@theMarket: Moving Forward After Tumultuous Stock Market Week
Stocks have made new yearly lows this week as fears of declining corporate earnings, higher interest rates, and a climbing dollar sent investors running for the hills. As we enter October, another relief rally may be in the offing.
This week, the countertrend bounce I predicted in the early part of the week happened on Wednesday. It was triggered by events in the United Kingdom. A sell-off in the Gilts (bond) market over there had reached such epic proportions this week that the Bank of England stepped into calm markets. The UK bond market rallied a record 5.6 percent and the global markets rallied with it. The U.S markets bounced as well with the S&P 500 Index gaining more than 2 percent, while the NASDAQ leaped by more than 3 percent. However, it did not last long. Traders tore those gains apart on Thursday. The indexes retraced those gains and then some.
There are plenty of excuses for further downside. A key metric the Fed is watching, U.S. jobless claims, hit a five-month low this week. Investors have been hoping to see a softening of the labor market (and therefore consumer demand), but so far, not so good.
The Personal Consumption Expenditures price index (PCE), a key inflation variable that the Fed follows to gauge the impact of their actions to fight inflation, came in slightly hotter than expected the following day. The month over month gain was 0.6 percent versus 0.5 percent expected. The PCE data was negative, but not negative enough to drive markets much lower.
As readers know, I have been predicting a re-test of the year’s lows (and possibly lower) for this past week. Both forecasts have come to fruition. However, the new lows have been relatively minor -- 3,610 on the S&P 500 Index (intraday) versus the June 2022 low of 3,666. Could we see something lower, like 3,550 or below? That’s a definite maybe.
I am already looking ahead, because that's what you read this column for, right? My thinking is once we form another temporary bottom for the year, we should see a rally. If we actually decline further into that 3,500 to 3,550 level on good volume, and then reverse higher, I will use that behavior to purchase stocks. If we continue higher, buy some more.
Bear market rallies, of which we have had several this year, can be powerful. The October-into-November time period could be an ideal time where we could see another such relief rally. Why?
The run-up into mid-term elections could be the excuse, since politicians on both sides use the elections to promise the world to voters. The economy, according to numerous polls, will be one of the leading election issues as inflation continues to hurt the consumer's pocketbook. In addition, recession risks, higher mortgage rates, and plenty of other unknowns are on the voters' minds.
Politicians usually promise remedies for all these problems and then some if elected, without providing much in the way of how it could be done. Nonetheless, these promises can provide some hope, however misguided, that there are solutions just around the corner.
I also suspect that the U.S. dollar may be topping, and if it is (at least for a month or two) that could also help support equity markets and provide some relief in stemming the continued climb in interest rates. That doesn't mean the dollar will have a major break down, but it could usher in a period of consolidation.
If I am correct, a declining dollar would have more impact on certain stores of value that are leveraged to a weaker greenback. Gold, silver, mines and metals, crypto and energy, in my opinion, would outperform most other assets. Overall, equities would gain, but not at the pace of the sectors I have identified.
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The Retired Investor: Can Neighborhood Ice Cream Man Keep Trucking?
|Richard Rockefeller, the neighborhood Mr. Ding-A-Ling man.|
The demise of the neighborhood ice cream truck business has been predicted several times over the years. Higher costs, new delivery methods, and lots of competition from grocery stores and other sources threaten the business. But don't count them out quite yet.
Earlier this summer, The New York Times published an article, "Melting Profits Threaten the Ice Cream Man," which prompted me to delve a little deeper into this business on the local level.
Nationally, most ice cream vendors are individual entrepreneurs who lease their trucks from a regional company on a yearly basis. Many lessees also buy their ice cream products from the same company. They are on the hook for all their costs, and in an inflationary environment like we are in now, those costs could sink an inexperienced vendor in a competitive market such as New York City.
The internet and a variety of takeout apps have increased competition to the street tucks. Walmart sells any number of Good Humor products and ice cream parlors promise not only designer ice cream but all sorts of exotic experiences. Illegal street vendors and food carts also provide alternatives, and more often than not, can undercut prices charged by the trucks.
Selling ice cream on the street has been around in American urban centers since before pasteurization was invented. In 1904, the ice cream cone was introduced at the St. Louis World Fair. In the 1920s, Harry Burt of Youngstown, Ohio, developed a smooth chocolate coating over ice cream that was eaten on a stick like a lollypop called a Good Humor Bar. Burt purchased 12 refrigerated trucks in 1922 so that he could distribute his new ice cream bars throughout the neighborhoods. The company expanded its truck fleet, especially after World War II, when ice cream production boomed. However, the competitive landscape began to change.
