@theMarket: Bad News from Jackson Hole
Federal Reserve Bank Chairman Jerome Powell set investors straight at the Fed's annual Jackson Hole symposium. He said the job of lowering inflation is not done, and that the Fed will continue to raise interest rates in order to slow the economy.
"We must keep at it until the job is done," Powell said, during his speech.
That was enough to send stocks lower after a few days of gains. At the same time, the U.S. dollar fell, as did interest rate yields, which is somewhat counter intuitive given Powell's hawkish statement. The inflation data released on Friday morning showed a little progress on the fight against inflation. The Personal Consumption Expenditure Price Index, (PCE), a closely watched indicator, eased to 4.7 percent, slightly below forecasts of 4.8 percent.
Month-over-month, the PCE index increased by 0.2 percent in April, which was much lower than the 0.9 percent rise in March 2022. Lower inflation in investors' minds means the Fed does not need to tighten monetary policy as much. That would translate into less downward pressure on the economy and better corporate earnings. Powell said we are not at that stage quite yet.
On the economic front, the data continues to conflict. U.S. second quarter GDP was revised upward this week from minus-0.08 percent to minus-0.06 percent. As readers may know, Gross Domestic Product measures the value of goods and services. Another data point the Fed follows closely is a subset of GDP called Global Domestic Income (GDI). GDI measures the progress of labor income. That number gained plus-1.4 percent in the second quarter of 2022.
Most economists tend to average these two variables together in order to get a better picture on how the economy is really fairing. If we do that, GDP in the first quarter 2022 would have been a gain of plus-0.1 percent and a positive 0.4 percent in the second quarter, instead of two negative quarters in a row, according to headline GDP. Granted, both quarters would still be below the long-term trend of GDP, but not quite recessionary just yet.
However, rising interest rates are impacting economic growth. The latest Job Openings and Labor Turnover Survey (JOLTS) report, for example, showed that job openings have fallen by 1.1 million between March and June 2022.
Indexes based on online job listings, compiled by two job search engines, Indeed and LinkUp, suggest that the trend in job openings continued to decline in July and August. Other economic data that shows a decline is pending home sales, that are now down 22.5 percent, versus last year, and durable goods orders are flat to down. That data should encourage the Fed in their efforts to slow the growth in the economy.
The gains in the market this past week were expected. Stocks lost 2.4 percent in three days and then bounced. Gains pushed the S&P 500 Index up to the 4,200 level before rolling over. The way things are set up right now, we should see the market bounce up somewhat for a day or so next week, but I expect a series of lower lows by the end of next week. The bounces we get will disappoint and fail to make higher highs. That is my best case. If things get out of hand, we could just continue to drop down to 3,900 on the S&P 500 Index. In any case, my playbook for September into October 2022 is down.
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The Retired Investor: Consumers Get Price Relief on Beef
Many consumers have changed their diets over the last two years consuming more chicken, pork, and fish and less beef. Driving this substitution have been the stratospheric increases in meat prices. The good news is that high-end beef cuts are now dropping in price.
As readers are aware, prices for food have been rising for months. On a personal basis, my custom of grilling outside at least once or twice a week is just not the same. The prices of steak — sirloin, rib eye, New York strip and steak tips — forced me to switch to chicken kabobs, hamburgers, hot dogs and maybe a cut of London broil.
Beginning in August, however, I noticed that some supermarkets were running sales on some high-priced cuts of meat. Checking prices nationwide, I discovered that prices for rib-eye and beef loin are down nearly 10 percent compared to a year ago. Beef brisket has dropped by more than 18 percent.
On the other hand, ground beef prices, usually the cheapest choice of beef for consumers, increased by 7 percent over the same period. That is understandable from my point of view. I began substituting ground beef for prime rib and other expensive cuts of meat well over a year ago, as have many other shoppers. I suspect my wife is getting sick of eating my meat loaf, and I don't blame her.
I would like to think that the economic concept of product substitution is at work here. The idea is that a customer will substitute a preferred product for another product with similar characteristics. Consumers are increasing demand for ground beef and reducing their demand for high-priced beef cuts.
In this case, substitution occurs due to the large price deferential between the two products. At some point, as supply becomes greater than demand, prices should fall and they have. Meat processors argue that bottle necks had caused the price declines and not price gouging.
