Earnings season?
50% or so rally off the bottom. Don’t be fooled by this rally. The data is still negative.
Corporate Earnings Season is Starting
QUOTE OF THE WEEK “Kind words are the music of the world.” – F. W. Faber TECH CORNER Corporate Earnings Season is Starting First quarter earnings season has already started and will last through Memorial Day. Some banks have already reported showing big banks doing well and some small banks not so much. As far as the banks are concerned, the Fed has stepped in giving them access to a lending window should they get into trouble if depositors start to make a “run on the bank”. So as of now, it appears banks are safe. The big concern for the economy is that because of the failure of Silicon Valley Bank, which has led to transfers of deposits from smaller banks to larger banks, they are now reluctant to make loans that would deplete their capital. Even the big banks are cutting back on loans. For example, Bank of America, one of the two biggest banks along with J.P. Morgan, has cut back on loans. Bank of America loan volume has dropped over the last three quarters by 12%, 10% and 7% respectively. Without the access to loans, businesses are restricted in expanding and often are facing restrictions in day to day operations. We are now in the part of the economic cycle where GDP (Gross Domestic Product), inflation, and corporate profits are declining. The question is how will this part of the cycle affect the stock and bond markets? The easy answer is if inflation is declining the bond market will do well because interest rates should decline. This is what we are expecting to happen and when we start to see declining rates, we will move into the bond market. As part of this cycle and if corporate profits start to decline, the stock market will do poorly. Remember, stocks rise when profits are rising and stocks decline when profits are declining. All indications show that we are beginning a corporate profit’s recession. The combination of banks being less willing to lend and a slowing economy, we see hard times ahead for the stock market. Even though it is early in the corporate earnings season we are getting an indication of where we are headed. For example, using the Nasdaq 100 which is made up of the largest 100 companies in the Nasdaq Index, nine of the 100 companies have reported earnings. The composite earnings of those nine companies are down -38.3%. We won’t have the entire picture of this earnings season for a while but the trend of the data so far is recessionary. Sources: Yahoo Finance, Hedgeye, Arizona Daily Star, Bloomberg, NPR,
Five Questions about Long-Term Care
Grab some popcorn and the drink of your choice. Sit back and watch the first quarter data come in.
Turmoil in the banking sector
The failed banks bought those long duration Treasuries when interest rates were low.
Officials Considered Pausing Increases
Projection of interest rates
The Collapse of Silicon Valley Bank
The FDIC’s guarantee
Week of March 6, 2023
QUOTE OF THE WEEK “The soul would have no rainbow if the eyes had no tears.” – Native American Proverb TECH CORNER Federal Reserve Chairman Jerome Powell testified today before Congress and the equity markets didn’t like what he had to say….
Equity Market, Economy and Housing Front
QUOTE OF THE WEEK “Hold fast to dreams, for if dreams die, life is a brokem winged bird that cannot fly.” TECH CORNER Last week was a bad week for the equity markets. The S&P 500 was down -2.66%, the Dow was down -2.97% and the Nasdaq was down -3.31%. As of Wednesday morning of this week, the equity markets are pretty much flat. It is appearing that they are giving up most of their gains for 2023. The S&P 500 has been down for the third straight week. Just a reminder, we do not hold any positions in the equity markets except for a small allocation to Private Equity. Just in the last few days a relatively small company, American Car Centers, declared bankruptcy. They have 40 dealerships around the country and they specialize in selling to lower credit car buyers. They came out with a $220 million dollar issue as an Asset Backed Security offering. What that means is that the assets backing the offering are the outstanding loans to their customers. The sale of the investment grade portion of the loans went fine, however the sale of the below investment grade loans had no buyers. This is the “canary in the coal mine” indicator of trouble ahead. I subscribe to text messages from a source called The Car Guy. He is a dealer in the car business and gives me insights on the auto industry. Last year he predicted that this year would be the year of auto loan defaults. As the lower end consumer gets squeezed by wages not keeping up with inflation for 24 straight months, those car buyers will start defaulting on their loans. This is just one indication that the economy is starting to get in trouble. Another sign that the economy is slowing is the demand for industrial chemicals and metals. Last month the aggregate price of industrial chemicals