Wednesday/ inflation now at 5%

The annual inflation rate for the United States was 5.0% for the 12 months ended May 2021, up from 4.2% for April, according to U.S. Labor Department data published on June 10.

Will the Federal Reserve Bank have to raise interest rates from zero much sooner than it had expected just a few months ago?

‘Based on central bankers’ fresh projections released Wednesday, the median Fed official expected to achieve the central bank’s goals and lift rates by late 2023. The Fed’s interest rate projections showed that more than half of its 18 officials expected rate increases by the end of that year. More, but not quite half, expected an increase or two in 2022.

That markup came as Fed officials offered headier economic forecasts. They now see growth coming in stronger in 2021, and expect inflation to average 3.4 percent in the final three months of the year. They expect that headline inflation gauge to retreat quickly, however, falling to 2.1 percent next year and 2.2 percent in 2023′.
– Jeanna Smialek reporting for the New York Times

Annual US inflation rates has been as low as 0.7% in 2015, and not much higher than 2.0% in any other year since 2012. There is a big debate among economists as to how long the recent, higher rates of 4.2% (for April) and 5% (for May) will persist.
[Cartoon by Robert Rich for Hedgeye.com]

Thursday/ the GameStop shares frenzy

This is gambling, not investing.

– Brett Arends in an opinion piece on MarketWatch called ‘An open letter to the GameStop army on Reddit’


There has been a ferocious tug-of-war happening on the US stock market with the shares of a company called GameStop.

Let’s set the scene first.

GameStop is an American video game, consumer electronics & gaming merchandise retailer. They closed 1,000 stores last year and seems destined to go out of business altogether in a year or two.  (Computer games are, in general, no longer sold as physical items that can be resold second-hand. Game players buy & download their games from the web).

Hedge funds are for billionaires and wealthy investors, and their managers like to use derivative instruments to make ungodly sums of money for their clients (and sometimes ungodly losses).  One such instrument is short selling. The investor (hedge fund) borrows shares from a broker, sells it into the market. The investor has to buy back these shares at a future date. So the investor hopes/ believes the share price will fall. (That way the investor pockets the difference). If the share price ends up higher at the future date, the investor will be forced to buy it back at the higher price, and lose money/ lose a LOT of money.

Robinhood is a financial services start-up with an app that makes it super-easy for individual investors to buy and sell shares, at zero commissions (free).  Critics charge that they make transacting too easy, and that they lure young and first-time investors into day-trading, instead of long-term investing.

Enter social news aggregation, web content rating, and discussion website Reddit.
The community members from reddit.com/r/wallstreetbets/ want to flip off the hedge fund managers and help the little guy to make money. One of the ways to do this recently, has been to pile into GameStop shares. If large enough numbers of investors (‘investors’?) ignore the sage advice from Yahoo Finance that a stock is overvalued, and buy it anyway, things start to happen.

GameStop was sort of left for dead by July 2020 ($4), but then came Jan 1, 2021 ($18), and when more short-sellers had to jump in this week and start to buy GameStop in a classic ‘short squeeze’. The demand pushed the price up to $468 at 9.45am this morning. That’s a 100-fold increase from six months ago. 

By today, hedge funds are said to have lost at least US$5bn. On the other side are people such as a Texas fifth-grader that cashed in the 10 GameStop shares his mom gave him for Kwanzaa, on Wednesday — for almost $3,200. She had bought them for $6 apiece as a holiday gift in 2019.

Robinhood jumped in and blocked its investors from buying GameStop today. I’d say that is interfering with the free market.  Google removed over 100,000 one-star reviews of the Robinhood app on Google’s Play Store, to restore its 4-star rating. I’d say that is interfering of some kind. Billionaire Leon Cooperman was on CNBC again today, saying he doesn’t fault the wallstreetbets investors, but that this would end in tears. (Yes, it would for some, but not for everyone). Cooperman reiterated his position that rich people shouldn’t pay more taxes.

All this is happening against the backdrop of a deadly pandemic, that has devastated the economy & magnified inequalities ten-fold. The federal government is pushing trillions of dollars of stimulus into the economy, with hundreds of billions going to undeserving companies and individuals.

