The Long Term Investor

I am STILL green for the day......with 20 minutes to go. Even with ONLY 20 minutes....I dont take it for granted.

My only red stocks today are.....Amazon, Home Depot, and Honeywell.

 

I hope so. BUT....I would not count on it this time around. This time inflation is different. It is based on ENERGY and supply chain disruptions. I dont think a Bear Market will put a dent in this sort of inflation.

Bear markets 'always' bring down inflation: DataTrek

https://finance.yahoo.com/news/bear-markets-always-bring-lower-us-inflation-data-trek-192200996.html

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

"The S&P 500 (^GSPC) is officially in a bear market.

For anyone watching their portfolios — or near retirement — this is stressful.

But there’s a bright side, of sorts: bear markets tend to scare away the inflation crushing investors today.

“Equity bear markets have one hidden positive: they always bring lower US inflation,” DataTrek’s Nicholas Colas wrote on Tuesday.

Though this might be cold comfort to an investor that bought stocks when the S&P 500 was 4,766 at the end of 2021, it’s a potential light at the end of the tunnel for those less exposed to markets but very exposed to the rising costs of living.

Looking at historical precedent, Colas pointed to 1973 to 1974, 2000 to 2002, and 2008 markets, noting that in the first and last instances, “PCE inflation fell by 6% during/right after a +35% decline for the S&P 500.”

The reason why this happens is simple. When people’s portfolios are fat, they feel rich and feel comfortable spending. But, Colas wrote, “the wealth effect cuts both ways, after all. When consumers see their net worth noticeably drop, their aggregate demand should decline as well.”

“On top of that,” Colas continued, “companies with plunging stock prices don’t tend to hire a lot of new workers or grant large pay raises. Wage inflation, a serious problem over the last 6 to 12 months, should start to moderate.”

News on Tuesday of layoffs at companies ranging from Coinbase (COIN) to Redfin (RDFN) certainly suggests these labor market pressures are building.

And while DataTrek’s use of “always” suggests certainty, the amount of inflation relief isn’t clear. However, the current rate of inflation is in-line with drops seen in 1974 and 2008, as PCE inflation in April topped 6%.

Another elephant in the room, of course, is DataTrek’s reference to a 35% drop. The S&P 500 may be down about 22% so far this year, but 22% is not 35%. So: does the index need to get there — or trade to 3,118 from a level of around 3,710 today — for investors to find relief from inflation? Fortunately, Colas says no.

“While we have not yet seen stock prices decline by 35 percent, history says we may not need that entire move (or the economic contraction it presages) to get inflation under control,” Colas wrote.

In Colas' view, as a recession becomes the consensus view among investors, the full 35% drop in the stock market that prices in this recession may not come to pass.

"While we do not think we are at the lows for the year, it is getting easier to connect the dots regarding where stocks might bottom," Colas wrote. "As investors grow comfortable that valuations reflect an economic slowdown and recession-level earnings, markets should stabilize.""

MY COMMENT

I am not sure that I buy this....this time around. If it is true it is not because of a Bear Market.......it is due to the fact that the Bear Market was caused by either recession or a crash....usually caused by the FED.

They dont take this data back far enough along the chain. The Bear Market is a symptom....not a cause of anything. It is ACTUALLY the recession/crash that is the cause of the Bear Market that causes inflation to start to drop. AND....of course the recession/crash is usually caused by the FED.

So if you want the true headline here it should be:

"The FED Through Causing Market Crashes Brings Down Inflation"

NOW.....I would actually agree with that statement.

 

Unfortunately this is probably true.

Economist: ‘The housing market is basically going into hibernation’

https://finance.yahoo.com/news/housing-market-hibernation-191801666.html

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

"What was once a ‘red hot’ housing market is now one quickly cooling off.

“The housing market is basically going into hibernation with buyers and sellers backing off,” Daryl Fairweather, chief economist at Redfin, told Yahoo Finance Live (video above). “Fewer new listings are coming on the market and there's less demand from buyers ... Prices won't fall [but] there's just going to be a lot less activity in home sales happening."

