Capital 19 Catch-Up

Weekly Index Movement

Aussie All Ords-2.3%

When last week began, the U.S. economy saw signs of hope. Gas prices had fallen around 10%, used cars prices dropped 4% — it looked like the Fed’s attempt to cool inflation might actually be working.‌

Unfortunately, August’s Consumer Price Index release said otherwise. The CPI had climbed 8.3% over the past year and 0.1% over the past month, surprising the expectations of decline, and still far from the Fed’s 2% target. The markets reacted poorly.‌

Immediately, the S&P 500 tumbled around 3%, and closed 4.3% down. (The Dow dropped 3.9% and the Nasdaq dropped 5.2%.)

‌ This was a classic example of the market being taken by surprise. In the weeks leading into the release, stocks had gained as oil fell. Oil is down around 30% from its highs in June. The market was positioned for a low inflation number. But it got a shock gain, especially in the core sector that was up +0.6% y/y.

While the fall in prices that ensued felt bad, and the 4.3% single day drop was the worst for the year, all that really happened last week is we gave up the gains we had made leading into it, with predictions of a low inflation number.

The main reason for the surprise print was gains in food and rent.

The increase in rent isn’t a US problem. It is a worldwide problem with similar movements being reported in both Australia and the UK. This should be no surprise. Landlords costs are going up so they are passing these on. You can expect rents to continue to move higher as interest rates continue to be passed on.

Food is another story. The food purchased today was grown six to twelve months ago. Six months ago oil was suddenly up at $120/barrel. Derivatives of oil and gas are used in fertilizer and stock feeds. The price we pay today for food was being set six months ago when farmers costs and transport costs increased.

Which is kind of a problem for the central banks. No amount of interest rate rises will bring rents or food down quickly.

The market knows this so is now positioning for rates being higher for longer.

That is why gold is down at two-year lows. I’ve never been much of a gold bug, and recent action reaffirms my view. For isn’t the old theory that gold is a safe-haven in times of uncertainty or an appreciating asset in times of inflation? It certainly does not look like that now. I’ll be continuing to stay away from this asset.

After rallying more than 17% from its mid-June low to its mid-August high, the S&P has now fallen 11% since then. In true bear market fashion, the index began the month of September with a 4% gain through 9/12, but it has fallen more than 6% over the last four trading days and taken out its September 2nd low in the process. The S&P is still 4.9% above its mid-June low, but the likelihood of those June lows being tested is increasing with every tick down.

The S&P 500’ s inability to break above its 200day moving average in midAugust kept the downtrend in place. Now the index is heading back towards its bear market low in June, and if that level breaks, technicians will be calling for S&P 3,300-3,500 before downside support comes into play.

The other big news item from last week was a profit warning from Fedex (FDX)

Fedex profits soared in the 2022 financial year as consumers were locked inside and so made plenty of online purchases. But since the end of lockdown, consumer spending has shifted to travel and services. Add in 6% mortgage rates and 13% higher food costs and you can see the demand for online shopping would be waning.

In 2018-2019 Fedex earned $4.3billion profits on $67billion revenues. After the close on Friday they told the market they expect profits of $4b to $4.5b for the next 12 months. That would be substainially the same as pre-pandemic profits and the market sold the stock down 21% immediately to the same price as it was in 2018-2019.

Who would have thought there could be some logic to market moves after all?

Profits about the same as 2018-2019 = share price about the same.

The market has decided the blip the pandemic caused in profits for Fedex are not going to be repeated and the company is basically the same it was pre-pandemic.

Take note all holders of pandemic darlings like Netflix (NFLX) and Zoom (ZM). I would not expect a recovery any time soon.

Back in 2000 the market priced tech stocks for perfection. Microsoft (MSFT) traded at $58 in late 1999. After that bubble burst Microsoft did not recover that $58 price again until 2016.

Learn lessons from the past so you do not repeat them in the future. Only those with the longest of time horizons should be continuing to hold pandemic price-inflated stocks that have since crashed to earth.

Here is a quote I saw this week. Rich Steinberg, chief market strategist at The Colony Group. The last time interest rates were around 4%, the S&P 500 traded at about 15-times earnings, he added. That means, if earnings fail to grow in 2023 and history repeats itself in valuations, the S&P 500 could fall toward the 3,300 level.

He is wrong.

