetary-policy curve. The Federal Reserve increased the money supply by 19 percent in 2020 and 16 percent in 2021 in response to the Covid-19 pandemic, increases that far out-stripped real economic growth. Meantime, Congress passed a series of massive, trillion-dollar relief bills. With such policies in place, it should come as no surprise that inflation is increasing, with interest rates soon to follow.

The end of a policy era may also signal the end of a historic bull market in stocks. In 1982, few expected the swift turnaround that took place in the stock markets at that time. Fewer still expected the historic rise in share prices to continue through almost four decades until the present day.

The charts below illustrate the exponential growth of the stock market over these decades, as measured by the Dow Jones Industrial Average of 30 stocks and the Wilshire 5000 Price Index (a broader measure of stock prices). Stocks (measured by the DJIA) advanced steadily through the 1950s and into the 1960s, reaching nearly 1,000 on the Dow in 1966, but did little thereafter due to the rising inflation and interest rates of that period. As of August 1982, the index stood at 808, at which time it began its long advance: doubling by 1986, doubling again by 1993, and eventually increasing 45-fold by 2021, when the index reached 36,000. The Wilshire index of the broader stock market illustrates the same pattern of growth: mostly flat from 1970 to mid-1982, it then began a long advance, doubling by 1986, advancing tenfold by 2000, and eventually reaching a high of 49,000 in 2021—another 45-fold increase. The market capitalization of U.S. stocks in 1979 was about $1 trillion (in current dollars) yet was $41 trillion in 2020.

Dow Jones Industrial Average (DJIA) History, October 1, 1928 Through April 15, 2022








It is too soon to say that this era is now ending. Nevertheless, the current situation bears more than a passing resemblance to the price and interest-rate instability that defined the 1970s. Then, as now, it was thought that inflation could be tamed by half-measures that would not disrupt the economy, even though rising prices were provoked in the first place by extreme fiscal and monetary policies of the kind that have always had inflationary effects.

Some important differences exist between the 1970s and the 2020s, yet many of these are cause for pessimism. The federal debt is much larger today than it was in 1979, so government will have more difficulty in the future servicing its debt while maintaining other expensive programs. The U.S. economy is growing at a slower rate than in the 1970s. Demographic changes mean that close to half the population depends on government support in one way or another, including government employment, welfare, and old-age assistance, compared with roughly 20 percent in the 1970s—leaving the federal government little room to cut budgets. And the political situation today is far more polarized. For all these reasons, rising inflation and interest rates, leading to a recession and falling stock and bond markets, stand to cause even greater conflict and distemper today than they did four decades ago.

By the end of this year, we’ll find out whether modest measures will reduce inflation—or whether we are in for an extended period of rising prices and interest rates, with accompanying economic instability. Whenever the current era ends, as it is bound to do sooner or later, Americans will undoubtedly look back upon it as a golden age of sorts, and wonder if, and how, it might be restored."

MY COMMENT

This is a great little article. The charts are very important to visualize what is being said.......so.....I recommend you to click on the link above.

note the statement:

"Whenever the current era ends, as it is bound to do sooner or later, Americans will undoubtedly look back upon it as a golden age of sorts, and wonder if, and how, it might be restored."

I could EASILY answer the question of how this can be restored.......but I will not.....because it would require much discussion that laps over into politics...........politics back in the 1980's and over the past 6 years. So I will stand MUTE on the subject even though the answer is.........simple and obvious.

The BOOM from 1982 extending over the next 40 years used to be known as the REGAN BOOM. Even though the article simply ignores this reality.

 

Here is another very interesting situation. With all the attention that the media LAVISHED on Cathie......it is interesting to watch how they treat her and ARKK now........typical.

Cathie Wood's ARKK falls 60% from its peak, erasing all post-pandemic gains

https://finance.yahoo.com/news/cathie-woods-arkk-is-down-60-from-its-peak-185056213.html

(BOLD is my opinion OR what I consider important content)

"A broad sell-off in technology stocks has dragged Cathie Wood’s main Ark Invest fund into the gutter – and it looks like it will take a long time for the popular ETF to dig itself out.