Buyers have been startled by the unrelenting upward march by mortgage rates this year, with the rate on the 30-year home loan sitting above 5% since mid-April. Runaway inflation and talks of a recession are also spooking buyers.

Some sellers, too, are reconsidering their plans.

“The listings right now are homes that haven't been able to sell earlier — they might have some issues, may be overpriced, or luxury homes that people don't want to stretch their budgets to afford,” Fairweather said. “There are fewer buyers going on home tours, too.”

For sellers who are considering putting their home on the market, it’s a strategic balance of pricing because the window to reach buyers who can afford to purchase is short.

“From a seller's perspective, you have to be careful and list at something more conservative, so you can get at least one offer that first week," Fairweather said. "Because if your home sits on the market, that's kind of like a Scarlet letter [and] buyers don't come back the way that they come out during that first week on the market.”

Just a couple of months ago, bidding wars with all-cash offers had sellers in the driver’s seat. Now the market is changing as rising rates make mortgages less affordable for buyers.

“As buyers back off, some sellers who don't have any option but to sell will have to work a little harder because they're not going to have multiple offers like they did before," Fairweather said. "But they will still find a buyer as long as they're realistic with their pricing.”"

MY COMMENT

The big HIT is going to be taken by home buyers. With the rate increases being talked about I see mortgage rates going to 6% to 8.5% over the next year. People are going to be very surprised how quickly and how high the rates will go. Much of this is due to a generation of house hunters having never experienced NORMAL mortgage rates. The PARTY is over. Anyone that got a mortgage or a refinance in the GOLDEN AGE of 2% and 3% mortgage money should hang on to that financing as long as they can.

 

A good day for me today. Not big dollars......but green is green. Seven of my ten positions were UP today. I also got in a beat on the SP500 by .57% today.

We move on from here.

 

YES.....Caterpillar is moving to Texas. No surprise there.

 

Yep....Zukodany.

The FED can either crash the economy by raising rates a ton all at once and get it over with. Or......they can slow motion crash the economy and drag the crash out for a year or two.

It is so nice to have options.

 

I am celebrating Inflation. We are about to start the three month span......July, August, September......that will be used to set the new Social Security Cost Of Living raise for next year. The higher inflation the better. I may as well get.....something.....out of it.

 

The problem with doing the rate increases all at once and killing inflation is........same as in the late 1970's early 1980's......we would have to raise the rates up to double digits and the crash would last for years.

 

You can tell it is FED DAY today. The markets are UP nicely.

If my memory is right the same thing happened last time on FED day....the markets went up. I assume this is because the markets CRAVE certainty.....same as plants crave electrolytes.

When the actual FED DAY comes around and the actual amount of the increase is made known.........the markets have what they crave.....certainty. AND....at that point the markets can move on.

Of course.....what happens at that point is that the media immediately starts to speculate and fear monger the next FED DAY rate increase and they throw the markets back into uncertainty and confusion. So we go around and around and around.

 

Here is an obscure topic, but relevant.

Accounting for (Rule) Differences
A new accounting rule is skewing bank earnings, but stocks see through it.

https://www.fisherinvestments.com/en-us/marketminder/accounting-for-rule-differences

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

"Among the lesser-seen worries in the cornucopia garnering investors’ ire lately hides S&P 500 Financials earnings’ -19.9% y/y plunge in Q1 2022—a highly unusual development during a stretch where most economic indicators are on an upswing and the vast majority of sectors are enjoying earnings growth. The culprit, as The Wall Street Journal examined last weekend, is both simple and complex: A relatively new accounting rule is distorting earnings math bigtime. Interestingly, unlike the last time an accounting rule change distorted bank earnings, US Financials are actually holding up better than the S&P 500 overall. That is a change from 2007 – 2009, when another accounting rule destroyed bank balance sheets, triggering the global financial crisis. Understanding the rules’ differences can help investors get a better grasp of both past and present, in our view.