What Rich is missing is the structure of the index has changed. 25% of the index is now made up of the 5 big tech companies. Big tech trades on much higher multiples than old industrials. That means the PE structure of the index is different to the last time interest rates were 4%.

The 10-year average PE for the S&P is 17. If earnings remain flat in 2022 at $228 that puts the index at 3876. Pretty much exactly where it is today.

But analysts think earnings will grow to $236 which puts the index at 4012.

I’m a lot more bullish on stock prices than the charts suggest. It is easy to look at a falling chart and think it is going to continue to fall. This is called a recency bias. But the fact is stocks have always recovered from every bear market. Ever. I have no doubt that that be the case this time also.

The coming week will be quiet in Australia, but the US will announce interest rates on Wednesday. There has been some call for 100bps following last week’s inflation, but that won’t happen. They will do 75bps but wording will give markets confidence and I am expecting some sort of rally to result.

Until we can take out the August high or the June low we are trapped in a trading range and I recommend you use down days/weeks to add positions.

If you don’t want to buy now because you fear further falls, then you need to decide when you will buy, because I can guarantee it will feel like the worst idea if a fall does occur. Write down what you need to see before you buy to make it real. Then just stick to the plan.

The gains will come again and you need to be invested ready for them.

CatchUp Stock Tips

It is interesting to see the weekly movements in our little portfolio as it tells you a lot about where you want to be invested right now.

We have purposely been picking stocks from 3 main themes

  • Tech
  • Dividend Growth
  • Unique situations

Our unique situation ideas (ASC, GMS.L) have been the best performers because they have special factors driving their share price that makes them fairly immune to macro events. It helps that these stocks also tend to be deep value.

The Dividend Growth stocks (TXN, UNH, WMB) have held up better than the market but the Tech ideas (MSFT, CDNS) have been weaker than the market in general because of the focus on interest rates.

Buy DateBuy PriceCurrent PriceGain / LossStop Loss
MSFT1 Aug 22277.82244.74-12.0%240.00
TXN1 Aug 22177.94165.26-7.1%145.00
ASC8 Aug 228.5210.00+17.4%6.40
CDNS15 Aug 22188.83164.27-13.0%130.00
UNH22 Aug 22541.39521.02-3.8%450.00
WMB29 Aug 2235.0031.69-9.5%29.50
GMS5 Sep 226.506.906.2%4.00
AAPL12 Sep 22159.59150.70-5.6%130.00

Buy Comstock Resources (CRK) with a stop at $12

We have been wanting to add a pure-play natural gas idea for a while and the fall in the sector his week has meant we can finally do it.

Russia turned gas supplies to Europe off a few weeks ago and even though Europe have been trying to stockpile inventories in preparation, they are woefully underprepared for winter.

Natural Gas is one of the cleaner burning fossil fuels so doesn’t attract as much negativity as coal for example. It can form a stepping stone to emissions reduction targets.

Plus you can liquify it and put it on ships to take anywhere you need it. (That’s the idea behind the ASC investment)

Gas prices have shot up around the globe and so companies like CRK are printing cash. It’s production costs are around 74 cents per MCF and it sells around $6.93 per MCF. CRK generated operating cash flow of $458million last quarter, a 133% increase.

It is using this new found money judiciously, paying down debt and acquiring 60,000 acres of Bossier shale in East Texas, plus a 145-mile high pressure pipeline and a gas treatment plant for $36million. The pipeline and plant are operating at 10% of capacity so there is plenty of production upside.

In the last 6 weeks, insiders have been purchasing large blocks of stock on market. The CEO is a big buyer, snapping up $975,000 worth of stock. He obviously believes there are good times to come.

There is some anticipation it will begin paying a dividend in Q4 this year.

CEO Jay Allison said “Midstream is becoming more and more and more valuable. You’re going to see the need for a lot more midstream, in fact one of the things we’ve been talking about is the tightness of the market in the Haynesville.”

He also spoke about recent acquisitions “We think we’ve got a lot of inventories. It’s quality and hopefully we can add some more inventory as we drill some wells. That’s been our view and that’s been our drumbeat for a long time and we’ve executed on it.”

With such a low cost of production and an expanding asset base, CRK is well positioned for profits even if gas prices moderate a bit. Buy now for what will hopefully be a multi-year hold.


Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account.