CWS Market Review – March 29, 2022
Posted by Eddy Elfenbein on March 29th, 2022 at 9:49 pm

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The S&P 500 Has Rallied 11% in 11 Days

Despite war, inflation and a flattening yield curve, the stock market has rallied quite impressively over the last several days. Sometimes the market has a mind all its own. Through Tuesday’s trading, the S&P 500 has gained 11% in eleven trading days. The index is now above its 50- and 200-day moving averages. In fact, we’re not that far from an all-time high.

I’ve been a doubter of this rally nearly since Day #1. It’s moved too fast, too soon and it’s been too concentrated in higher-risk stocks. Since the rally has been making us money, that’s helped comfort my misguided forecast. It also tells you why we follow a long-term buy-and-hold strategy. Just because the evening news appears scary doesn’t mean the market is worried.

The month of March comes to a close this week. Not too long ago, it looked like we were headed towards one of the worst quarters for the stock market in many years. Fortunately, the recent uptick has softened that blow. With the change of the month, we’re going to get several important economic reports.

Tomorrow, ADP will release its payroll report for March. For some reason, this report gets a lot of attention even though the ADP report is notoriously bad. A few weeks ago, ADP revised its January jobs number from a loss of 301,000 to a gain of 509,000. I’m sorry, but that wrecks your credibility.

Also tomorrow, the government will update its report for Q4 GDP growth. Bear in mind that this is a fairly dated report. We’re talking about the period that began six months ago and ended three months ago.

The last report showed Q4 growth of 7%. That’s in annualized terms and it’s adjusted for inflation. Except for the quarter immediately following the lockdown, last quarter was the best quarter for economic growth in more than 20 years. It also looks like 2021 was the best year for annual economic growth since 1984, although tomorrow’s revision could alter that.

On Thursday, we’ll get another jobless-claims report. The last report was the best since September 1969. That data series tends to be “noisy” which is a fancy stats term for meaning it can bounce around a lot. I’ll be curious if we can set another long-term low.

The day after the GDP report, the government releases the monthly personal income and spending data. This is one of the key data pieces that decides if we’re in a recession or not. For the time being, these numbers are quite healthy. The government also releases the personal consumption expenditures report. This is important because it’s the Federal Reserve’s preferred measure of inflation.

The big day for economic news will be on Friday when the government releases its March jobs report. Yes, it will be on April Fool’s Day. Please note that at the time of the release, March will have been over for just 8.5 hours.

The last jobs report showed that the unemployment rate is lower now than at any time in the 1970s, 1980s, 1990s and 2000s. There still is the problem that many people haven’t returned to the jobs market. The good news is that that has receded somewhat in recent months. I hope that trend continues.

I’m also looking out for the next CPI report which will be due out on April 12. I’m particularly concerned about this report because I don’t believe the Fed realizes just how much of a problem inflation is. This report will also be the first to show the price impact of the war in Ukraine. Prices at the pump rose 85 cents per gallon in just two weeks.

I want to take some time to discuss inflation because it’s a complicated topic and often misunderstood. For one, inflation tends to have an unusual impact on society. For example, there were severe bouts of inflation in pre-revolutionary France and in Weimar Germany. Those are extreme examples, but they show that inflation can often be a destabilizing force in society.

The soundness of money, at its root, is an implied trust between the citizen and the state. When that gets shattered, weird things can follow. Note the general sense of disillusionment in the United States in the 1970s.

For our concerns, inflation can also have a destabilizing impact on financial markets. I think of inflation as being similar to holding a magnet near a compass. It screws up the readings.

To give you an example, let’s say you run a manufacturing company. Your company buys its raw materials at Time X. It processes its parts at Time Y. It then sells its finished goods at Time Z.

The distance between those three time points can be quite large and if inflation is high enough, it will distort your actual profitability. Initially, inflation can give you the illusion of efficiency even when that’s not the case at all.

Not all earnings are the same, and inflation exacts a heavy toll on asset-heavy businesses. Companies with high assets relative to their profits tend to report ersatz earnings.

Inflation also benefits the borrower at the expense of the lender. The cost of inflation falls heavily on lower-income consumers and people on a fixed-income.