So exactly how free is this economy, this market, and who on Wall Street, is manipulating whom?

Today’s panel for GameStop shares from Yahoo Finance. Volatile! 44% down in one session, and then 61% up after hours. Look at the belated ‘Overvalued’ marker at the bottom left. One-year target estimate $13.44.

Tuesday/ wow: Dow 30,000

The venerable Dow Jones Industrial Average stock market index closed above 30,000 for the first time today. (Trump can eat his words now— the ones where he had said the stock market would crash if Biden won).

These slides are from the online Wall Street Journal. The annotations are mine.

The Dow Jones Industrial Average debuted on May 26, 1896, the brainchild of Charles Dow and his statistics-minded business partner Edward Jones. Back then its components were 12 smoke-stack companies: American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas, National Lead, North American, Tennessee Coal and Iron, U.S. Leather, and U.S. Rubber.
In 1928, the Dow was expanded to include 30 companies. Companies from older industries are replaced from time to time by newer ones. (This slide is old, actually. ExxonMobil & United Technologies are out of the Dow). The current 30 components are: 3M, American Express, Amgen, Apple, Boeing, Caterpillar, Chevron, Cisco Systems, Coca-Cola, Disney, Dow, Goldman Sachs, Home Depot, Honeywell, IBM, Intel, Johnson & Johnson, JP Morgan Chase, McDonald’s, Merck, Microsoft, Nike, Procter & Gamble, Salesforce, Travelers, UnitedHealth, Visa, Walgreens, and Walmart.
Check out this steep drop in Feb & March when the reality of the pandemic set in .. but then the Federal Reserve’s massive, multi-trillion-dollar economic stimulus, and optimism due to the Covid-19 vaccine announcements overcame all of that, in just 9 months. Make no mistake, though. This optimistic stock market index does not reflect the general state of the national economy. There is still a loonng road ahead to repair the widespread damage the pandemic had done.
This slide shows how the spectacular growth of the tech giants offset the poor performance of the industrial companies. (Not sure why GE & XOM are shown. GE was removed from the DJIA in 2018, after which none of the original components of the DJIA remained. Exxon Mobil was removed in August this year).

Monday/ take my oil: I will pay YOU

The world is awash in oil, with the recent ‘demand destruction’ as the pundits call it. (The world still uses 75 million barrels a day, down from 100 million). Oil producers have not been able or willing to cut production, though. It takes a lot of money to close down an oil well, and even more to reopen it.

How’s this for an oil price: from $18.27 on Friday down to -$37.63 per barrel ! Yikes. Now all eyes turn to the June price. And is this an ominous sign for what still lies ahead for the world economy? [From the front page of the WSJ for Tuesday].
A breaking point was reached today, though. I turn on the financial channel CNBC in the mornings, and this morning the May contracts dropped 90%, then down to a penny, back up a bit, and then it went negative and stayed there. This has never happened. How can the price of oil be negative? Well, there are hardly any more places left to store the stuff. So producers will now literally pay ‘buyers’ to take the gooey black stuff off their hands. There was talk today of filling up empty supertankers that may still remain, even though they have nowhere to go.

What’s going to happen is that a lot of oil producers in Texas are going to go bust. I’ll have to look, but I believe many of the tar sands producers and the frackers are long gone (they needed a price of $60 a barrel to stay afloat).

People filling up their car tanks, and airlines filling up airplanes with jet fuel, will continue to pay lower prices. It’s just that there is nowhere to go, really. The world has closed down.

Another Black Monday on the markets

It was a beautiful blue-sky day here in Seattle, but another Black Monday on the financial markets.

Not the Federal Reserve’s emergency rate cut of 100 basis points (to zero), that was announced on Sunday, nor Trump’s press conference at the close of the bell on Monday, made much of a difference.

All three Wall Street indexes opened 12% down. The circuit breakers kicked in. After 15 minutes, trading resumed for the rest of the day, but without any uptick.

