The market does not make any sense.
When Inflation numbers were released on Thursday (more on this below), the Stock Market opened down 2% but then went on a rally and finished the day up 2%. A massive 5% swing in one day. THIS DOES NOT HAPPEN!! That is a lot of money moving back and forth in a short period of time.
As for why the market rallied, I have no idea. But Friday, reality set back in, and stocks closed much lower.
This moment shows that no one knows what the Stock Market will do at any moment in time. No one and I mean NO ONE saw the markets rallying on the bad news of inflation rising from August to September. The best bet for us, as always, is to stay the course. Focus on your financial goals and ignore the noise. Keep investing and DO NOT PANIC!!
Crazy Market Returns:
Tale of the Tape
Economy
This was the highlight of the week.
Unexpectedly, inflation came in much higher than expected.
Month Over Month Inflation increased by 0.4%,
it was expected to only increase by 0.2%.
ore Inflation increased month over month by 0.6% and year over year by 6.6% up from 6.3%.
This is the largest core inflation gain since 1980.
This is scary because Core Inflation removes food and energy prices, which have been the drivers for inflation so far this year. If those are no longer the drivers of inflation, it means inflation is becoming more embedded in the economy. Core Inflation is also what the Federal Reserve pays attention to which means, we can basically book there will be two more interest rate increases between now and December of at least 75 basis points.
The question is what is driving inflation? Rent, Healthcare, and Food
Rent continues to surge as home prices decline.
Rent accounts for 40% of Inflation calculations which makes sense as it makes up a large portion of living expenses for all of us.
It increased by 6.6%.
Food increased by 13% in September with some prices going up as high as 30%
Eggs are 30.5% higher
Butter and Margarine are up 32.5%
It is actually cheaper to eat out than eat at home at least inflation wise
As Mark Hamrick, senior economic analyst at Bankrate said, "Trouble is, there are more contributors to inflation than there are detractors to it right now. It’s not a localized problem.”
Another problem is wages are not keeping up with inflation.
Month-over-month wages are down 0.1%
Down 3% year-over-year.
This is why the Fed is going hard against inflation. It is putting heavy pressure on the ability of everyone to afford life. The problem is interest rates are a very blunt tool to fight inflation. This means it may take a long while before we see things stabilize. A better option would be for Congress to raise taxes which would have an immediate effect on high-income families and businesses. But no one in Congress has the balls to do that, especially in an election year.
My Takeaway: Ironically, rent is actually falling despite what is being reported by CPI. Redfin and Realtor.com, both showed year-over-year rent to be down 2.5% for the month of September. The problem is Redfin and Realtor only capture private-market institutional landlord data while CPI captures more broad information from your mom-and-pop landlords. In other words, CPI is lagging.
This poses a problem. If the Fed only looks at the CPI data, which they do. It means they will always be behind the 8-ball and could cause more harm than good by keeping on their path of interest-hike-inflation-destruction.
Earnings
JP Morgan, Wells Fargo, Morgan Stanley, and Citigroup all reported earnings Friday morning. Every single bank reported earnings (aka profit) loss of about 25% when compared to 2021. JP Morgan achieved the best results losing only 17%. Ironically every bank reported high revenues as interest rate increases are helping them make more. However, those dollars are not flowing down to the bottom line of their businesses because as interest rates increase fewer businesses and people are looking to take out loans.
But more importantly, because of the level of uncertainty in the economy. Banks are having to make preparations for the possibility that there will be major defaults. Every single bank made a statement about increasing their loan reserves for the possibility of an economic downturn. Per Axios:
JPMorgan set aside an extra $808 million to absorb loan losses
Wells Fargo marked another $385 million
Citigroup devoted an additional $370 million to do the same.
From a consumer perspective, things are looking very wobbly. Inflation continues to drive the cost of living to the moon and is beginning to make it harder for people to pay bills. This is causing people to find other means to sustain their lifestyles. JP Morgan and Citigroup reported a very worrying trend. Credit-card spending continued to increase in the quarter by 17% and 14%, respectively. Although there has not been a higher rate of defaults on these loans, loan balances are increasing for consumers.
My Takeaway: this is probably the one time, you do not want your credit cards to be maxed out or have a revolving balance on your credit cards. As we have discussed previously, as interest rates continue rising. Your life is becoming much more expensive. My advice would be to cut out as much stuff as possible before having to rely on your credit card. It is better to forgo some things for a while than to make your life that much more difficult. At the same time, I understand those who have no other course of action. However, be very wise as you use it to sustain your life.