and metals was down around -15% from the previous month. Just a few examples were Urea Ammonia -32.5%, Rhodium -10.8%, nickel k-15.9%, and tin -16.8%. These were just some examples on a long list. On the housing front, mortgage purchase applications were down from 180,000 to 139,000 last week which shows a slowing in the housing market. In the last few weeks there has been a nationwide drop in housing prices and as long as mortgage interest rates remain high, we will continue to see a decline in housing demand. The money supply (M2) declined again last month to -1.7% from -1.3%. This is the first time in 60 years that the money supply has gone negative which I talked about in a previous letter. What this means is when there is less money in the system, there is less money to spend. There are two events coming up that are not getting much attention as to how they will effect the economy. They both have to do with the consumer having less money to spend and that will slow the economy. The first is, as of today, the SNAP program or otherwise known as food stamps is being cut back by 33% in 32 states. That equates to $95 per person per month for 42 million people. That means that there will be 3 to 4 billion per month or 35 to 50 billion per year not being spent in the economy which is estimated that will lower the Gross Domestic Product (GDP) by 15-20 basis points per year. (One basis point is 1% percent of 1%.) The second is that the Supreme Court had a preliminary hearing yesterday on whether the Biden Administration could forgive 40 million borrowers of $10,000 per person or $20,000 for low income borrowers of student debt. From most people’s readings, the court seemed skeptical of finding in favor of the the loan forgiveness. If that is true, this will certainly tend to slow the economy over the longer term, however, there is a short term issue that will effect the economy soon. The shorter term issue is the fact that the forbearance of loan payments for the last three years on the student debt will expire on September 1st. The average monthly payment for undergraduate borrowers is $235 and $600 for graduate borrowers. I am pretty sure that the resumption of loan payments has probably not been factored into most people’s budgets. This out flow of payments to service the student loans will be taken out the money now being spent in the economy. Finally, the private employment agencies Indeed.com and Zip Recruiter.com are starting to report a decline of demand in the posting of job openings. These figures are much lower than the figures that are being reported by the U.S. government. Remember, employment is the last indicator to show that we are going into or are already in a recession. Think about it this way, most employers will hold onto good employees for a long as possible. It is expensive to hire and train a new employee, plus no employer wants to layoff anyone unless they have to. This lower demand for new employees is a start of a trend towards coming layoffs as the economy slows.
Last week’s Fed meeting
QUOTE OF THE WEEK “The only person you are destined to become is the person you decide to be.” TECH CORNER Last week the equity markets were pretty much flat with the S&P 500 -0.20%, the Dow up+ 0.02%, and the Nasdaq up +0.63%. What was telling was that the markets started the week up, and then on Thursday and Friday the markets started a deep dive and have continued down again today (Tuesday). I think the reality of the Consumer Price Index Report from last week showed that the Fed has a lot more work to do to get to their target of 2% inflation. In last week’s letter I quoted a lot of statistics from the report so I won’t go into them today. But it doesn’t look like the recent interest rate increases from the Fed are having the desired effect to lower inflation. The Fed has said that more increases are on the way and they will probably keep interest rates high through the rest of 2023. The big event this week is the release of the minutes from last week’s Fed meeting. That will tell us a lot about what the Fed is planning for interest rates. If they come out “hawkish”, meaning they plan to keep raising rates and keeping them high, the equity markets won’t like it. Right now the equity markets are hoping for the elusive “soft landing”. If the Fed is “hawkish”, the chance of a “soft landing” will fade quickly. TOM’S THOUGHTS What Is Probate? Probate is one of those terms that is frequently used without people understanding what it is. The following article from Broadridge provides a short explanation. Enjoy. When you die, you leave behind your estate. Your estate consists of your assets — all of your money, real estate, and worldly belongings. Your estate also includes your debts, expenses, and unpaid taxes. After you die, somebody must take charge of your estate and settle your affairs. This person will take your estate through probate, a court-supervised process that winds up your financial affairs after your death. The proceedings take place in the state where