Falling off a cliff: we’re now almost back at January 2017 levels, when Trump took office. Trump has been very fond of tweeting out something like ‘Highest Stock Market in History!’. Just this Friday, he gloated about the day’s ‘huge gains’. (Pro tip: single-day gains are almost meaningless in such a choppy market; a ‘dead cat bounce’).
Blue skies and blossoms from my second floor window. Smith Brothers’ cow truck is delivering fresh milk to my neighbor. A little while later the UPS truck came by and dropped my new tennis shoes I had ordered online. Puget Sound Energy put up ‘No Parking’ signs along the sidewalk. They are going to chop up the asphalt any day now, to work on the gas line buried beneath it.

Thursday/ the ‘end of the world’?

From the German translation of ‘The Shooting Star (French: L’Étoile mystérieuse)’ by Belgian cartoonist Hergé, 1942.
A giant meteoroid was projected to hit Earth at 20:12:30 pm. A very anxious Tintin dials for a countdown to the exact time of doom. NOW .. ! he thinks, and then There! It is the End Of The World! dropping the phone and covering his ears. 
Tintin and Snowy survived, and ran out into the street, celebrating.
P.S. Even in this internet & smartphone age, the US Naval Observatory still offers a dial-in number to get the exact time. Dial 202-762-1401.

More cancellations today: the entire NBA season cancelled — and the NCAA’s March Madness games, as well (Madness? No, necessary).

Trump’s muddled speech about banning travel from Europe to ‘stop the spread of the coronavirus’ landed with a thud in the financial markets, as did the Federal Reserve’s announcement today, that they will intervene in the markets and pump in more than $1.5 trillion (yes, trillion with a T).

The United States is having a crisis of confidence in the President, and the White House, during this nationwide public health emergency.

Black Monday, the 2020 edition

Well, it was not quite Black Monday, Oct. 19, 1987 – but I see there is already a Wikipedia entry for today.

What happened? Well, a Russian–Saudi Arabian oil price war erupted over the weekend. The Saudis are planning to ramp up oil production, so that low crude prices put the Russians and the North American shale producers out of business. This situation has actually been years in the making.

So together with the instability brought on by the coronavirus crisis, that was too much. The S&P 500 was down by 7% almost immediately after the markets opened in New York. So the circuit breakers kicked in to halt trading for 15 minutes. The idea is to let traders step back and ‘take a breath’. With all the high-frequency & automated trading happening today, who knows if this is any help at all, though. (At the end of the day the S&P was down by more than 7%). 

CNBC’s Bob Pisani and Wilfred Frost at the close of the trading session on the floor of the New York Stock Exchange today. The Dow ended down 7.8%, and the S&P 500 ended down 7.6%. Late on Monday, the Trump Administration floated payroll tax cuts to try to bolster the markets, but there is very likely more pain ahead for investors. Watching the coverage of the markets had a little bit of a post-9/11, and a ‘2008 global financial crisis’ feel to it. It is now likely that Germany, Italy, Japan, South Korea will slip into a recession this year, with the United States not too far behind if this continues for too long.

Friday/ still a long way down?

I guess it could have been an uglier week on Wall Street. (The three major indices actually ended up more or less where they started the week).

A great February jobs report* did not help at all today: it is in the past, and says nothing about the economic impact of the coronavirus.

Donald Trump would do well to just shut up about it — but he cannot. He has to be the bride at the wedding, the corpse at the funeral, and the expert on the coronavirus.

*273,000 jobs added; employment rate at 3.5%.

The carnage of the 2008-09 financial crisis was epic. Man! Hopefully that end point on the far right, is not even close to where we are headed with the economic impact of the coronavirus. The United States stumbled in its initial coronavirus response (unprepared, faulty test kits, muddled messages from the White House), and will only now be able to start large-scale testing of patients and people at risk.

Thursday/ no points for your sensationalism

Whoah. What a rough day, and a rough week so far, for stock markets around the world. The Dow Jones Industrial Average index declined another 4.4% today. Yikes.

Oh, and here you go, CNN Business.
I corrected your sensational and misleading headline for you.

Black Monday in 1987 saw a decline of ‘only’ 508 points, but that was 22.6%. In one day. And in 2008, there were three days with declines around 700 points, which came to more than 7% each. The Dow Jones is an index, and since the point figure goes up dramatically over time, points cannot be used to compare declines with one another. Percentages must be used. It’s elementary school math.

