Monday Sep 26, 2022
Monday Sep 26, 2022
The Fed continued to spook markets yesterday with the outlook for monetary policy. The 0.75% rate hike to a range of 3% - 3.25% came as no surprise, but the concern came when the outlook for rate hikes going forward was released. The current estimate is a terminal rate or an endpoint of 4.6% next year. Six of the 19 “dots” were in favor of taking rates to a 4.75%-5% range next year, but the central tendency was to 4.6%, which would put rates in the 4.5%-4.75% area. The current expectation is that the Fed will raise rates by at least 1.25% in its two remaining meetings this year and then potentially another 0.25% next year. I do believe at this rate the Fed has gone too far. They completely missed the mark last year and now are completely missing the mark on the other end. If you look at the first photo it is the dot plot from the meeting last September. You will notice not a single member had the Fed Funds Rate toping the 0.75% - 1.0% range and a majority believed the rate would fall between 0% and 0.5%. The second picture is the current dot plot which as you can see is drastically different. I wouldn't give much confidence in the current dot plot given how far off the Fed was at their meeting last September
Streaming services are now in a big hurry to add advertisements to their content to help reduce costs for subscribers. In addition to providers like Netflix, Paramount, Disney and Warner Bros. Discovery they will also be competing with Facebook and Google. Supply and demand being what it is, there's a possibility that the high available ad space will decrease the prices for advertising, especially with the slowdown in the economy. Also, don’t forget the traditional advertisements on TV and radio. There’s a term they are using in advertising called Cost Per Mille (CPM). Mille is Latin for thousand and it measures the price of 1,000 advertisement impressions. It is estimated that the CPMs will come in somewhere around $20-$30. HBO Max currently is topping that range over $40. For Netflix, depending on the analyst, estimates range from $20 to $50 CPM‘s. If Netflix does not get the higher price their stock could fall by another 40 to 50% from current levels. It was also revealed that studios that have a lot of content such as Paramount and Warner Bros. Discovery used to charge very low levels for content and have now been hoarding it for their own streaming platforms. This means other content providers like Netflix and Amazon will have to spend billions of dollars to create new content which may or may not attract viewers.
Being a value investor as I am, it means you only invest when what you’re buying is on sale. For the past couple years, we have been talking about growth stocks and real estate being well overpriced. Here is a comparison for you that backs that up. During the two-year timeframe of covid stimulus, household net worth ballooned by $39 trillion or 158% relative to the US GDP. The housing bubble of roughly 15 years ago saw household net worth increase by 98% of GDP during its two hottest years and the big dot com boom that eventually crashed saw an increase of 79% in household net worth compared with the United States GDP. Be careful where you invest or what you buy as those two other historical events ended poorly for many investors.
I have been guiding my clients that come December 31 of 2022 they’ll be very pleased with the way their portfolio looks. Much of that is based on what is in the portfolio, but there are other factors that I see as positive that I will share with you. Currently funds' relative exposure to the stock market is lower than 90% of historical readings, which means we should see more money come into the market before year end. Also, with the new tax law on stock buybacks I believe many corporations will dramatically increase their stock buybacks before December 31st rather than paying taxes in 2023. Lastly, I have continued to see improvement in commodities such as wheat, corn and soybeans with the prices being down in some areas more than 30%. I’ve also heard talk that meat supplies appear to be improving as well. This could help produce lower inflation numbers and that could lead to the Fed slowing down their interest rate hikes. I should also mention that this was the worst first half in over 50 years and it would not be surprising to see a bounce in the last quarter on the right equities.
Many times when we post about the employment situation, we get comments about why so many jobs and why they’re not being filled. First, we have never had this many open jobs going back to 2010 there were about 2 1/2 million open jobs compared to the 11 million now. It has been rising steadily. Second, our population is getting older and as that happens more people are retiring. In 1999 the percent of retirees of the population was around 15.75%. Today that has risen to nearly 20% and is expected to rise more as years pass. Third, we need to increase the legal immigration which has fallen off dramatically over the last 10 years, part of that was due to Covid. 10 years ago, legal immigration was around 800,000 a year and now has dropped to just over 200,000 a year. It is very difficult to include or count the illegal immigration. The difference with legal immigration is it also brings in what is known as STEM professionals. STEM stands for science, technology, engineering and mathematics. Immigrant students receive about half of all master's degrees in the STEM fields and about 44% of doctorates. The United States needs to substantially increase its legal immigration because of our low birth rate, if we do not, we will be experiencing a lower quality of living in the US in 15 to 20 years.
Some continue to say that we are wrong about Bitcoin continuing to drop dramatically in price. We also doubted the idea of companies like Beyond Meat and were told we didn't get it because many people are going to switch over to this new form of protein and we should be buying the company that trades under the symbol BYND. Back in July 2019 the stock had a high of $196/share and dropped to about $66/share 14 months later. Then January 2021 it came back to $178/share with people rejoicing. Now, in September 2022 you can pick the stock up for around $16.50/share and the company still has no earnings and in fact has lost $4/share over the last 12 months. Be careful of hype in the market, it will destroy your portfolio returns over the long term.
Existing home sales came in at 4.8 million on an annual basis. That’s the seventh monthly decline in a row and outside of Covid the slowest pace since November 2015. Compared to last August, sales were 19.9% lower. I don’t see that trend turning around anytime soon with a slowing economy and rising interest rates. Prices did drop from the prior month which I think is the trend that we will be seeing going forward.
Rising Interest Rates
With rising interest rates and a slowing economy this is when investors really need to work hard at understanding a company's balance sheet. Two important areas you want to make sure the company is strong in are liquidity, which comes from good quick and current ratios, and the upcoming debt maturities. For this you want to check the long-term debt to equity to make sure that number is similar to the total debt to equity. If not, this could be a warning sign that the company has a lot of short-term debt which means they would need to renew at higher interest rates going forward causing an increase in interest expense and reducing earnings.
There are only a few months left in 2022 and we are beginning to look at where to invest in 2023. Unions have really come on strong this year and I expect that will continue with the current administration. There are some big contracts coming up next year with the Teamsters. United Parcel Service will see their contract end on July 31, 2023, and I expect the union will ask for big increases based on inflation. Also, some big car makers have contracts coming up with the UAW and I don’t believe it will go well. I think we could see strikes against Ford Motor company, General Motors and Chrysler whose parent company is Stellantis. I’m sure the union will play the game of how much money the car makers have made and not take into account that going forward with the slowing economy sales will slow as well, which feeds into lower profits.
Increases in price
Over the last year, we have seen prices at the pump increase for our cars and now that winter is approaching, you’ll also see the cost to heat your home go up as well. Across the country the cost is expected to increase by 17.2% for an average cost of $1202 to heat your home.
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