During the 1950s, when I was a kid back in Philadelphia, the Good Humor refrigerated truck was a fixture on my block. Several times a week, a white-shirted driver opened his rear door and for 25 cents presented me with my favorite, the original chocolate-covered ice cream bar.
In 1956, competition came to my Philadelphia neighborhood. A new ice cream truck entry, Mister Softee (founded by two brothers in my hometown), arrived complete with a fantastic new kind of soft serve ice cream. The arrival of this new sweet treat vehicle was preceded by the enticing sounds of a catchy tune that could be heard several blocks away.
In my neighborhood of row homes, kids (and many parents) listening for the approach of this new Pied Piper of ice cream, would line up. Everyone had enough change jingling in our pockets to sample these afternoon delights, covered in multi-colored candy sprinkles, and all sorts of wonderful toppings on many a hot summer day.
The Good Humor company finally sold off its truck fleet in the 1970s, preferring instead to concentrate on distribution of its ice cream products to grocery stores and other sales avenues. Unilever purchased the company in 1989. Mister Softee trucks are still plying the streets. However, as time goes by, ice cream trucks are becoming less and less common. But not in the Berkshires.
Several days a week this summer, while I was day trading the markets, the dulcet tones of the "Theme from The Godfather" drifted up through my windows. In the street below, a white Mr. Ding-A-Ling truck drives slowly by on his usual route.
It is one of a fleet of 66 trucks owned and then leased to independent operators by Brian Collis, the 70-year-old owner of Ding-A-Ling Inc., a family business, established in 1972. Headquartered outside of Albany, N.Y., the company distributes ice cream products, which he buys from the Good Humor company. His trucks roam territories within a 150-mile radius, which includes parts of Vermont, Massachusetts and New York. Three of his trucks service the Berkshires, including Lenox, Lee, Great Barrington, North Adams, and Pittsfield.
"It is a steady business and fairly predictable," Collis said. He laughs at the dire predictions of his imminent demise. "Back in 2012, when gas prices were $4.29 a gallon, there were predictions that we would suffer and some ice cream trucks would be run out of business, but that never happened."
He admitted that ice cream costs, like everything else, have risen, but so far customers seem to accept the higher prices. As for the independent operators who lease the trucks and sell the ice cream, "I have a waiting list of drivers who want into the business."
I chased down one of his independent operators this week. Notebook in hand, I simply followed the "Godfather" music. Ding-A-Ling operator, Richard Rockefeller just turned 59, and has been serving the same route for the last 15 years, working seven days a week. "I have built up a lot of repeat customers over the years," the gray-bearded, neon, T-shirt-clad entrepreneur reminisced. "Pregnant mothers were customers back then, and now their children are customers, too. Just seeing these kids grow up and the joy on their faces when I come around, well … ."
Inflation, he admits, has taken a heavy toll on his wallet. "I spend $210 a week on gas alone. You add in the lease on the truck, the local fees, background checks, etc. that I'm paying, plus everything else, and I need to make $120 per day just to break even."
But he's not singing the blues. "I make a good living, but it wasn't like that at first," he explained. Starting out years ago, he had to learn where and when to find repeat customers and then stick to a predictable schedule to build his client base. "Sometimes, when I have a party to serve, I get holy hell from my customers when I don't show up."
I asked what keeps him driving and showing up day after day. "Three words," he answered, it's fun, enjoyable, and it's a commitment." Sounds like a recipe for success in my opinion.
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@theMarket: Stocks Drop as Fed Delivers Same Dire Message
It was another "read my lips" moment for equity investors. Federal Reserve Chairman Jerome Powell out hawked the hawkish as he reiterated the Fed's tightening stance on monetary policy after the Federal Open Market Committee meeting on Sept. 21.
That should come as no surprise for those reading this column every week. A 75-basis-point hike, which was expected, was followed by a promise to continue raising interest rates higher, and longer than investors expected.
The eventual terminal rate where investors hope the tightening will be done, has now ratcheted higher to 4.6 percent. Expectations are now set for another 75-basis point increase in October, and 50-basis point hike by the end of the year. These actions have now forced most investors into a more defensive camp. The markets' actions reflect that.
And it is not only the U.S. central bank that is raising interest rates. It is almost as if bankers are outdoing themselves in their single-minded intent on seeing who can raise rates faster and further. After the Fed's actions on Wednesday, a half-dozen countries from Norway to Indonesia followed suit with hikes that were of similar size within hours.
Remember, too, that normally, as interest rates rise, so does a country's currency. The dollar is already at 20-year highs, which is crippling many countries ability to pay interest and principal on their U.S. dollar-denominated debt. Foreign governments need to at least keep exchange rates at their present levels. They do so by matching the Fed's rate hikes with those of their own.