The rule in question is known as Current Expected Credit Loss, or CECL. As the name implies, it requires banks to account for all reasonably expected losses in their loan portfolio based on current economic conditions. Before CECL came on the scene, banks had to recognize—and provision for—loan losses only when they were imminent. While this system worked well for decades, following the 2007 – 2009 financial crisis, some industry critics argued banks were late to acknowledge trouble in their loan portfolios. In our view, they were misinterpreting the havoc wreaked by another accounting rule—FAS 157, the mark-to-market accounting rule, and its illogical application to illiquid and hard-to-value assets that banks never intended to sell. But cooler heads rarely prevail in these matters, so regulators decided the best way to shore up banks’ defenses would be to require them to provision for all expected credit losses over a loan’s entire lifetime.

What this means, in practice, is that banks must constantly adjust a given loan’s probability of default, usually based on current economic and financial conditions—and on the presumption that these conditions will last indefinitely. This has led to some outsized swings in banks’ earnings—swings that don’t totally reflect actual economic reality. In early 2020, at the height of lockdowns, this led to banks ratcheting up default projections and beefing up loan loss reserves accordingly. That was a big contributor to falling bank earnings early that year, as these provisions are basically paper losses. But a year later, with economies more open and an alphabet soup of fiscal and monetary assistance programs in place, expected defaults plunged, enabling banks to reduce their loan loss provisions—a paper gain. Now, high inflation and rising interest rates are again raising default projections, contributing to S&P 500 bank earnings falling -30.7% in Q1 2022.[ii] At some point in the future this will flip again, delivering a paper fillip to earnings.

Before CECL took effect at the beginning of 2020, bank earnings rarely diverged sharply from total S&P 500 earnings—the main exception was in 2015 – 2016, when falling oil prices wrecked Energy earnings, skewing the total lower. But since CECL entered the fray, divergence has become the norm, as Exhibit 1 shows. Note the magnified swings during and after lockdowns, blowing away S&P 500 results to the up and down side.

Exhibit 1: CECL’s Bank Earnings Skew


Source: FactSet, as of 6/9/2022.

To understand why these swings represent some less-than-ideal side effects of the new rules, we will have to use a wee bit of jargon. When it comes to shoring up bank balance sheets, beneficial measures are usually what industry insiders would call “counter-cyclical”—banks would build up rainy day reserves in good times and draw them down in bad times. That is the purpose of a buffer: It is a cushion against illiquidity and insolvency in a crisis. This is what all the bank capital changes applied globally after the financial crisis sought to accomplish. CECL, by contrast, is what econ-types call “pro-cyclical”—it releases reserves in good times and adds them when conditions get tough. As a result, it makes net income look extra-good in happy times and extra-bad when things go south.

FAS 157 was also pro-cyclical. It required banks to value every asset on their balance sheet at comparable assets’ most recent market value—regardless of how hard these assets were to value, and regardless of whether banks intended to sell. So when hedge funds and other banks sold illiquid mortgage-backed securities at fire sale prices, it forced all banks to mark down similar assets on their balance sheets at similar discounts. That destroyed bank capital, forcing some banks to sell their own mortgage-backed securities in a pinch, which triggered more writedowns, then more fire sales, then more writedowns. Lather, rinse, repeat—with some institutions failing, others bailed out, and chaos reigning on Wall Street and Main Street alike until regulators suspended the rule’s application to hold-to-maturity assets. This was the vicious cycle that did in Lehman Brothers in September 2008.

CECL and FAS 157 both had outsized impacts on bank earnings. So why did FAS 157 cause a crisis while CECL has mostly generated sighs and annoyed soundbites from bank CEOs? For one, as mentioned earlier, FAS 157 wiped out bank capital. CECL doesn’t—it is a paper loss reflecting an increase in cash reserves earmarked to guard against expected future defaults. Two, loan losses weren’t at issue in the global financial crisis. According to former FDIC head Bill Isaac, who crunched the numbers in his excellent book on that period, Senseless Panic, total loan losses at this time were only about $200 billion. That is big in a vacuum, but not inherently large enough to wallop the global economy. But FAS 157 magnified this figure into nearly $2 trillion in exaggerated and unnecessary writedowns—that was the wallop. It destroyed bank capital used to underpin lending capacity. Credit froze. CECL just doesn’t compare.