There are almost no upsides of inflation, and it often leads to a recession. If you remember the later 1970s, inflation sparked a massive rally in precious metals. The Hunt Brothers tried to corner the global silver market. They failed but came perilously close. The point is that investing in rocks shouldn’t be more profitable than in investing in businesses that provide jobs to people.

Inflation can be very rough for stocks. During the entire decade of the 1970s, the Dow Jones Industrial Average gained a grand total of 38 points.

To get a better sense of inflation’s impact on the stock market, I went over to Professor Robert Shiller’s online data library. Shiller is a Nobel laureate who maintains a database of stock market numbers going back to the 19th century.

I took all the monthly data and re-sorted it by level of inflation. The tipping point is 7.3%. Below that, stocks have gained an average of 7.5% annually adjusted for inflation. When inflation is above 7.3%, stocks have lost more than 11% annually adjusted for inflation. We’re not far above 7.3% right now.

This is why the Fed has to make it clear that it’s committed to beating inflation. In three months, I expect to see rates at least 1% higher. The Fed must stand firm.

The Stock Split Boom

Yesterday, Tesla (TSLA) said that it’s proposing to increase its number of shares so the company can split its stock.

This is an unusual topic because stock splits themselves do absolutely nothing, yet shareholders love them. If you own 100 shares of a $50 stock, a 2-for-1 stock split means you now own 200 shares of a $25 stock. The value of your position hasn’t changed one penny.

Still, shares of Tesla jumped 8% yesterday. That’s worth $100 billion. Again, there was zero reason for this. To quote Sire Isaac Newton, “I can calculate the motion of heavenly bodies, but not the madness of people.” Tesla is now worth more than the combined value of the world’s 13 largest automakers.

Two years ago, Tesla jumped 12% when its previous split went into effect—not when it was announced, but simply when the split went into effect. I don’t even know what to say about that.

Tesla isn’t the only big stock to split its stock. Nvidia (NVDA) had a 4-for-1 split last year. Apple (AAPL) split its stock 4-for-1 two years ago. In 2014, Apple had a 7-for-1 split.

Both Alphabet (GOOG) and Amazon (AMZN) have announced massive 20-for-1 stock splits. That means for every one share you own, you’ll get 19 more although the nominal price will drop about 95%. Amazon’s split will take effect in June while Alphabet’s will be in July.

The data has shown that stock splits are good for stocks, but I think they’re getting cause and effect backward. Companies announce splits because their stock has gone up. The stock has gone up because business has been good. It seems reasonable that the conditions that led to the split hang around for a little while. The splits themselves do nothing.

It seems that investors simply don’t like share prices that are too high. Even with modern markets, the transaction costs aren’t that high. Many years ago, when I worked on the retail side, I often heard investors say they didn’t want to buy stocks over $100 per share, even if it simply meant buying fewer shares. If I had to guess, I’d say there’s a comfort range of $20 to $50 per share for a stock.

Of course, there are exceptions. The “A” shares for Berkshire Hathaway (BRK-A) recently broke $500,000 per share. There are currently 616,000 shares outstanding.

Even with Amazon’s big scheduled split, that will bring its price down to around $170 per share (based on the current price). That would still make the nominal share price higher than about two-thirds of the S&P 500. Alphabet will be around $145 per share.

From what I recall, there used to be a lot more stock splits. I was never a fan of the small 5-for-4 or 3-for-2 splits. In my opinion, JetBlue deserves an award for the worst stock splits. The company split its shares 3-for-2 three times in less than three years, yet the stock went nowhere.

What’d the point?

My stock split hero is Hawkins (HWKN). This is a specialty chemical company based in Minnesota. So if you’re in, say, St. Paul and you need a shipment of sodium hydroxide, well…these are the folks to call.

Hawkins distributes, blends and manufactures chemicals and other specialty ingredients for its customers in a wide variety of industries. The company has 49 facilities in 24 states.

They’ve been around for many years and the company is largely in family hands. The current CEO is Patrick Hawkins. They do what they do, and they do it well.