One might wonder how all these frenzied rate hikes will impact the global economy. Not well, I suspect. The conversation here in the U.S. is now flipping from a focus on inflation to how much damage the Fed's action will inflict on the economy. It is no longer "if" we get a recession, but how deep and long will it be? The debate between the bulls and the bears centers on judging how badly the Fed will err on the side of tightening.
Naturally, equity investors are also concerned about how all of the above issues will impact corporate earnings. Over the last few months, I warned investors that at some point we will begin to hear corporate managements lower their outlooks for future sales and earnings. That is already happening.
Companies across the country are announcing layoffs, but the fall out is still uneven across many sectors.
Energy companies, for example, are still looking for workers, while many high-tech companies are reducing staff. I expect as recession begins to take hold, we will see more sectors succumb to this lethal dose of inflation, rising interest rates, and slowing economic growth.
As quarterly corporate guidance and results continue to decline, so does the "E" in the Price/Earnings Ratio (P/E). I have explained in the past that the P/E ratio for the overall market is a key metric when valuing the stock market. The average P/E of the markets is now hovering around 16, but there are many companies that are trading anywhere from 20 to 23 times earnings or more. Others are trading much, much lower.
Several of the high P/E stocks happen to be favored by investors, like the FANG stocks. The bears are betting that markets won't see a bottom until those high-valuation stocks catch-up to the rest of the market on the downside. That makes sense to me.
So where do we stand after this week's latest Fed disappointment? As of Friday morning, we are just a few points above my first target, which is the year's low (3,666) on the S&P 500 Index. We are at historical levels of pessimism, according to the sentiment readings of the American Association of Individual Investors (AAII). Only 17 percent of investors are bullish, while 61 percent are bearish. Presently, there is an inverse relationship between the U.S. dollar (up) and the S&P 500 Index (down). Both are at extreme levels right now.
Given the dire mood of most investors (except those readers who have followed my advice, and are either short, or in cash). As a contrarian investor, I expect we will get a countertrend bounce in the early part of next week before turning down again at quarter's end.
It remains to be seen whether we bottom at the lows or break lower. I'm leaning toward the 3,500 level on the S& P 500 Index. In either case, I am looking for another bear market relief rally starting in October through November 2022, but it may be led by precious metals and not equities. To me that simply gives investors another chance to reduce their stock exposure.
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The Retired Investor: The Dishwasher Debates
In most new homes there is a litany of appliances that buyers almost automatically purchase, one of which is the dishwasher. While ovens, refrigerators, washers, and dryers are used almost daily, the dishwasher is among the least-used appliances in American homes.
The global dishwasher market is well over $7 billion and projected to grow by 7.5 percent to $10 billion by 2025. Much of that future growth is due to smaller-sized food service organizations. This list includes companies, businesses, institutions, and organizations that prepare meals and serve them to consumers and other customers. Of course, restaurants, cafeterias, hotels, and catering businesses are included in this demand base.
On the consumer side, busier lifestyles, increased employment, especially among women, and the expansion of nuclear families in both the developed and developing world have contributed to dishwasher demand. The increased convenience of shopping, thanks to the internet, has also made the purchase of most household "white goods" easier and faster. The COVID-19 pandemic disrupted supply lines, reduced travel, and increased prices for most home appliances, including dishwashers. However, these issues are beginning to lessen.
Dishwashers go back a long way. The first mechanical dishwasher was patented in the U.S. in 1850. It was made of wood and cranked by hand. Other machines improved the first, but few were commercially viable.
It required the widespread use of indoor plumbing and running water in the home before dishwashers could be considered as a viable household appliance. The postwar boom of the 1950s saw some of the wealthier households purchase such machines, but it wasn't until the 1970s that dishwashers became commonplace in both the U.S. and Europe. By 2012, more than 75 percent of homes on both sides of the pond had dishwashers.
However, unlike other kitchen appliances like the refrigerator or the electric stove, the dishwasher has not proven to be indispensable. Today, more than 89 million American homes have a dishwasher, according to the U.S. Energy Information Administration, but almost 20 percent (nearly one in five), fail to use it.
A breakdown of weekly dishwasher use statistics reveals that about 4 in 10 households don't use theirs in a given week, and just 11 percent of Americans use it once a week. Only 11 percent use it daily. In our own household, I would guess we run the dishwasher every other day between the two of us.
The reasons for its scant use are varied. There will always be a segment of the population that simply distrusts technology of any sort. Then there are those, usually older folk, that grew up washing dishes by hand. They don't see a reason to start letting some automated contraptions do what a little elbow grease can do better, and in a shorter time period.