Stats of the Week
The amount estimated to be spent on Holiday Shopping this year according to Adobe Analytics
A growth of 2.5% from last year. Slower than in 2020 and 2021. Guess free money makes a ton of difference.
Typically I'm an early Christmas shopper but this year I've been holding out
With the massive inventory that companies like Nike, Amazon, Walmart, and Target are having, the sales will be immaculate.
It's expected that sales will be upwards of 32% off
Plus those sales will occur this month i.e. Amazon having ANOTHER Prime Day
Amount the US economy would have lost if trains are not moving
Back Story
There is a potential for a strike by railroad employees, who want better work schedules
The main gripe is the way the on-call system works for the crews.
It forces most people to be on call for seven days a week which means even when they get days off. They don't actually get days off
A strike would halt all railroad activity in the US, which fun fact. Most foods and goods are moved across the US by rail
Any disruptions would put us back in the times of the Suez Canal and supply chain disruptions of 2020 and 2021
The White House definitely does not want that to happen and they are jumping right in the middle of negations, something that typically does not occur.
I wrote all of the above 3 weeks ago. I scrapped it from the newsletter as a deal was supposedly struck
However, railroad workers of one of the unions rejected the offer so a strike might be back on the table.
Not exactly the news we want as we head into the holiday season. However, they have a great point
The President of the Railroad Union said, "Railroaders do not feel valued. They resent the fact that management holds no regard for their quality of life, illustrated by their stubborn reluctance to provide a higher quantity of paid time off, especially for sickness."
There are 12 unions in total that represent about 115,000 railroad workers. 4 have accepted the deal, and 1 has rejected it. There are 7 left to vote
The voting will conclude on Nov. 17
Price of the new ad-supported tier of Netflix which was announced on Thursday and will roll out on November 3
It is much cheaper than the $15.49 standard plan but comes with other caveats like 720p resolution and no longer having the ability to download movies and shows.
Looking Ahead
Earnings season truly begins this week. We get a little bit of everything from Financial companies like Bank of America to Healthcare companies like Johnson & Johnson to Tech companies like Tesla and Netflix.
I don’t expect any of the earnings reports to be positive. Most companies within the S&P 500 gave negative earnings guidance last quarter. Most analysts expect very anemic revenue growth as global inflationary pressures are causing rising costs to various businesses.
My Watchlist: Tesla and Netflix because I like DRAMA. With how popular these companies are they should provide enough drama to make me happy.
BTW do you consider either of these companies to be tech companies?
To me, they are not.
Tesla is a car company, yeah they do cool things with tech but it’s like calling Walmart a tech company because it delivers things with a drone.
Netflix is a media company that uses tech to deliver that media.
Sports I Care About Update
As I am writing this post, I am watching the Man U vs Newcastle game. It is not pretty to watch, Man U has absolutely no ability to control the tempo and pace of a game. We play extremely frantically, there is no ability of this team to control the ball at all. Every play turns into a long ball across the field with the hope of creating a quick counter-attacking situation. Such a long way to go for this team, at least we didn’t lose.
Today was also El Classico and all I have to say is
I am glad I have a team that does not disappoint me on a week-to-week basis.
Extras
Kroger, the second largest grocery company in the US is trying to buy the 4th largest grocery company, Albertsons, for $24.6 Billion. Literally the biggest merger since, Zendaya and Tom got together.
Kroger owns 2800 stores in 35 states. Albertsons owns 2200 stores in 34 states. They are trying to eat into the dominant position that Walmart has, at 21% market share. Also by combining forces, they can have more efficiencies in logistics and cut down on labor costs.
The question though is will the FTC allow this deal to go through? Very unlikely because this is raising all kinds of antitrust red flags.
A new law proposed by the Department of Labor might bring the end to gig work as we know it. On Tuesday the Department of Labor released a test that courts and regulators can apply to consider if workers should be classified as independent contractors or employees. The questions are as follows:
Is the work integral to the company’s business?
What investments do workers make (buying equipment, etc.) to do their jobs?
How much control do workers have over their hours and responsibilities?
Labor Secretary Mary Walsh said, 'the department has seen many cases of companies misclassifying employees as contractors, depriving them of their full pay, and that the proposed test would help decrease instances of misclassification."
The announcement sent the stocks of Uber, Lyft, and DoorDash crashing HARD. Because when applied to those companies the answers to Question 1 and 2 is a definite YES! Investors were not happy because these companies’ labor costs could increase by 20-30%. For cash-losing businesses like these, any increase in cost basically destroys the business. This leads to the question, Should these businesses even exist?