Wednesday/ all-time low for the 10 Year T-Bond

Well, the Dow Jones Industrial Average index tried to close in the green today, but failed. The next few weeks — and even months — may get ugg-ly for investors.

The 10-Year US Treasury Bond’s rate closed at an all-time low today: 1.310 %. So: many investors are putting their money into these bonds to seek safety from the stock market sell-off, driving the rates down.

Update Fri 2/28:  When all had been said and done at the end of a tumultuous  week, the 10-Year had closed down even lower, at 1.13 %. So going to 1.00 % is certainly possible.

Update Tue 3/3:  And there it was. The 10-year US Treasury note yield ended the day at 1.005%, after falling to an intraday record low of 0.914%. Earlier in the day, the Federal Reserve Bank surprised everyone with a 0.50% emergency rate cut to the federal funds rate (now down to 1.00-1.25%, from 1.50-1.75%).

Here’s a 1979 $10,000 Treasury Bond, gloriously printed on paper, and look at that rate: 10 1/8 %. These days transactions and records of ownership are all done electronically, in the same way that paper share certificates for company stock ownership are no longer issued. I wonder if we will see 10% interest rates again here in the United States, in my lifetime, given the tight hands-on approach of the Federal Reserve, that we have become accustomed to after 2008. [From Wikipedia].

Wednesday/ ‘too much wretched excess’

.. that is what Charlie Munger, vice chairman of Berkshire Hathaway and Warren Buffett’s longtime business partner, said of the US stock market today.

‘The S&P 500, Dow and Nasdaq close at record highs as coronavirus fears ease’, says Yahoo Finance. Well. The fears may have eased, but is the global economic impact of the virus really known? As always, only time will tell for sure.

The Shiller PE Ratio is the Price/Earnings ratio based on average inflation-adjusted earnings from the previous 10 years, also known as the Cyclically Adjusted PE Ratio (CAPE Ratio).  The average is about 15 (market not overbought or oversold), and we’re sitting at 32. So if one believes in investment fundamentals – and why should one not? – yes, the stock market is expensive, and it may be due for a big correction. Curious that this graph does not highlight the height of the dot-com bubble in early 2000, or the onset of the Global Financial Crisis in late 2007. (Those were monster declines, but relatively short-lived. Look at the mid-60s to mid-80s: a down trend that lasted some 20 years).
And then there is the case of electric car maker Tesla, with its parabolic move up just last week. That pushed its market cap to well over a $100 billion valuation, the first U.S. automaker to meet or surpass that gargantuan figure. (Toyota is worth some $200 billion).

Wednesday/ the Fed cuts rates, again

The Federal Reserve on cut interest rates today, the third time since July. Chairman Jerome Powell says that they are likely done, for now. The federal funds rate is now at 1.50-1.75%, still a lot higher than the 0% of the European Central Bank, though.

Germany’s 10-year Bund yield is now at -0.35% (up from a record low of -0.61%), showing that investors there are still desperate for safe assets. They are really not confident about the economic prospects of the Eurozone.  Besides, Germans tend to hoard money in savings, instead of investing it.

‘How Germany Saves: The Federal Republic counts under the richest countries in the world. Even so, the average person benefits little from that. The problem: Germans hoard money, instead of investing it’. The donut at the bottom shows that Germans keep an astonishing 39.7% of their money in cash and deposits. Another 37.3% goes to ‘Versiecherungen’ which I believe would be capital life insurance policies or pension plans. Equities and equity funds: 8.7%. What do Germans save for (bottom right)? 23% Old age care/ insurance, 20% Emergency funds, 12% General purchases, 7% Discretionary spending, 6% Vacation & Travel, 4% Buy or Build a House, 3% Buy a Car, 3% Children or Family. [Source: Der Tagesspiegel newspaper online]

Thursday/ where the brutality of American capitalism comes from

The New York Times has launched a project called the 1619 Project. ‘The 1619 Project is a major initiative from The New York Times observing the 400th anniversary of the beginning of American slavery. It aims to reframe the country’s history, understanding 1619 as our true founding, and placing the consequences of slavery and the contributions of black Americans at the very center of the story we tell ourselves about who we are’.

