The title of this month’s refers to Major League baseball where they have a 162-game schedule. This is the time in the long season when the players are tired, the pennant race hasn’t started to heat up as that typically starts after Labour Day, and the last-minute trades have not taken place to try to bolster a contender.
In the investment business, I refer to this as the dog days of summer for the following reasons:
A lot of senior executives in both the US and Europe take their remaining summer vacations.
Trading desks (at major firms) are given the following instructions, make money, however, don’t lose money. In other words “I don’t want to be disturbed on my vacation”.
As a result, liquidity dries up and firms with conviction and a very short time horizon can easily move markets in both directions
Markets will be back to normal after Labour Day.
We are just finishing the 2q/2023 earnings reports, and listening to conference calls/reading some of the transcripts, one needs to understand some of the jargon. Whatever happened to plain English? The following two items are quoted content from Brian Feroldi, “How to Decode Managements Jargon”. The first, here are some other common terms you may hear on these calls (and what's actually being said): "Color" = To provide more details on a subject. "Churn" = Customers who stopped buying from us. "Double click" = Provide more details. "Elongated Sales Cycle" = Demand is weak. “Green Shoots” = We’ve invested a lot but have not seen much return yet. "Inorganic growth" = We grew from mergers & acquisitions "Investing in our people" = Employee costs are rising fast. “Move the needle" = Increasing sales enough to change the growth rate. “Low hanging fruit" = Easy opportunities for improvement. “Land and expand" = A small initial sale that leads to larger opportunities. "Investing in Price" = Competitive pressures forced us to lower prices. "Organic growth" = Increasing sales of internally developed products. "Softness" = Demand for our products & services is weak. "Streamline" = We fire a bunch of employees. "We'll take this offline" = I haven't scripted an answer to your question “What Drives Stock Returns”, is the second observation that we find summed up best by a picture. We are not traders, we design custom portfolios for our clients and as such we look to their time horizons, measured in years, not days/months. - Brian Feroldi
There are several big picture events we are very actively following, as is the rest of the investing world. The first is inflation and the attempt(s) to bring this number from over a high of 9% last summer, to a much lower and more manageable number of 2 – 4%. Where the idea of 2% inflation is OK came from, no one seems to really know, however it seems to be a number the world’s central banks have adopted. In our opinion with close to 20 years of very low inflation, this drive to lower inflation will take longer than expected.
From the top-down perspective, the US Fed Reserve (FED) will do whatever it takes to avoid a repeat of the 1970’s. The chart below from Torsten Slok of Apollo shows what they are trying to accomplish. In my opinion we are very quickly approaching the critical turning point. They will keep rates at the current level or slightly higher for the next year to make sure we do not have a repeat of the 1970’s.
Why is that important? In the 70’s the FED relented to political pressures and inflation resumed and went even higher than before. You can see that in the second hump in the chart below. For a frame of reference, mortgage rates went into low double digits for a 30 year mortgage. Anyone remember getting a mortgage above 10%? I do, our first mortgage was above 11%.
While the previous paragraph showed the perspective form the top down, the following points demonstrate why inflation will be harder to break from the bottom up:
The following are our observations as to why it will take longer:
1) Supply chain issues resulted in soaring prices as companies were caught flat footed as a result of covid. At that time companies relied upon global supply chains, now they are diversifying, and bringing more production back home. Costs are higher due to more certainty in the longer term which allows for less disruption.
2) Energy is a major component of inflation calculations. Quite simply with the drive to clean energy (without any forethought), all of the energy companies are being very careful in their capital expenditure plans. Instead, they are being very conservative, paying dividends and buying back shares. Recently the energy price (oil, gasoline) came down year over year, now it is rising. We think the price of oil and gasoline is being controlled by the Saudi’s as they need higher prices to pay for their “social spending costs”, and to diversify their economy away from oil. The Saudi economy is not diversified, and they realize they are one scientific discovery (fusion) away from having an almost worthless asset.
3) Housing, we have not had enough housing for years, both new homes and multifamily. With interest rates higher, costs are higher hence housing costs are not coming down as fast as hoped for. Housing is at least 25% of the US economy.
In conclusion we have summer doldrums for several weeks with the accompanying market fluctuations, followed by the press dissecting Chair Powell of the FED’s comments from Jackson Hole next week. We can spare you that time. Quite simply they will say “Higher for Longer”.
If there are ever any topics you wish for us to explore, please let us know. We are here to help and guide you through these times.
We thank you all for taking the time and reading “Market Watch.” It is meant as an educational piece on the always evolving markets. It is something we plan on providing every month, and your feedback is very important to us.
On a personal note, RMH is now in the position to bring on new clients so please be sure to share this informational letter with whomever you wish. RMH’s focus is on the customizable investment needs of individuals, families, and foundations. We enjoy working with our clients to better understand their goals, values, and passions for what is important in their lives. In expanding our client base, we look forward to working with people who share these same desires.
Richard Mundinger, CFA