Hawkins often announces 10% or 15% stock dividends each year. These have tended to be in line with the stock’s long-term performance. As a result, the nominal share price is often around $40, but that might you lead you to believe the stock hasn’t moved much.

On the contrary, Hawkins has been a huge winner. Check out its performance this century compared with the S&P 500.

After all that success, Hawkins is followed by one Wall Street analyst. The madness of people, indeed.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Morning News: March 29, 2022
Posted by Eddy Elfenbein on March 29th, 2022 at 7:01 am

OPEC Says the U.S. Must Trust Its Oil Production Strategy

The War Is Reshaping How Europe Spends

Xi Battles Distrust by Global Investors Burned in China Before

Shanghai Covid-19 Lockdown Poses Fresh Test to Supply Chains

Russian Supply Chains Next in Line for Sanctions, Deputy U.S. Treasury Secretary Says

Russia Built Parallel Payments System That Escaped Western Sanctions

Do Russian Oligarchs Have a Secret Weapon in London’s Libel Lawyers?

Fed Pivots Toward Jumbo Hikes After Being Slammed as Too Slow

America’s Inflation Problem Is Weirdly Hard to Fix

Inside Biden’s $5.8 Trillion Wish List

Apple’s Best Run Since 2003 Brings $3 Trillion Back in Focus

If You’re Focused on Amazon’s Competition, You’re Missing the Future

Walmart Stops Selling Cigarettes in Some Stores

Emirates Says Russians Also Have Right to Travel Despite Ukraine

World’s Longest Passenger Flight Plans to Avoid Russian Skies

FedEx Says Fred Smith to Step Aside as CEO, Remain Executive Chairman

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Morning News: March 28, 2022
Posted by Eddy Elfenbein on March 28th, 2022 at 7:08 am

Japan to Revise Foreign Exchange Law to End Crypto Loophole for Sanctions on Russia

Heineken to Exit Russia at Cost of Around 400 Million Euros

Oil Slides on Concerns of Weaker Chinese Demand

U.S. to Boost Gas Deliveries to Europe Amid Scramble for New Supplies

Ukraine War Drives Up Cost of Wind, Solar Power

Global Bond Rout Deepens on Fear Rate Hikes Will Stoke Recession

Goldman, JPMorgan Strategists Say Equities Can Weather Bond Rout

A Recession Warning Sign? Part of U.S. Yield Curve Inverts for First Time Since 2006

U.S. Bankruptcy System Faces Government Pushback Over New Corporate Tactics

PhDs Killed Off the Gold Standard In 1971, Not ‘Guns & Butter’

New Supply Chain Risk: 22,000 Dockworkers Who May Soon Strike

Volkswagen Prepares for a Deglobalized World

Vanguard Stumbles in Pivot from Cult of Jack Bogle

Billionaire Bonderman’s Wild Ways Forged TPG. It’s Up to Winks to Tame It

From GM to Powerade, Brands Pitch Mental Health

NordicTrack CEO Scott Watterson Forced Out in Battle with Peloton

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Morning News: March 25, 2022
Posted by Eddy Elfenbein on March 25th, 2022 at 7:05 am

E.U. Takes Aim at Big Tech’s Power with Landmark Digital Act

U.S., EU Reach LNG Supply Deal to Cut Dependence on Russia

U.S. Gas Prices Are Coming Back Down, but Not in California

London Metal Exchange Sees Trader Exodus as Open Interest Slides

Bank of Mexico Lifts Interest Rates for Seventh Time

Sri Lanka Economy Has ‘Hit Rock Bottom,’ Putting Pressure on President

Europe’s Economy Slows as Ukraine War Sends Costs Soaring

Four Weeks of War Scar Russia’s Economy

Alibaba’s Russia Venture Puts Chinese E-Commerce Giant in Awkward Spot

Inside China’s Electric Drive for Swappable Car Batteries

Call for an Uber, Get a Yellow Taxi

Instacart Slashes Its Valuation by Almost 40% to $24 Billion

Apple Is Working on a Hardware Subscription Service for iPhones

She Was a Candidate to Lead Levi’s. Then She Started Tweeting.