The tight labor market and higher employee turnover and absenteeism due to COVID-19 has eased somewhat since last year due to higher wages and fringe benefits, although it is not yet back to pre-COVID levels.
Climate change is another reason for higher beef prices. Drought has forced ranchers to push more cattle into processing plants as drought, high heat, and the price of feed forces the size of herds to be reduced. For example, thousands of cattle in Kansas died in June as a result of excessive heat. Cattle prices are up 15 percent versus 2021, for ranchers, but so has other expenses like feed fertilizer and fuel, so producers are struggling to just break even.
I wish I could predict that meat prices will continue to decline but that doesn't seem to be the case. Prices may see a temporary decline, but only if ranchers continue to reduce their herds. Industry experts and the USDA are forecasting that U.S. beef production will decline once again in 2023, and possibly out into 2024. The law of economics would say, as beef supplies dwindle, processors will be paying (and passing on to you) higher prices once again.
The morale of this tale is to take advantage of cheaper prices while you can and maybe buy a bigger freezer in the process. In the meantime, any meat lover will tell you that the taste of London broil is a far cry from a juicy, rib-eye, but steak is steak when you're craving beef.
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The Retired Investor: The Beloved Baseball Glove
Baseball continues to be one of the most popular youth sports in North America. More than 3 million kids in the U.S. play the game and about 10 million children play worldwide. They are not alone. In 2022, approximately 20 percent of Americans between the ages of 18 and 64 also play baseball, according to Statista. Every one of them do so with a baseball glove.
Prices have risen substantially since I was a kid. Today, the price of these baseball gloves can range from $20 to $400, depending on the kind of materials involved. Back in the day, most kids in my neighborhood kept their glove next to the bed. A typical summertime day started with pick-up games in the morning, followed by practice in the afternoon, and a little league game starting at 6.
In this age of the internet, children (ages 6 to 18) probably play less than we did, but they still spend four hours during the week in free play, another 6.5 hours in practice and training, and 4.5 hours at games, according to TeamSnap, a mobile and web service for managing recreational and competitive sports teams and groups.
Overall, the global baseball equipment market is valued at $13.3 billion in 2022 and is expected to top $16.6 billion by the end of 2027. Gloves account for a large share of those overall sales. COVID-19 dented sales, as well as the number of children who played baseball in 2020 and 2021. However, the long-term growth rate has turned back up. Analysts expect baseball equipment should return to its historical growth rate of 3.2 percent annually.
For those who do not play baseball, there are different types of gloves depending on what position is played, the size of the glove and dominant hand. Common glove types include outfield and infield gloves, first base and catcher's mitts, and pitcher's gloves.
There are various types of gloves from the cheapest to the most expensive. There are plenty of lightweight and flexible gloves with enough padding constructed of all-synthetic fabrics. Many of these designs can resist moisture and absorb impact. These are normally the cheapest gloves (good for starters), but prone to breaking over time.
Full-grain, or cowhide leather gloves are more expensive ($30-$60), and are thicker, and more durable, but require time to break in. These are the gloves most familiar to players of my age. The problem is they require time, effort, and a lot of glove oil to break them in, molding them to your hand, and your play.
There are more expensive choices like steer hide leather gloves ($75-$300), that are even more durable and the choice of many amateurs, as well as professional players. Finally, another high-end product, the kidskin glove, is usually the favored choice of certain professionals and can fetch as much as $400 a glove. Infielders love these mitts. Light, smooth, and yet, durable, they balance comfort with ruggedness.
The top brands in this market include Wilson, Rawlings, Easton, Akadema and Mizuno, among others. Many baseball manufacturers are based in the United States. However, many of these companies now outsource to other regions in order to reduce costs. In the 1960s, production shifted to Asia in places such as the Philippines, Vietnam and, of course, China.
Most of the wholesale baseball glove manufacturers are based in China. China boosts the factories, workforce, and training to deliver large orders in time. The quality is equal to most brand-name products, but at much lower prices. These are the gloves usually purchased by schools, clubs, sports centers, and youth leagues.
There is only one place in the U.S. that still manufactures baseball gloves from top to bottom. Based in Nocona, Texas, and founded in 1926, Nokona has been making baseball gloves in a small brick factory since the Great Depression era.