you were living at the time of your death. Owning property in more than one state can result in multiple probate proceedings. This is known as ancillary probate. How does probate start? If your estate is subject to probate, someone (usually a family member) begins the process by filing an application for the probate of your will. The application is known as a petition. The petitioner brings it to the probate court along with your will. Usually, the petitioner will file an application for the appointment of an executor at the same time. The court first rules on the validity of the will. Assuming that the will meets all of your state’s legal requirements, the court will then rule on the application for an executor. If the executor meets your state’s requirements and is otherwise fit to serve, the court generally approves the application. What’s an executor? The executor is the person whom you choose to handle the settlement of your estate. Typically, the executor is a spouse or a close family member, but you may want to name a professional executor, such as a bank or attorney. You’ll want to choose someone whom you trust will be able to carry out your wishes as stated in the will. The executor has a fiduciary duty — that is, a heightened responsibility to be honest, impartial, and financially responsible. Now, this doesn’t mean that your executor has to be an attorney or tax wizard, but merely has the common sense to know when to ask for specialized advice. Your executor’s duties may include: The probate court supervises and oversees the entire process. Some states allow a less formal process if the estate is small and there are no complicated issues to resolve. In those states allowing informal probate, the court may be involved only indirectly. This may speed up the probate process, which can take years. What if you don’t name an executor? If you don’t name an executor in your will, or if the executor can’t serve for some reason, the court will appoint an administrator to settle your estate according to the terms of your will. If you die without a will, the court will also appoint an administrator to settle your estate. This administrator will follow a special set of laws, known as intestacy laws, that are made for such situations. Is all of your property subject to probate? Although most assets in your estate may pass through the probate process, other assets may not. It often depends on the type of asset or how an asset is titled. For example, many married couples own their residence jointly with rights of survivorship. Property owned in this manner bypasses probate entirely and passes by “operation of law.” That is, at death, the property passes directly to the joint owner regardless of the terms of the will and without going through probate. Other assets that may bypass probate include:
Markets fighting the bad economics news
QUOTE OF THE WEEK “One way to get the most out of life is to look upon it as an adventure.” – William Feather TECH CORNER Last week the equity markets declined with the S&P 500 down -1.07%, the Dow down -0.11% and the Nasdaq down -2.37%. This week as of Thursday, the markets are pretty much flat. The markets are really fighting the bad economics news far better than I expected so far this year. They are factoring in a soft landing for the economy. Based on what I see in the data, the odds of that happening are extremely low. The big news this week was the Consumer Price Index Report (CPI) for January. The headline CPI was up +6.4% (Y/Y) year over year. The unexpected print was the (M/M) month over month +0.5%. Core CPI which takes out food and energy was up +0.4% M/M and up +5.6% Y/Y. Shelter was up +0.7% M/M and accelerated to +7.8% Y/Y. Services ex-Shelter was up +0.6% M/M and +7.2% Y/Y. I can go on with more statistics on the inflation report, but you get the picture. The Fed has a long way to go to get inflation down to their target of 2%. The Fed in its announcements has been especially hawkish in saying that they are going to continue to raise rates and once they stop raising rates they will keep rates high until they reach their goal of 2% or something breaks in the financial system. Please believe them that they will do what they say. They are not going to ease off too early as past Feds have done and have inflation come roaring back. The markets I think are delusional in thinking the Fed will pull off a soft landing. All the economic indicators are pointing down at an increasing rate. They have reached the point where in the past they have been a precursor to a recession. Whether it is a shallow recession or a deep recession we will certainly have a deep corporate earnings recession which will lead to lower stock prices. It happens every time. LARRY’S THOUGHTS I found this interesting chart showing the Interstate Migration Trends for 2022. It is pretty much what I expected. The movement is away from high income tax states to low or no income tax states. There also seems to be a movement from cold weather states to warm weather states.