Here is an excerpt from an essay written by Matthew Desmond, professor of sociology at Princeton University for the Times’s 1619 Project.

‘Those searching for reasons the American economy is uniquely severe and unbridled have found answers in many places (religion, politics, culture). But recently, historians have pointed persuasively to the gnatty fields of Georgia and Alabama, to the cotton houses and slave auction blocks, as the birthplace of America’s low-road approach to capitalism.

Slavery was undeniably a font of phenomenal wealth. By the eve of the Civil War, the Mississippi Valley was home to more millionaires per capita than anywhere else in the United States. Cotton grown and picked by enslaved workers was the nation’s most valuable export. The combined value of enslaved people exceeded that of all the railroads and factories in the nation. New Orleans boasted a denser concentration of banking capital than New York City. What made the cotton economy boom in the United States, and not in all the other far-flung parts of the world with climates and soil suitable to the crop, was our nation’s unflinching willingness to use violence on non-white people and to exert its will on seemingly endless supplies of land and labor. Given the choice between modernity and barbarism, prosperity and poverty, lawfulness and cruelty, democracy and totalitarianism, America chose all of the above’.

Wednesday/ the first Fed funds rate cut in 10 years

Federal Reserve Chairman Jay Powell fielded a lot of questions today after the announcement that the Federal funds rate will be cut by 25 basis points to a target rate of 2.00 – 2.25%. He characterized the cut as a mid-cycle ‘adjustment of policy’ — and that it is a way to brace against downside risks. (Um, another way to ‘brace against downside risks’ would be for the Trump Administration to stop the never-ending tariff wars with China and others).

That means savers will earn even less money on their savings. Borrowers for say home loans, may get a little relief from lower borrowing rates .. but 0.25% will barely make a difference on an 18% annual rate on a credit card!

Steve Liesman from CNBC talking about the rate cut. The US dollar is the strongest it has been in two years. The immediate reaction from the US stock market was negative, probably because the comments from Federal Reserve Board chairman Jay Powell were less dovish than expected.

Tuesday/ Facebook’s cryptocurrency

Facebook revealed the details of its cryptocurrency, called Libra (symbol ≋), today. Its planned launch is in early 2020. The digital wallet will reside in Messenger, in WhatsApp or in a stand-alone app.

Libra currency will let people buy things or send money anywhere in the world, with nearly zero fees.
Facebook will not have full control – they are recruiting founding members for the Libra Foundation and have signed up the likes of MasterCard, Visa, EBay, Uber and Vodafone.

Facebook’s subsidiary company called Calibra will handle its crypto transactions, and they promise to not combine payment data with Facebook social media data (so that transactions cannot be used for ad targeting). Hahaha. Tell you what, Facebook. Twenty bucks at a time is all I will ever use of your Libra. MAYBE. To buy beer and burgers with on Wednesday nights. 

From this article on techcrunch.com:
A Libra is a unit of the Libra cryptocurrency that’s represented by a three wavy horizontal line unicode character ≋ like the dollar is represented by $. The value of a Libra is meant to stay largely stable, so it’s a good medium of exchange, as merchants can be confident they won’t be paid a Libra today that’s then worth less tomorrow.

The Libra’s value is tied to a basket of bank deposits and short-term government securities for a slew of historically stable international currencies, including the dollar, pound, euro, Swiss franc and yen. The Libra Association maintains this basket of assets and can change the balance of its composition if necessary to offset major price fluctuations in any one foreign currency so that the value of a Libra stays consistent.

Friday/ Timothy hay, for the chinchilla

Hey, it’s Timothy hay! .. for pet rabbits, guinea pigs or chinchillas. $16 for 6 pounds of hay.

The stock market here in the States does not seem too freaked out yet by the Trump Administration’s tariff wars and threats of starting a real war in Iran, but we will have to see where we end up at the end of 2019.

Today an online pet food purveyor called Chewy, had its IPO, and ended the day 60% higher.