The process of making a glove requires about 40 steps and can take four hours to complete. Basic parts of a glove include the bridge, web, heel pad, hinge and the lacing. As a result, Nokona's gloves can run many times the price of a competitor's mitt that is produced on an assembly line. For example, a 9-inch kid's glove that you can pick up for $8 at your local big box store would cost $220 at Nokona for an equivalent-sized glove.
Surprisingly, most professionals have little interest in custom gloves. They usually purchase gloves from one of the many manufacturers. Rawling's and Wilson's gloves seem to be the manufacturer of choice for many pros. The good news, in my opinion, is that some things stay the same. Yes, the price has gone up by several multiples, but several generations can still relate to that feeling of slipping one's hand into a well-used glove as the game begins.
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@theMarket: Markets Gain Back Half This Year's Losses
This week's decline in two key inflation indicators gave investors an excuse to buy stocks. At this point, we have retraced 50 percent of the losses from the beginning of the year. The thinking behind this recent move higher is that inflation is coming down, and the Fed no longer needs to maintain its super tight monetary policy stance. Is that a good bet?
That is not the case, according to several talking Fed heads that were trotted out by the U.S. central bank to address the markets on almost a daily basis this week. Even the most dovish of members continued to stress that nothing has changed in their thinking. To a person, each Federal Reserve member stressed that the market should expect another interest rate hike in their September 2022 FOMC meeting. In addition, the reduction in their balance sheet will continue unabated.
Clearly, investors do not believe these warnings. The bulls are confident that inflation will continue to decline to the point that the Fed will change its mind. As such, that belief is enough to support if not justify further purchases. It certainly is an enticing story considering the data.
Everyone should have been pleased with the inflation data. It points to a peak in inflation. Both the Consumer Price Index CPI), and the Producer Price Index (PPI) came in lower than expected. However, both the CPI rate of plus-8.5 percent, and the PPI gain of 9.8 percent are still a long, long way from the Fed's official target of 2 percent inflation. Even if we had zero additional inflation for the remainder of the year we would not reach the Fed's 2 percent target.
Some bullish investors may also be betting that since we won't know what the Fed is going to do until September, markets can continue to rock and roll at least for another week or two. As it is, the bond vigilantes have already reduced their expectations of how much the Fed will raise rates from 75 to 50 basis points at that meeting.
Most of the decline in both the CPI and PPI can be credited to the price decline in energy. Nationwide, we are seeing gasoline prices below $4 a gallon, while oil has dropped recently to below $90 a barrel. But here's the rub.
The Fed has little influence over the future price of oil. Geopolitical events, currencies, and global supply and demand are much weightier factors in determining where the price of oil goes next. What if oil climbs above $100 a barrel next week? What will that do to the future CPI report, and how would markets handle that?
As I have been advising readers for weeks my target for the S&P 500 Index on this bounce was 4,100 to 4,200, give or take a few points. This week we hit 4,257. Now what?
I warned readers back in June 2022 that after this relief rally, "somewhere in middle to late August," we would start a decline that could take us back down to 3,800 to retest or slightly break the year's lows. That remains my forecast.
However, this decline will be accomplished in fits and starts. Investors are caught in the throes of greed and FOMO. So, for example, next week we could see a series of shallow pullbacks, only to have those who have missed this rally buy the dip. These Johnny-come-latelies will expect even higher highs. They may even push us back toward 4,250 on the S&P 500. However, by the end of next week we should be declining.
This kind of market action could continue for the next few weeks. As it does, I would expect the markets to be making lower lows, and lower highs. By September 2022, we will likely see the lows I am forecasting. What is my thinking behind this rather gloomy prediction?
I expect oil prices have bottomed for now and will rise over the next few weeks. Geopolitical tensions could heat up as well adding tension to global markets. The Fed will continue to tighten, despite the atmosphere of hopefication that has infected investors right now. Corporate earnings will continue to fall and profit warnings will become more commonplace as the economy continues to slow.
None of my thoughts are original. I am simply echoing the bear case. The only difference is that I have been predicting this since December 2021.
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The Retired Investor: Can You Put a Value on Your Dog's Life?
Your elderly dog has arthritis. His breathing is difficult. He needs assistance to get up, and his bladder is failing. The vet bills are far higher than your own, and it is getting more difficult to pay them. "How much is too much?"
Some say there is a limit, others would be willing to go into enormous debt to prolong the life of their pet. The veterinarian technological and medical innovations of today make preserving your pet's life achievable. Vets offer plenty of ways to prolong life, even in cases of terminal illness.