Are we are headed for a recession?
QUOTE OF THE WEEK “The size of success is measured by the strength of your desire, the size of your dream, and how you handle disappointment along the way.” – Robert Kiyosaki TECH CORNER There was no letter last week. I was waiting for the results of the Fed meeting and by the time I wrote the letter it was too late to get it out by Friday. The Fed met last week and raised the interest rate by 1/4 of a percent as expected. Speaking at the Economic Club of Washington D.C, Chairman Powell reiterated his comments from last week where he said that we can expect further rate increases going forward. He said it is going to take quite a bit of time and it is not going to be smooth to get inflation down to the Fed’s 2% target and did anticipate that the Fed will keep interest rates high for the rest of 2023. After December’s market decline we have had a nice little bear market rally with the S&P 500 up +7.86% and the Nasdaq up +14.77%. This is not unusual for a bear market rally. During the bear market of 2000 to 2002 there were 11 bear market rallies with one rally of +49%. The markets seem to think that the Fed will back off soon due to inflation dipping slightly over the last quarter but I am of the opinion that the Fed will do exactly as they said they will and keep raising rates and keeping them high for a long period. Chairman Powell has said that the economy can’t thrive with a 4% or 5% inflation rate imbedded for the long term. Under the covers there are many things going wrong with the economy and the trend is definitely going in the wrong direction. The ISM Manufacturing Index just went into contraction mode with a print of 47.40. Any reading less than 50 is contracting. I want you to pay special attention to the rate of change downward of the ISM Manufacturing Index. It doesn’t look like it is anywhere near the bottom. The ISM Manufacturing New Orders Index is also headed straight down. Every time the New Orders Index has printed below 42 we have had a recession. The Leading Economic Indicators (LEI) which is a forward indicator of the economy has been down for seven consecutive months. A recession has commenced in every prior instance in which LEI has been negative for 6 straight months. The press has been talking about how the consumer is in good shape and still spending. On an inflation adjusted basis that is not true. Inflation has caused the cost of living to rise which leads to lower consumption capacity meaning companies won’t sell as much stuff. That means revenues are going down and with wages going up that puts a squeeze on corporate profits. So far 262 of the 500 companies of the S&P 500 have reported earnings for the fourth quarter of 2022 with earnings are down -3.58% so far. That percentage includes Energy being up +68.97%. If you exclude Energy the number looks really bad. Another factor is that Liquidity in the monetary system is drying up. If there is less money in the system, there is less money to buy stuff from companies, thus lower profits. For the first time since 1960 the growth of the money supply went negative in 2022. Take a look at 2020 and 2021 when the money supply went up +24.84% and +12.37%. The stock market did quite well. Now look at 2022 when the money supply was negative -0.64%, the markets crashed. I could go on and on with statistics but you get the picture. We are headed for a recession and it is already baked in because of the direction of the rate of change of the data. We are currently positioned in a Money Market fund in order to avoid the coming recession. At some point in time if history is an indicator we will be moving to U.S. Treasury Bonds as longer term interest rates start to decline. Remember bond prices go up when interest rates decline. KATHY’S THOUGHTS Many of us can be unsure of what to keep and for how long to keep records and so I thought with tax season upon us, I would share this information with you as a refresher. Record Retention: Deciding Which Financial Records to Keep Keep critical documents and records safe and secure but accessible in a time of need Certain documents and records are too important to retain in an ordinary file drawer. Fortunately, they are also the ones you tend to need least frequently. If they are stolen or destroyed by a catastrophe such as flood or fire, replacing them could be extraordinarily difficult, if not impossible. One of the best places to retain such items is a safety deposit box. These can be rented for a small monthly fee at many banks. The boxes are actually locked drawers within the bank’s vault. Various