25 Sep Capital 19 Catch-Up
Weekly Index Movement
| S&P500 | -2.9% |
| Nasdaq | -3.3% |
| Aussie All Ords | -2.8% |
A tough week for investors as major averages suffered their worst percentage losses since early March, buffeted by rising interest rates, rising oil prices, an auto workers strike against the biggest U.S. automakers, and the distinct possibility much of the federal government will shut down in early October.
I have been expecting a 5% tumble for a few weeks now and technically we are now down 5.6% from the high.
This selling is all about interest rates. My opinion is they are close to topping out. Once that happens the stock market rally will resume. I am even tempted to say start buying now as we are very close to this event.
On Wednesday the Federal Reserve kept rates on hold but Powell’s central message continues to be that Fed policy rates need to remain “higher for longer”
The FOMC feels it is close to the right level of interest rates to achieve its 2 percent inflation target over time. That was the central reason the committee chose to keep the Fed Funds rate unchanged. But, Powell said that the balance of risks is “two-sided” now. This means rate policy is relatively balanced between being too low (risking further inflation) and too high (risking an unnecessarily deep recession).
An economic soft landing is still not the Chair’s baseline scenario. He described it as “plausible” and desirable, but given the famously long and variable lags between monetary policy decisions and economic outcomes he did not rule out a recession. He did, however, return to the issue of higher energy prices several times, once calling it “a significant thing”. His view is that, if they continue to climb, consumer spending may soften and inflation expectations could start to increase. More on this below.
Alongside its policy decision on Wednesday to hold rates in a range of 5.25%-5.5%, a 22-year high, the Fed released updated economic forecasts for interest rates, unemployment, growth, and inflation. The so-called dot plot, which offers officials’ forecasts for rates in the coming years, showed most Fed officials think one more rate hike will be needed this year.
But the changes to 2024, 2025, and the first look at 2026 offered even more clues about where the central bank sees things headed.
Since offering these forecasts in June, the central bank took away 0.50% worth of rate cuts for 2024, 0.50% worth of rate cuts for 2025, and suggested rates would end 2026 above where rates are expected to land over the longer run.
That has sent the 10yr yield to a 16-year high.
We discussed the implications of this last week so the move in stocks this week was not unexpected.
A Poor 2024?
I’ve spent some time this week doing big picture thinking.
You will recall that I wrote a couple of weeks back that we are still well within the time frame for the start of a recession based on previous occurances.
You will also recall how a rising oil price is one of my fears as this will lead to a tick-up in inflation and the inevitable interest rate response. The fact Oil got to $90 last week only compounds my concerns here. But you’ve all gone out and bought Oil companies to hedge against this by now. Right? Surely you have. It feels like I write about it every week.
Anyway, the GDPNow model estimate for real GDP growth in Q3 is running at 4.9% in the US. Which got me thinking about how is this happening? How are consumers still spending in the face of the highest interest rates since 2007?
I suspect it is because they are all so cashed up after Covid. They sat around at home not spending and then the government sent them more money so they just stashed it away for a rainy day. The thinking is they have been tapping this pool of funds to keep spending even though everything is a lot more expensive. But, how much of this is left?
Through Q2, the answer appears to be quite a bit. Deposits plus money market balances for households are still up 32% from Q4 of 2019, and while those are skewed towards higher income households, lower earners still have 13-20% more cash than prepandemic. Of course, that cash doesn’t go as far. As a percentage of total nominal spending, household cash balances (in total and therefore skewed towards higher-income households) are 91.8% of personal spending at annual rates. That compares with just 86.8% just before the pandemic hit. While cash cushions have declined, there’s still gas left in that particular tank.
Which says the consumer can keep going for a while yet. A 4.9% Q3 GDP could well contribute to higher company profits.
My prediction is we will get a nice year-end rally that starts about mid-October driven by surprisingly high corporate earnings (they will start announcing mid-October). You only have a few weeks left to position for this. So get your buy lists ready.
But the consumer will run out of cash at some point so even though I’m positive for this year, I am starting to get worried what 2024 looks like. High interest rates, slowing spending and a consumer out of cash to keep going could be all it needs to tip things over.