The average holding in Ark Innovation (ARKK), Ark Investment Management’s namesake flagship exchange-traded fund, is currently down over 70% from its five-year high, according to fresh data from market research firm Bespoke Investment Group. The rout in ARKK’s portfolio brings the investment vehicle 60% below its peak in February 2021.

Shares of ARKK were down 4.7% Wednesday to $56.89 as of 2:23 p.m. ET.

Without Tesla (TSLA), Ark Innovation’s largest holding and a relative outperformer compared to other components in the fund, the picture would be even worse. The electric-vehicle maker has fallen only 16.4% from its high on Nov. 4 as of Tuesday’s close — a substantial loss of its value but far less severe than the losses in ARKK’s other stocks. Digital biology company Berkeley Lights (BLI), for example, is down over 94% from its five-year high.

When taking into consideration the broader declines, Tesla, which comprises about 10.4% of all holdings, has kept the fund from falling even lower.

Moreover, Ark Invest continues to bet heavily that Tesla will help it reach its lofty promises to investors. Earlier this week, Ark Investment Management boosted its already-hefty $3,000 price target on the electric-vehicle maker to $4,600 by 2026, citing its prospective robotaxi business and expectations the company will become more capital efficient. The firm’s bear case for Tesla alone is $2,900 by 2026, roughly three times its current share price and the bull case sees Tesla at $5,800.

“Although tuned to our expectations for 2026, we believe our Tesla model is methodologically conservative,” Ark analyst Tasha Keeney said in a recent research note. “We assume that Tesla’s stock will trade like a mature company rather than a high-growth one in 2026.”


The average holding in Cathie Wood's flagship ARK Innovation fund is currently down over 70% from its high.
Of all the stocks in ARKK, nearly half have fallen by at least 75% from their five-year highs, per Bespoke’s data, and only one is positive on the year — Signify Health (SGFY). Bespoke Investment also pointed out that the average stock in the ETF needs to rally 348% to get back to prior highs.

“I'm thinking about our clients,” Wood said in a recent interview with Yahoo Finance Live. “They have felt the full force of this decline, and yet we inflowed last year, and we're inflowing this year, and I think that has been shocking to a lot of counterparts out there, who have gone through periods, like we've just experienced, and have had massive outflows.”

“I think a few things are at work,” Wood added. “Number one, our long term time horizon is practically the first thing we say, when we're talking to prospective investors.”

Wood repeatedly emphasized that a critical feature of Ark’s investment strategy is that it focuses on a five-year time horizon, even calling the 12-18 month time horizon of most traditional asset managers “short-sighted.” When considering that period as a gauge of performance as of recently, ARKK is up only 20% over the last five years. By comparison, the S&P 500 has a five-year return of 91.75%.

Ark rose to fame when the fund returned 150% in 2020, but the fund has since erased its post-pandemic gains.

Its struggling performance also prompted Morningstar to downgrade its rating on ARKK from Neutral to Negative last month, citing issues with the fund's risk management and ability to navigate the space it aims to explore.

“The firm favors companies that are often unprofitable and whose stock prices are highly correlated,” Morningstar strategist Robby Greengold wrote in a note. “Rather than gauge the portfolio’s aggregate risk exposures and simulate their effects during a variety of market conditions, the firm uses its past as a guide to the future and views risk almost exclusively through the lens of its bottom-up research into individual companies.”

“Wood has suggested that risk management lies not with her but with those who invest in ARK’s funds. It’s tough to see why that should be so,” Greengold wrote. “ARK could do more to avert severe drawdowns of wealth, and its carelessness on the topic has hurt many investors of late. It could hurt more in the future.”"

MY COMMENT

I am definately NOT an owner or a fan of this fund. I think that Cathie is mostly playing momentum on most of her stock picks and tends to buy when they are heading up. I do not like her stock picking strategy at all. I believe she is very erratic in her stock picks.

I have seen a few funds.....over the years..... come on like this one did early in its life as a fund. NONE of them are household names today. I would personally be EXTREMELY CAREFUL in buying this fund now or ever. I have strong doubts that it will ever perform as it did during the pandemic. I know many will say....."hey this is a great deal, it is on sale by 70%". Well I remind you of the old saying about.......trying to catch a falling knife. In this case the knife is being dropped point first from The Empire State building.