Just for fun, I wondered if chewy.com would have food for say, a pet chinchilla that I might have. Well, it turns out 1. that they do, and 2. that chinchillas love Timothy hay. I did not know that! Washington State is known worldwide for the quality of its Timothy hay.

Here’s CNBC’s reporting of trading for the Chewy.com stock. The stock ended the day at $34.99, 59% above the initial offering price.

Saturday/ the ripoff, wrapped in a swindle, inside a bank called Wells Fargo

The bank I referred to yesterday is Wells Fargo. I’m in the process of closing out all my accounts there. It’s really just to simplify my finances, but I could have justified it with the never-ending stream of scandals coming out of this bank.

Says Huffington Post: ‘To any reasonable person, Wells Fargo is a rolling disaster – a ripoff, wrapped in a swindle, inside a bank’.  And: ‘Wells Fargo’s very existence, not to mention its continued profitability, is an indictment of two decades of embarrassing regulatory oversight from four separate administrations‘.

Among the scandals: millions of new accounts in customers’ names without their consent, wrongly repossessing 27,000 cars, and foreclosing the homes of 400 families for no reason.

Nice picture collage of Seattle’s history outside the Wells Fargo branch at Westlake Center, though.

Saturday/ October is scary (for the stock market)

It’s been a rough week in the US stock market this week, with the Dow Jones Industrial Index down 3% and the Nasdaq down 4% just on Wednesday, both down some more on Thursday, and then recovering a little bit on Friday.

Morgan Stanley published a bland note on Wednesday for their investors saying – uh, the market is down – and ‘a host of concerns have appeared to weigh on the market in recent sessions’.  (Higher US Treasury yields, rising interest rates, trade uncertainty between the US & China, political uncertainty & rhetoric, economic growth could be peaking).   Yes, yes, we know all of that. And it’s October, notorious for weighing on the stock market.

For once, Trump is not crowing about the stock market; now relentlessly attacking the Federal Reserve Bank (for raising interest rates).  Always looking for someone else to blame.

A lot of pain in some stock markets from around the world. (South Africa is down 15% from its January high). Greece has a tiny economy, but look at China, down 23%.  [Source: CNBC’s ‘Closing Bell’ on Friday]
This chart shows the remarkable divergence between the S&P 500 (up 3.65% for the year) and the MSCI ACWI ‘All Country World Index’ (down 10%). That’s a large gap, almost 14%. [Source: CNBC’s ‘Closing Bell’ on Friday]

Monday/ 10 years after 2008 (it is still the end of the world as we knew it)

The filing for Chapter 11 bankruptcy protection by financial services firm Lehman Brothers – ten years ago this week (Sept. 15, 2008) – remains the largest bankruptcy filing in U.S. history. Lehman held over US$600 billion in assets. The fall-out from the 2008 crisis reverberates to this day through global politics. It gave us Donald Trump, Brexit, extreme nationalism, the blaming of immigrants for economic misfortunes.

Here is Philip Stephens in a column in the Financial Times newspaper (headquartered in London):
‘Historians will look back on the crisis of 2008 as the moment the world’s most powerful nations surrendered international leadership, and globalisation went into reverse. The rest of the world has understandably concluded it has little to learn from the West. Many thought at the time that the collapse of communism would presage the hegemony of open, liberal democracies. Instead, what really will puzzle the historians is why the ancien régime was so lazily complacent – complicit, rather – in its own demise’.

 

Thursday/ Apple at $1 trillion .. yay?

Apple Inc. has a market cap of $1 trillion .. wow. Once, there was Exxon, General Electric, IBM and Microsoft, at the top of the heap, but Apple made it to $1 trillion first. (PetroChina briefly hit $1 trillion in 2007 on the Shanghai Stock Exchange, only to plummet to less than $260 billion by the end of 2008. According to Bloomberg, this represents the largest destruction of shareholder wealth in world history).

So we will see what happens. China is a huge market for iPhones, but a risky one. And will Americans be willing to shell out ever more for a new iPhone? Another thought: Maybe – 30 years from now – a company that builds fusion reactors (that produce 100% clean & cheap energy), will be the world’s most valuable.