Recently, climate change and the resulting worldwide drought has added another reason for not using the dishwasher. The growing recognition of water scarcity and the estimated lack of access to safe water for an estimated 771 million people worldwide, according to Water.org, has influenced even more people to use their dishwasher sparingly. All in the name of wasting less water.
That is a mistake. The Environmental Protection Agency says Energy Star dishwashers use nearly 5,000 gallons less water per year, compared to those who wash dishes by hand. This has not escaped the attention of companies that produce or sell products that require water to work. Proctor & Gamble, for example, the maker of the dishwasher detergent, Cascade, has argued and promoted the idea of "rethinking the sink." The company argues that skipping the pre-rinsing of dishes and instead running the dishwater daily will save you gallons of water. Another detergent brand, Finish, sold by consumer products company Reckitt, is urging consumers to "skip the rinse" as well.
This summer, our area (Berkshire County) is under certain restrictions to conserve water. I confess that my wife and I are in the habit of pre-rinsing dishes before putting them in the dishwasher. My thoroughly modern daughter, who uses her dishwasher daily, simply shakes her head at this practice. She says it in not only redundant but wastes water. I promise to stop that practice, and at the same time, up our use of the dishwasher further. What about you?
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@theMarket: Consumer Price Index Triggers Market Decline
Sticky inflation, as represented by Tuesday's Consumer Price Index (CPI), caught most investors off guard. The resulting equity market rout drove the three main averages down over 4 percent. It was the worst market day in more than two years. Is the selling over?
I doubt it. The rampage lower spared few stocks. The dollar soared higher and most commodities as well as precious metals plummeted. That's what happens when you get everyone on one side of the rowboat.
Many analysts, traders, economists, and retail investors had bid up stocks in the days prior to the report in anticipation that the CPI would result in a cooler inflation print. The opposite happened and everyone headed for the exit at the same time. On Wednesday, Sept. 14, the Producer Price Index (PPI) was a bit better and came in at the consensus forecast.
It only required an hour or so before strategists were hiking their expectations for how long and how high the Fed will raise interest rates. At least one Wall Street analyst I follow raised his expectations for next week's FOMC meeting rate hike from 0.75 basis points to 100 — a full 1 percent.
I am sticking with a 0.75 basis points hike. And after this week's CPI, most of the financial community have given up on their mistaken notion that the Fed may be moving into a more dovish stance next week.
This week the Biden administration intervened to avoid a U.S. railroad strike that could have been a disaster for the economy. Aside from the backup in product shipments, the strike could have added a percentage or two to the inflation rate depending on the duration of the strike. However, the markets barely acknowledge the Biden "save."
The overall macroeconomic data still points to an economy that is chugging along, especially the labor market that still appears to be growing and with it, rising wages. That is bad news for the markets, but good news for the economy. The Fed needs to see demand start to slow and the labor market cool off before they even think of pausing in their tightening policies.
That means the stock market will continue to be pressured downward by higher interest rates and further quantitative tightening. As markets tend to do, everyone is now crowding to the other side of the rowboat. From expecting easing earlier this week, investors are suddenly convinced that the Fed's tightening is going to cause a deep recession. You can't make this stuff up!
If you are looking for proof that the Fed will over tighten and cause a disastrous decline in economic growth, look no further than Friday, Sept. 16.
Some companies are sounding warnings on the future health of U.S. and global economies. In just one day, FedEx issued a profit warning due to declining package delivery volumes around the world. International Paper said it was being hurt by decelerating orders and an inventory glut. And General Electric revealed that the company's cash flow remained under pressure as supply chain issues continued to impact their ability to deliver products.
FedEx dropped more than 20 percent on the news taking the entire transportation sector down with it, since the company is a leading indicator on the future health of economic growth.
In my opinion, the strong CPI number has stretched out the duration of the Fed's tightening regime by a quarter or two. The big money in the market believe that the Fed has lost its way and that remaining "data dependent" suggests the Fed does not know what it is doing.
I am still expecting that this next week's FOMC meeting will deliver bad news — more hawkish statements — which allow investor hysteria to expand. But maybe, just maybe, Fed Chairman Jerome Powell may try to restore some of the Fed's credibility by offering a target terminal Fed funds interest rate for this tightening regime. The historical average of the Fed funds rate is 4.25 percent, and assurances that it won't go higher could help markets recover.
As I said last week (and many weeks before that) "a retest of the year's lows in the weeks ahead," was, and still is, my call. If we break the year's lows my terminal value on the S&P 500 Index is 3,500. It doesn't have to go straight down, however. We could see bounces that could take that index up 100 points or more, and then down again.
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