sizes are often available to meet individual needs. A home safe is another option, provided that it is adequately rated to protect contents from fire, water, explosions (gas leaks), and other calamities. Documents deserving extra protection include: Keeping copies of vital records can save time, money, and headaches There may be times when you need to know certain information contained on documents you’ve placed in safekeeping but don’t need the actual document. Avoid the inconvenience of obtaining the original documents by making copies of them for your file. Tip: Create one file that includes copies of all documents you’ve placed in safekeeping (e.g., a “Safety Deposit Box” file). Then, you not only can turn to it for vital facts, but if you are incapacitated, whoever handles your important affairs will be able to locate key documents quickly. Caution: The specific contents of some documents, such as wills and trusts, may be inappropriate to keep in more
IRA Contribution Limits
So far this year, as of this writing, the S&P 500 is up 3.2% YTD and the Nasdaq is up 6.1% YTD but the Bear Market is not over…
Bear Market Is Not Over
So far this year, as of this writing, the S&P 500 is up 3.2% YTD and the Nasdaq is up 6.1% YTD but the Bear Market is not over…
Equity Markets Have Held Steady For The 4th Quarter
The year has started off well for the equity markets. Last week the equity markets were up between 1% and 2%…
Economic Indicators Are Much Clearer
The economic indicators are much clearer this year than last year. With the addition of Omega Squared as our new advisor…
Volatility Spiking
We are still in Quad IV and getting deeper with the trend declining. Because of the strength of the downward trend, it looks like this trend should continue for a few more months. Of course, trends could change but the math doesn’t see that happening any time soon.
Social Security Survivor Benefits
However, no one needs more than 40 credits (10 years of work) to be “fully insured” for benefits.
The Decline
In other words, growth and inflation slowdown are imminent, and we can expect a deep Quad IV in the second quarter of 2022, whether you like it or not.
Quad 4
We are starting to see the signs of Quad IV coming down the tracks now.
Inheritance?
As much as we would appreciate a normal distribution of stock price returns, that’s just not how the stock market game works.
PVV
The three factors are Price, Volume, and Volatility with Volatility being the most important.
Inflation
We will soon start having some headwinds as people on unemployment and getting the extra $300 per month will soon lose the $300.
Infrastructure & College Funding
We don’t see a change in the Quads coming soon so it looks like smooth sailing for a while.
More on Housing
Yet, the number of initial jobless claimants remains at 16 million or roughly ten times the 1.7 million job unemployment claimants in January 2020.
Taxation of Investments
This rapid increase in housing prices may moderate going forward.
Grocery Prices Apocalypse
The inflation issue comes down to exceedingly low inventories and increased demand due to the public “getting out of jail” with lots of money in their pockets
Jobs
The US job market added only 266,000 jobs in April, falling really far short of expectations of one million new jobs.
Personal Income Rises
Starting in Mid March and through most of April, there has been a swing from growth outperformance to value outperformance.
Incapacity
What we are now seeing is a rotation from value investing back towards growth investing.
Retail Sales
We think that the March report is the start of what will be an extraordinary year in household spending.
Your Compete Number
You may want to check how you have local numbers entered into your cell phones.
Week of April 5, 2021
“When do I think things will get back to normal or the way it used to be?”
Market News and More
That means the consumer is bullish on the future.
Relief!
I find it interesting that the Nasdaq performance is up only +2.54% year to date.
Trust Basics
We see a series of lower highs and lower lows in some of the bellwether market indicators.
Pullback & Job Growth
The one negative in investors’ eyes is that all this demand will increase inflation.
The Big Drop
But the real question is, will the rise in interest rates adversely affect the stock market?
Nothing But Green Lights Ahead!
We expect an especially strong recovery in the economy …
Stimulus
I expect FOMO (fear of missing out) to infect most investors.
Employment
Whether this is the correct move to make probably depends on your political preference.
