Thursday Sep 15, 2022
Thursday Sep 15, 2022
We knew the day was coming when streaming would have bigger viewership than cable TV. It officially happened this past July. Streaming services accounted for 34.8% of total US TV viewing compared with cable at 34.4%. The 34.8% streaming services viewing climbed dramatically from 23% one year earlier. We may see similar numbers in August but in September we may see a switch back to cable as major networks launch new seasons and new shows. Streaming businesses are still losing hundreds of millions of dollars as witnessed in the latest quarter. Part of this is because of the cost to create new content and it is so easy to switch from one streaming company after a specific show/series is over to another streaming company. Remember how difficult switching cable companies was? You had to have a cable guy come out for an appointment that was set a week ago and then wait half a day at home for them to show up to switch your service. Now you can switch your streaming service just sitting on your couch in the comfort of your living room. I think the winner long term in the streaming services will be those that have the most titles in their libraries, along with the best studios to produce new content in.
The news from President Biden around student loan debt is quite frankly idiotic and dangerous in my opinion. To begin with we are delaying payments on student loan debt again to the end of December 31st, because people have not had enough time to prepare? What about the last 2+ years of not making payments? Also, the $10,000 worth of forgiveness is estimated to cost another $300 B. In an inflationary environment the type of loose spending we have been seeing does nothing to help reduce the inflation burden for the average consumer and in fact likely fuels inflation higher. It is also just unfair to the people that have diligently paid off their debt, opted to join the military to receive the GI bill, or just avoided college due to the high cost. The biggest problem here is this does absolutely nothing to solve the root cause of the problem and in fact may just fuel the cost of college higher. Students borrowing money today will continue to rack up debt and will likely want another handout in just a few years. I don't see how this does our economy and our country any good.
I have been thinking both the stock and bond markets were taking the Federal Reserve and its interest rate policy too lightly. Powell has now made his intentions clear, making some strong comments like, "While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” Unfortunately, I don't believe the battle with inflation is over and I believe interest rates will continue to rise.
Inflation / Interest Rates Rising
The Fed's preferred measure for inflation, the personal consumption expenditures price index (PCE), showed inflation easing somewhat as in the month of July the index climbed 6.3% year over year vs the 6.8% gain in the month of June. While inflation is easing, it is still well above the 2.0% level the Fed targets, which is why I believe they will continue to move forward with quantitative tightening and interest rate hikes. I'm still optimistic we will see inflation ease as we exit the year, but there is still a way to go before inflation is no longer a concern.
Bed Bath & Beyond
I hate to say it, but I really don't feel bad for these meme investors that are getting hammered the past few days. Traders in Bed Bath and Beyond (BBBY) saw shares fall more than 40% on Friday and they are down more than 60% if you bought last Wednesday morning. The reason for the crash is Ryan Cohen exited his position in the company and he was a major reason for the excitement from the Reddit crowd. He definitely capitalized off the small investor who will yet again be stuck holding the bag for these silly investments. When will they learn?
Subscriptions / Cell Phones
Wireless subscriptions are still growing at a rate of 3.9% year over year. One area that has grown dramatically is for children between the ages of 8 and 12-years-old. Back in 2015, 24% of that age group had their own cell phone. Today nearly half or 43% of kids in that age range have their own cell phone. I have no idea why an eight or nine year old needs a cell phone other than to talk to mom or dad.
Not everyone thinks that electric vehicles will be flooding our streets in the near future. Jack Hollis who is executive vice president of sales at Toyota Motor North America believes a high sticker price and a poor public charging infrastructure will likely keep customers from widely embracing battery powered vehicles. He also has concerns on the rising cost of raw materials such as lithium, cobalt and other crucial battery inputs which will be pushing electric vehicle car prices even higher. In the near-term Toyota will continue to focus on hybrids and plug-in hybrids believing they will appeal more to a mass market. The hybrids are also more affordable and another concern keeping people from going to full electric vehicles is range anxiety of being stuck on the road with a dead battery. However, 8 to 12 years down the road it appears to be a different story.
On Thursday morning Tesla investors will wake up to have three shares for every one share of Tesla stock they had on Wednesday. Going back to August 2020, for every one share you had of Tesla you will now have 15 on Thursday. That sounds like a big win, but valuations still matter in the long run. If Tesla stock drops by 30% that would be a decline of $90. That doesn’t sound like that much, but if you go back prior to August 2020 the equivalent share price would be about $4500, and the dollar drop would be $1350. Tesla still has a price/earnings ratio of around 109 which means based on current earnings it would take you 109 years to get back what you paid for the stock. Don’t be fooled by financial shenanigans as companies play with stock splits. With rising interest rates, a slowing economy, higher expenses on EV parts and competition coming from all of the car makers, the stock still remains way overpriced. The number of shares you have when it comes to splits does not matter, it is the value of each share based on the company's fundamentals.
The demand side of the equation in the housing market continues to show signs of weakness as pending home sales were 19.9% lower in the month of July compared to last year. We have discussed how the lack of supply has kept prices elevated, but pricing is starting to show some cracks as people simply can't afford these high home prices with higher mortgage rates. According to the National Association of Realtors, higher rates have pushed the typical mortgage payment up by 54% from a year ago. This has pushed housing affordability to its lowest level in 30 years. Assuming a 20% down payment, it currently requires 32.7% of the median household income to purchase the average home. This compares to about 20% of a household's median income before the pandemic. The 25-year average is 23.5%. The affordability appears to be starting to impact prices as in the month of July prices declined 0.77% compared to June. This was the first monthly decline in approximately 3 years and was the largest monthly drop since January 2011. Year over year price growth remained strong as prices were up 14.3% compared to July 2021. I believe we will continue to see double digit year over year gains as we conclude 2022, but as we lap these higher prices in 2023, I believe it is likely we will start to see year over year declines.
Harrison - "How interest rates affect pensions."
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