04 Dec Capital 19 Catch-Up
Weekly Index Movement
|Aussie All Ords
It was a fairly quiet week with not much to talk about. The biggest moves came in the bond markets where the 10-year yield dropped to under 4.3%. Remember, it was this very same yield rising to 5% from July to October that sent stocks down 10%. The move back down in November is why stocks have recovered.
There was chatter about increasing recession risks and that is why these rates fell. Rubbish. If there was really a recession risk the rates would collapse, not pull back a bit after a big run.
All that happened was the markets have crystalised the thought that the Fed is done raising rates and is now expecting a rate cut in March 2024. I agree they are done, but am not convinced cuts will come that fast.
Powell gave a speech on Friday and tried to tell the markets there would be no rate cuts next year. But the markets completely ignored him and are pricing in a 64% chance of a cut in March. That is up from 21% last week.
Inflation isn’t too far above the 2% level wanted, but it is all on the back of a lower oil price and not so much in any other areas. A blip back up in Oil and inflation will head North taking all bets of rate cuts off the table.
Oil was happily sitting at $75 a barrel (OPEC likes it above $80) until OPEC came out and suggested they might need to cut by another 1mn barrels per day. It is basically impossible for Oil to fall. OPEC just cuts production to remove supply. If something else was to come along and send Oil higher, you can bet they won’t increase supply to reduce the price.
So I think it is too early to say we have beaten inflation in the US.
And if 2.9% inflation is not beaten then I do not know why Australia got all excited about it’s 4.9% figure last week. It was lower than the 8% peak but it is still 5% and mostly due to lower Oil.
The RBA still has work to do. I find myself surprised but I think I like the new RBA boss Michele Bullock. In a recent speech she said our inflation is home grown. That would have upset the government who have been saying it isn’t their fault and inflation comes from overseas.
She made an unpopular but correct statement and was not afraid of upsetting the pollies.
What does this mean for your investments? – Aussie banks could see growing trouble but the biggest impact is a rising AUD rate. I said it before and it is starting to move now. If you have not hedged your currency risk on US Shares it still isn’t too late.
The Passing of Charlie Munger
Sad news this week with the death of Charlie Munger just one month before his 100th birthday.
Charlie was the other half of Berkshire Hathaway and Warren’s right-hand man. Whilst he didn’t get the same spotlight as Warren, he was undoubtedly very talented.
His belief when investing was to buy outstanding businesses at reasonable prices. Don’t wait for great prices as outstanding businesses never go on sale.
There are thousands of brilliant quotes from Charlie, but this is my favourite:
“I do not use a formulaic approach to valuing a company or stock like future cash flow etc. If the gap between value and price does not look attractive, I go to something else.”
It reminds me that this is not a precise game and if it is not absolutely obvious then it isn’t worth it. If you have to sit down with a calculator and work out the discounted future cash flows of a business to two decimal places – you don’t really get what it is all about.
Good investments should stand out like a sore thumb. It should be screamingly obvious that you should buy it now
Like B.Riley Financial (RILY) right now.
I wrote about this a couple of weeks ago. Short version is the stock has been under significant short pressure because it invested in a company called The Franchise Group. One of the directors of Franchise Group is also a director of a managed fund. One of the other guys in that managed fund defrauded clients of $600million.
So the shorts have attacked RILY thinking the investment bank will be pulled into the fraud.
To me that is a remote possibility. They are a long way removed from the fraud.
Anyway, the stock is down from over $40 to around $18 and pays $4 a year in dividends.
There is nothing wrong with RILY as a business, just that there is a news story floating around and the shorts have got all excited about it. They will turn out to be wrong, the news will be forgotten and RILY will return to $40.
This is what Charlie Munger was talking about. I think it should be worth $40, I can buy at $18. You don’t need complex mathematical calculations to work out if it is worth it or not and there is enough fat in the numbers that I can still profit even if my assumptions are out a fair way.
Fed Beige Book
The Feds Beige Book might not be something you often hear about.
The Fed is actually made up of 12 different district members. 8 times a year they send a survey out to businesses asking for their views. It often comes out 2 weeks before an interest rate decision and is a Qualitative assessment by the Fed rather than the usual solely Quantitative measures.
The way most people seem to parse this data is by looking for references to particular words. In the latest Beige Book last week the points of note were:
“Recession”: 3 references, down from 6 in October and 15 in September. There were 12 in the first report of 2023 (January).
“Slow/er/ing/ed”: 64 appearances, down from October (69) and September (70). There were 80 in January.
“Inflation”: 10 references, down from 15 in both October and September. There were 30 in January.
“Wage growth”: 14 mentions versus 15 in October and 21 in September. There were 20 in January.
“Tighten”: 10 mentions, all pertaining to tightening financial conditions and credit standards. That’s down from 18 in April (after the mini bank-crisis in March) and up slightly from 8 in January.
Takeaway: The Fed’s business contacts are not especially worried about an impending recession and mentions of “inflation” are down by a third since the start of this year. At the same time, variations of the word “slow” remain elevated relative to economic activity, labour demand and wage growth. Additionally, there are still quite a few mentions of “tighten”, especially for credit standards. It makes sense banks are getting stricter, with industry contacts in St. Louis reporting that “profit margins are tightening due to higher interest expenses.” Overall, the Fed’s assessment after meeting with its regional contacts is that the US economy continues to slow and bring down inflation, but a soft landing is still possible.
That’s bullish for stocks.
It will be another quiet week for stocks with no major catalysts to drive change. November was the best month of the year so far, so I expect stocks will pause for a bit before we get a late rally to end the year.
The only number worthy of note next week is the employment numbers on Friday. They are expected to show a softening in the labour markets. The danger is a strong figure here that lowers the chances of interest rate cuts next year.
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.