The pandemic was a one time very specific situation for this fund. There is no guarantee that the majority of holdings in this fund will EVER be profitable. Buyer Beware.

 

Here are the TESLA earnings.

Tesla reports $18.76 billion in revenue and record margins in Q1

https://www.cnbc.com/2022/04/20/tesla-tsla-earnings-q1-2022.html

(BOLD is my opinion OR what I consider important content)

"Key Points

• Tesla beat analysts’ expectations on top and bottom lines for Q1 2022.
• For the period ending March 31, 2022 Tesla reported $3.22 earnings per share, and revenue of $18.76 billion.
• It also recorded record automotive margins of 32.9%.

Tesla just reported first-quarter earnings for 2022 and beat analysts’ expectations on the top and bottom lines. Here are the key numbers.

• Earnings per share: $3.22 vs $2.26 expected
• Revenue: $18.76 billion vs $17.80 billion expected

Shares rose as high as 6% in after-hours trading.

Automotive revenue reached $16.86 billion, up 87% from the same period last year. Automotive gross margins jumped to a record 32.9% with Tesla reporting gross profit of $5.54 billion in its main segment. Regulatory credits accounted for $679 million of automotive revenue for the quarter.

Revenue growth was driven in part by an increase in the number of cars Tesla delivered, and an increase in average sales prices, the company said in its shareholder deck.

Early this month, Tesla reported vehicle deliveries of 310,048 for the first quarter, the closest approximation of sales disclosed by the company. Model 3 and Model Y vehicles comprised 95%, or 295,324, of deliveries in the period ending March 31, 2022.

On the company’s earnings call, CFO Zachary Kirkhorn and CEO Elon Musk said that Tesla remains confident that it can grow at least 50% over 2021 numbers. However, the execs noted that the company has lost about a month of “build volume” in Shanghai due to Covid-related shutdowns.

“Production is resuming at limited levels, and we’re working to get back to full production as quickly as possible,” Kirkhorn said.

Despite this slowdown, Musk said, “It seems likely that we’ll be able to produce one and a half million cars this year.” He cautioned that customers ordering now are facing a long waitlist, and some of their orders won’t arrive until next year.

Musk also acknowledged that autonomous driving advances were taking longer than he anticipated.

“With respect to full-self driving, of any technology development I’ve ever been involved in, I’ve never really seen more kind of false dawns where it seems like we’re going to break through but we don’t.” He encouraged people to join Tesla’s FSD Beta program, which requires Tesla owners to buy or subscribe to Tesla’s FSD premium driver assistance package first, then achieve a high driver safety score. (FSD, which costs $12,000 up front or $199 a month, does not make Tesla vehicles fully autonomous.)

Musk declined to give details on a “futuristic” robotaxi that he said the company was now working on in early April. Tesla will hold a robotaxi event next year, he said, and is “aiming for volume production in 2024.”

In its energy segment, Tesla’s solar deployments dropped by nearly half to 48 MW in the first quarter of 2022 versus the same time last year. The company deployed 846 MWh of lithium ion based battery energy storage systems, up 90% from the same time last year, but down from the previous quarter.

The company said declines in solar deployments were caused by import delays on certain components that were beyond Tesla’s control.

Amid inflationary pressures, parts and semiconductor chip shortages exacerbated by the ongoing pandemic and Russia’s brutal invasion of Ukraine, Tesla global vehicle inventory dwindled to a three-day supply in the first quarter of 2022. That’s down from a four-day supply of global vehicle inventory in the previous quarter, and eight-day supply during the first quarter of 2021.

“Our own factories have been running below capacity for several quarters,” Tesla said in its shareholder deck. The company did not give detailed guidance on deliveries going forward, but said it expects 50% annual growth on a multi-year basis, and warned that supply chain constraints are likely to continue through 2022. Musk also said that he believes inflation is worse than reported, and will continue through the year."

MY COMMENT

These are total BLOW-OUT earnings. It is like someone did a rope-a-dope on all the analysts. Well done Tesla.