August 13th, 2022 | High Prices, Inflation, Stocks, Population, Las Vegas, Railroads & Strong Job Market

High Prices
The highly anticipated inflation numbers for July came out today and were better than expected. July inflation was 8.5% a decline from June‘s inflation numbers of 9.1% and also below the forecast of 8.7%. One month does not make a trend however I believe this could be the start of the decline to December 31, couple reasons I think that.
We have continued to post about different commodities and how their prices have come down and it would take some time to get through to the consumer. I believe we’re starting to see the benefit of those declining commodity prices at those commodity prices will continue to decline. Supply chains at this time will not drop and will either stabilize or increase supply and continue to rise faster than demand. I also believe the consumer will not go back to high spending, they are still feeling the effects of the higher prices and will continue to reduce where they can.
I have also mentioned in the past about the higher base number for inflation which would make year over year inflation numbers lower.
Stay tuned we will continue to watch inflation closely

Inflation
I have talked in the past how I expect inflation will ease as commodity prices decline and we are now seeing that unravel as hedge funds have continued to drop the contracts bringing prices way down for soybeans, wheat, and corn. The biggest decline has been seen in wheat, which is down 27% over the past three months, corn has fallen 24% over the same time while soybean is down 14%. This will not be reflected tomorrow at the grocery store and if we have a difficult harvest this summer and Ukraine exports of wheat stop again this could turn around and go back up. We will be watching this but as of now I think will see inflation cool over the next few months

Stocks
On our radio show and podcast the Smart Investing Show, one of the valuations that we cover is the price to tangible book value which backs out intangible assets. When they economy slows down and markets decline this is when investors can begin to see intangible asset write downs. Currently intangible assets now account for about 30% of the total assets of the 500 largest US companies, which does not include banks and real estate firms. Compare that to 10 years ago when it was only 5%. With higher interest rates, lower growth projections and lower stock prices this can cause companies to do what’s called an impairment of assets and write down all or some of the intangible assets. Some analysts and others say it doesn’t matter because they are non-cash write downs. We choose to be more conservative and say that these intangible assets represent cash paid at the time of purchase and had the company not overpaid for the asset they would still have that cash on the balance sheet. It is also apparent that companies that are forced to write down their intangible assets tend to underperform the market for years after the impairment. This is why at my investment firm Wilsey Asset Management for well over 20 years when we are investing we always look at what the intangible assets are during good times and bad times and this is why when we go through difficult times like now we know we have very strong companies that can weather the storm.

Population
The current world population is 7.96 billion people, and it is projected by the year 2050, (which is now only about 27 years away) the population will grow to 9.7 billion people. The question is how will we feed all these people? It is very interesting to note how farming more than ever needs to be extremely productive. There are companies now that are using drones, robotics, navigation systems and extensive use of data and analytics to make farmers more productive. Some companies making headway in this industry which may be good long-term investments would include Deere and CNH industrial. This may also be one of those investments that make you feel good because you’re doing something to help feed the world and yet make money on your investment. Please note this could be a very long term investment and we have not done the fundamental analysis on these companies.

Las Vegas
Las Vegas has always been a popular tourist destination, but it is really hitting historical highs as consumers are looking for good value in their vacations. Caesars and MGM last week reported record performances for the operations in the gambling and entertainment Mecca in the latest quarter. They were saying that older consumers are returning to the strip as they are no longer concerned about the pandemic. Also, international travelers began coming back in recent weeks and businesses are booking conventions at a high pace filling up the calendar. This has come with a cost as in June 2020 the average daily hotel room rate on the strip was only $118 and in June 2022 that had skyrocketed to $167, a 42% increase. If you plan on staying at the higher end properties during the weekend, be prepared for a price around $500. And even if you’re willing to pay those higher rates occupancy at places like Caesars was at 97% so don’t expect any deals or the exact room you want. Year over year visitation to Las Vegas has increased by 12% from June 2021 to June 2022 and the gambling revenue in June was about $1.3 billion which is the 16th month in a row that the gambling revenue was over $1 billion.

Railroads
I’ve always liked the railroads as an investment because they were rather simple. Unfortunately, over the last couple years they have become too expensive for us to hold in our portfolio, but that could be changing as labor issues continue to build for the railroads. President Biden and the government have stepped in, and Congress can force a deal to prevent a strike. Wall Street is predicting a 2 to 3% rise in wages which will hurt the railroads because labor is their largest expense at 20% of revenue. Working in the railroad industry may not be the most glamorous job but trainees can start at $50,000 for the first year while conductors and engineers can hit $80,000 on an annual basis plus benefits. There is a labor shortage at the railroads, but they are competing for workers with a shortage of 80,000 truckers, and over 10,000 pilots. I am hopeful one day in the future maybe we can see a railroad company in the Wilsey Asset Management portfolio.

Stock Growth
The NASDAQ had a nice reduction in the year-to-date decline from nearly 28% to around 17% today. That was helped because of a large amount of inflows to growth stocks in July of $9.3B which was the largest on record. However, value stocks are still ahead of growth stocks by $74 billion year to date showing people are still cautious with their investing. I believe people are underestimating the Fed and still believe value will win come December 31st.

Strong Job Market
Some good news on the recession front, S&P 500 companies are still spending on capital expenditures at a good rate. Year over year their increase is 20% on capital expenditures. What this tells me at this point is the job market should remain strong and people should continue to have jobs. As always, we will be watching this closely for any changes!

 

Harrison - Charitable Remainder Trusts