UAW Strike and Impact on Car Makers
The United Auto Workers Union is an old and complex organisation that aims to support its members who mainly work for the big three Car makers, Ford, GM and Stellantis. The UAW employs a chief economist whose main job is to analyse the Big Three’s financial statements and help union leadership craft bargaining strategies.
I found this amazing. Imagine trying to run a company where your work force are organised and analyse exactly how to hurt you the most. I’d just give up and make everyone redundant much like the auto companies did in Australia.
Anyway, the UAW has decided now is a great time to really hurt the hand that feeds them and is demanding higher wages (36% increase over 4 years), shorter work weeks, restoration of defined benefit pensions and stronger job security as automakers make the shift to electric vehicles.
Strike action is already taking place and expected to increase unless the Big Three cave to demands.
This is a classic example of the reduced productivity world we live in. Workers want to work less and be paid more. This does not just apply to autoworkers and is a major problem for many industries.
You can see what this strike action is going to lead to. Increased costs of new cars and inflation. Not good for anyone who isn’t an autoworker.
You would think that this action would hurt the Big Three. But the truth is the market doesn’t care about it.
Ford trades on a forward PE of 7. GM is 5 and Stellantis is 3.
Automakers are in a lot more trouble than just having to deal with a few strikes.
There is one other significant automaker. Tesla. That trades on a forward PE of 62.
So is that an opportunity? Is Tesla overvalued or Ford undervalued?
I don’t think so. I think they are all valued perfectly.
The problem for the traditional automakers is they have to retool and switch to electric vehicles. For, love em or hate em, we are all going to be driving souped-up golf buggies soon.
At the moment the market does not know if the traditional automakers can do this. Which is why they trade so cheaply.
However, Tesla proves it can do it already so is priced as the clear favourite.
Put it this way – when you look forward 20 years which automakers do you think will still be here and which will have gone to the big scrap yard in the sky?
That’s why you pay a lot for Tesla and nothing for GM.
Jimmy Has A New Idea For Us This Week
Amprius Technologies (AMPX)
Amprius is a ultra-high-density lithium-ion battery producer and distributor for existing and emerging aviation applications. What’s that you may be asking? Basically, they make an industry leading battery for aviation and electric vehicles.
Aviation is one of the biggest carbon polluters so a change here makes a big difference. There aren’t many other companies in the sector because traditional batteries are too heavy to be used effectively in planes.
Technically, the Amprius battery is a silicon anode battery that is smaller, lighter and has a higher cathode loading than the current graphite anode batteries. This will allow longer flights/drives, a reduced environmental impact and greater operational efficiency. The numbers below illustrate this point.
Upgrade Energy CEO Matthew Bernard marks this as a ‘leap forward for the entire battery industry’.
Amprius expects large demand and is scaling up with a new silicon anode battery manufacturing facility, coming sometime in December, that will give it 10x production capacity and output.
Technical indicators are showing this company is in oversold territory. The RSI is at 40 and the share price is at 3.96 (just above the all-time low), whilst the MACD momentum indicator and price action could be indicating a reversal of price.
Earnings currently run around $3.9m. Analysts are predicting earnings of $85m in 2025 for an increase of over 2000%! That’s a lot of growth. Currently, four analysts cover the stock and the average price target is $13-$15.
It’s not all sunshine and rainbows. It does have some competitors in the market that are also producing lithium-ion batteries. It has had a drastic drop for the past year and it recently made a new low. But that is what makes it cheap. There is always the risk that the price will continue to go down or it will not hit expected earnings and the product won’t receive the expected demand. Maybe another company is underway producing something better.
But a small allocation in your portfolio could pay off handsomely should this technology pay off.
Next Week
Expect the volatility to continue next week. The big event will come on Friday with the release of PCE Expenditure, the Fed’s favoured measure of inflation. In addition we will get earnings from CostCo and Nike that will demonstrate the health of the consumer.
As I stated at the top of this week’s update, we are getting close to a buy point here. You could even begin to take a nibble at things, use any down days this week as your signal to buy.
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Warning
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 and might not be suitable for you.