Specialists abound who can offer chemotherapy, radiation, kidney transplants, drug trials, and much more. Given all these options, it is no wonder that the emotion that wells up in most of us is "save my dog (or cat), no matter the cost."
Pet insurance, given the expense of pet health care, should be the obvious answer, but it isn't.
The American Pet Products Association (APPA) says that 67 percent of American families own a pet. Roughly 70 percent of those families own a dog, 45 percent have a cat, and roughly one third have another sort of animal. However, less than 3 percent of all dogs in the U.S. are insured, according to the North American Pet Health Insurance Association (NAPHIA).
The most common assumption is that pet insurance is just not worth it. And if you only consider annual routine veterinary care that's probably true, since the average cost is between $200 and $400 for a dog, and roughly half that for a cat. In comparison, the average annual wellness insurance policy can cost $300 per year.
Pet insurance becomes "worth it," however, when illness and accidents come into play. Consider that diabetes in a cat once diagnosed and treated will cost between $240 and $360 per year. Heartworm in your pet can cost upwards of $1,000 to treat. Emergency room care, $1,000 or more. If your German shepherd tears an ACL, you are facing $3,300 to treat and repair it, a herniated disc in a Labrador retriever (my personal experience) will cost you more than $15,000.
The older your pet, the more health issues it will likely have. As your dog ages, they become susceptible to a variety of illness, injuries, and health conditions. Many of these can be life-threatening, painful, and extremely costly to treat. For example, the American Medical Veterinarian Association reports that almost 50 percent of all dogs over the age of 10 will develop cancer. The minimum cost to treat this condition can be $5,000.
You might wonder when your dog becomes a "senior." Smaller dogs live longer than larger dogs. As such, they qualify as seniors at 11 years of age. Medium dogs at 10, and larger dogs at 7. Some of the physical signs of aging are greying snouts, reduced energy, lumps and bumps that begin to appear, and periodontal disease (bad breath is telltale sign).
The average monthly cost of pet insurance premiums in the U.S. for elderly dogs is just under $120 a month with an annual limit of $5,000 and a $500 deductible. If you decide to sign up, make sure you study the pre-existing conditions clause. Many elderly dogs will have developed one, if not more, health conditions like arthritis that many insurers will not cover.
The older your animal, the less likely it will qualify for many coverage options and the more expensive the premiums will be. Some insurance companies won't cover hereditary conditions, which often manifest later in a pup's life or cover periodontal disease. Fortunately, there are various insurance policies tailored for older dogs, although you can expect the premiums to be steeper than those that aren't.
As for my own experience, it is true confessions time. Our dog, Titus, a loving, energetic chocolate Labrador retriever, passed a little over four months ago at 13 1/2 years old. My wife and I failed to purchase insurance for Titus. Over the years, we spent large sums of money on his health care. Arthritis, and a herniated disc, were his main symptoms. We tried everything including water therapy, massage, and acupuncture plus dozens of medications. In his last year, laryngeal paralysis, a condition common to elderly labs, foretold the beginning of the end.
The decision to continue to pay his mounting expenses, his almost weekly visits to the vet, and the growing cupboard-full of medications that had little to no effect on his condition was never in question. We knew there were surgical options that may have worked, but at what cost? He loved the water and surgery on his larynx would make it impossible for him to swim, or even dip his paw in the water. His arthritis became so crippling and painful that he needed to lay down every 15 feet on his walks.
Fortunately for us, our vet had a talk with us in April 2022. I say "fortunately" because many veterinarians are not trained to have frank conversations about terminal conditions of pets with clients. She advised us that it was time to end the increasing pain and discomfort that Titus was going through. She gave us permission to do what suddenly became obvious to us. We were so focused on keeping him alive and with us that we failed to consider his well-being.
What I learned was that "how much is too much" should not begin with your pocketbook, but with what is best for your dog, cat, or other animal. How badly will your pet's lifestyle be impacted by its medical condition or its treatment? Is your pet in pain and is it increasing? Remember, animals live in the now. They have no projects to complete, nor do they fear death like we do, as far as we can tell.
End-of-life decisions are traumatic and intense and there is no right or simple answer. In our case, Titus had to come first, and his passing was the best way we could express our love for him. As for the economics side of this equation, if we could do it all over again, (or if we adopt another dog), we will definitely purchase pet insurance. I advise you to do that as well.
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