Overall, we are inclined to agree with JPMorgan Chase CEO Jamie Dimon’s assessment of the situation. When announcing bumper results in Q1 2021, tied largely to the release of loan loss provisions set aside under CECL rules during lockdowns, he put it bluntly: “We don’t consider it profit. It’s ink on paper.”[iii] In our view, markets see this too. In 2008 and 2009, the fire sales and writedowns were a giant shock hitting a core aspect of banks’ operations. So were the government’s haphazard attempts to manage the situation, which stoked more uncertainty. But under CECL, markets are pretty good at sussing out how banks’ models will extrapolate current conditions into expected defaults. They can also delineate between actual and paper profits and losses, and they know CECL isn’t erasing capital in tough times.

Mind you, we don’t think CECL is the smartest rule ever applied. In addition to its pro-cyclicality, it essentially requires banks to forecast future loan losses by extrapolating the present economic and financial conditions in perpetuity. The past two years’ swings show the folly in this, as rapidly changing conditions brought rapidly changing CECL provisions. Then too, any number of variables could affect a borrower’s default risk over the entire lifespan of a loan. Far-future developments like this are simply unknowable.

So, it is a rather unhelpful rule. But thanks to markets’ efficiency and some key differences with FAS 157, it isn’t inherently destructive. Mostly, it is an academic curiosity that we encourage investors to be mindful of when assessing banks’ earnings."

MY COMMENT

If we could get government off the backs of business we might have a chance to see REAL data and results. We do need basic regulations to protect consumers and insure fair business processes. BUT...most of the time the regulations that are piled on business are either busy work, or punishment.

 

Here is what is the economic news of the day that is totally overshadowed by FED DAY.

US retail sales unexpectedly drop in May as inflation weighs on spending

https://finance.yahoo.com/news/may-retail-sales-data-june-15-2022-123734719.html

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

"U.S. retail sales registered a bigger-than-expected drop in May as motor vehicle sales plunged and record gasoline prices prompted households to cut back spending on other items.

The Commerce Department said Wednesday that retail sales fell 0.3% last month, down sharply from April's downwardly revised 0.7% increase, following 0.9% initially reported. May's print also marked the first decline in five months. Economists surveyed by Bloomberg expected the latest data to show a rise of 0.1%.

"Consumers pulled back on their spending in May as [a] price shock has curbed their enthusiasm," FWDBONDS Chief Economist Christopher Rupkey said.

Weakness in May's print was led by a slowdown in car purchases as vehicles and borrowing got more expensive. Sales at motor vehicle and parts dealers fell 3.5% in May. Without the autos component of the report, retail sales rose 0.5% during the month.

Spending at gas stations was up 4%, with last month's sales rising 43.2% against the prior year. Gas prices topped $5 per gallon nationwide last week, according to the latest data from AAA.

Excluding autos and gas, the pace of retail sales slowed to a 0.1% gain in May, compared to 0.8% the prior month.

Data also showed a dramatic slowdown in online shopping, with a 0.1% decline in activity during the month of May compared to the prior month's 0.7% increase.

The cut back on spending comes as inflation continues to climb steadily and consumer confidence retreats.

U.S. consumer prices accelerated 8.6% in May at the fastest rate since 1981, as Americans grapple with a surge in the cost of gas, food, and shelter, data showed Friday. At the same time, consumer sentiment sank to its worst level on record in early June as higher prices on everyday items dampen the outlook among Americans."

MY COMMENT

YES......the recession is here. People know it......even if government and others dont want to acknowledge it or talk about it.

 

Rate increases WILL work Zukodany. Just like they worked in the 1970's/1980's. BUT...remember it took long term 30 year Treasury rates getting up to 13% to 15% to do so. Imagine that today.

With all the various MORONS in power and pulling all the various strings at the moment......we "could" see a repeat of that time period. Emphasis on...."could"......not "probably". BUt....we are getting closer to hitting......"probably".

As I said......." Plants Crave Electrolytes".