Frosties NFT Creators Charged with ‘Rug Pull’ Investor Fraud

‘Testosterone-Fueled Bear Pit’ Discourages Women From Economics

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Morning News: March 24, 2022
Posted by Eddy Elfenbein on March 24th, 2022 at 7:03 am

Oil Climbs 5% After Russia Warns of Prolonged Pipeline Outage

Oil Price Rise ‘Trickles Down to Everything,’ Even Your Potato Salad to Go

Fertilizer Prices Surge as Ukraine War Cuts Supply, Leaving Farmers Shocked

Nickel Turmoil Is Back With Another 15% Limit-Up Spike on LME

Challenges Arise as Russia Calls for Gas Payments in Roubles

Japan Unsure How Russia Will Execute Rouble Payments for Energy Sold To ‘Unfriendly’ Nations

Russia Puts Floor Under Stock Market Selloff as Trading Resumes

No Longer in Russia

How Russia and Right-Wing Americans Converged on War in Ukraine

Putin and Xi Exposed the Great Illusion of Capitalism

Judge Frees China’s ZTE From Some U.S. Oversight

The Odds Don’t Favor the Fed’s Soft Landing

With Multiple Personalities, Polestar Plots Its Post-Volvo Course

Mark Zuckerberg and Meta’s Leadership Take Remote Work to the Extreme

Former Boeing Pilot Found Not Guilty in 737 MAX Criminal Trial

An Alleged Fraud Uncovered by a Short Seller Ends in Gunfire

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Morning News: March 23, 2022
Posted by Eddy Elfenbein on March 23rd, 2022 at 7:06 am

Global Bond Plunge Wipes Out $2.6 Trillion, Exceeding Losses of 2008 Financial Crisis

Wall Street Is Scrambling for the Exits in Moscow — and Billions Are at Stake

Hedge Fund Up 3,000% in Five Years Can’t Buy Enough China Stocks

The U.S. Scales Back Metal Tariffs as Britain Lifts Duties on American Whiskey and Jeans

Will War Make Europe’s Switch to Clean Energy Even Harder?

Dutch Bank ING Ends Financing for New Oil and Gas Projects

TotalEnergies Says It Will Stop Buying Oil from Russia by the End of the Year

Surveillance Risks Shape How Central Banks Test Digital Currencies

The ‘Great Retirement’ Disconnect That Puzzles U.S. Economists

The Education Department Says Owners Will Have to Pay If Their Colleges Collapse

Student-Loan Freeze Saves Borrowers Nearly $200 Billion

Home Appreciation Is a Sign You May Live In a Feudal Society

Amazon Union Vote Set to Begin in New York, Which Has Challenged Company in Past

Disney Workers Walk Out to Protest Company’s Response to Florida Bill

U.S. SEC to Elon Musk: Regarding Your Tweets, a Deal is a Deal

The Morphe Beauty Saga Isn’t Pretty

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CWS Market Review – March 22, 2022
Posted by Eddy Elfenbein on March 22nd, 2022 at 7:35 pm

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The stock market continued an unusual streak today. For 23 straight days, the S&P 500 has not had a daily gain of less than 1%. To be sure, the market had several positive days over that span—nine to be exact—but all nine produced gains of more than 1%, and four were more than 2%.

The reason isn’t hard to find. Such is the stock market at war. Most of the days have been volatile and negative. Fortunately, the stock market has had an impressive bounce over the past few days. The good news is that the S&P 500 closed above its 50- and 200-day moving averages.

Still, I’m suspicious of this latest move.

For one, the recent uptick has been inordinately strong. In just six days, the S&P 500 has added more than 8%. Last week, the S&P 500 rose by over 1% for four days in a row. In all its history, the index has never risen by more than 1% for five straight days. Alas, last week was no exception.

Also, the rally has been almost exclusively confined to high beta stocks. That’s not a good sign. Check out this chart. Since March 7, the S&P 500 High Beta Index is up over 11.5% while the S&P 500 Low Volatility Index is up just 0.85%.

The Federal Reserve Needs to Wake Up

Last week, the Federal Reserve decided to raise interest rates for the first time in more than three years. I’ve been critical of the Fed as I believe the central bank is behind the curve on combatting inflation. The Fed’s recent economic forecasts bear out my fears as the Fed apparently believes that inflation will soon fall back to modest levels. Eh…I’m not so sure.

Yesterday, Federal Reserve Chairman Jerome Powell spoke before an economic policy conference and tried to alleviate fears that the Fed isn’t being aggressive enough. Specifically, Powell said that the Fed is open to raising rates by 0.5% increments if needed. (It’s needed.)

Prior to last week’s meeting, there had been some speculation that the Fed would raise rates by 0.5%. Eventually, the Fed made it clear to the market that it would only raise by 0.25%. The market seemed pleased.

Since Powell’s comments, the futures market has noticeably shifted its tone. While we never know exactly what the Fed is thinking, we can do the next best thing: look at how traders are betting.

According to the latest prices, traders think the Fed will hike by 0.5% in May and again in June. Goldman Sachs just said it expects that as well. Ultimately, traders expect the Fed to raise rates by 2% by the end of the year. That may not be enough.

Next, I’m going to bring up some economic theory. No, I promise it won’t be boring. Well, it will be boring but let’s say it’s relevant. Anyway, I’ll make it simple.

There’s the idea that there’s a magic, invisible, natural interest rate. If the Fed goes below the natural rate, that causes inflation. If they go above it, that chokes off the economy. The hard part is that we don’t know exactly what the natural interest rate is. It’s like the invisible man in the room. While we can’t see it, we can feel its effects.

Here’s a look at the inflation-adjusted Fed funds rate, based off core inflation. The important point is that you can see how dramatically low interest rates are right now.

Current thinking on the Fed is that the natural rate is 0.5% above inflation. According to the Fed’s preferred stats, inflation is currently running at 6.1%. So that means that interest rates will have to go up to 6.6%? That’s a huge increase, and that’s just to be neutral!

It gets a little more complicated because the Fed sees inflation falling quickly. By the end of this year, the Fed sees inflation cooling off to 4.1%. As a pleasant side effect, the Fed projects that its current policies will work just fine. Again, I’m skeptical.

By 2024, the Fed forecasts inflation of 2.3% and interest rates of 2.8%. In other words, they think we’ll hit the natural rate in a mere 21 months. I hope that’s true, but that strikes me as a very optimistic forecast. Too optimistic.

The Yield Curve Starts to Flatten

The bond market has already reacted to the Fed’s aggressive tone. Today, the 20-year Treasury closed at 2.71%. That’s up 52 basis points since earlier this month. You may have noticed that 30-year mortgage rates are closing in on 5%. The bond market is having one of its worst downturns in several years.

The mid-maturity Treasury yields have risen the most. Since January 4, the date of the stock market’s high, the yield on the five-year Treasury has increased by 102 basis points. The yield on the three-year has increased by 136 basis points.

Here’s what the yield curve looks like today compared with the end of the year:

Notice the big bump the orange line now has. That’s due to the Fed. Beyond five years out, the yield curve is very nearly flat, and a negative yield curve is one of the warning signs of a recession.

Not surprisingly, several economic forecasts have been pulled back in recent days. The Atlanta Fed’s GDP Now model now projects Q1 GDP growth of just 1.3%. That’s actually higher than where it had been. A few weeks ago, the forecast was for negative growth. Bank of America sees Q1 GDP growth of 1.6%. Goldman Sachs is at 0.5%.

We’re nearing the end of Q1 and that means that earnings season will start up in mid-April. Wall Street expects the S&P 500 to report Q1 earnings of $51.28 per share. That’s the index-adjusted figure. If that forecast is accurate, it would represent an increase of 8.2% over last year’s Q1. I’m afraid that’s too high.

For all of 2022, Wall Street sees earnings of $225.03 per share. That’s an increase of $25 in the past year. That means the S&P 500 is going for about 20 times this year’s earnings. That’s a little high but nothing extreme.

By the way, tomorrow is the second anniversary of the Covid low. The S&P 500 plunged 33.9% in 23 trading days. The index reached its closing low of 2,237.40 on March 23, 2020. That was a scary time but we’ve more than doubled since then. Even measuring from the February 2020 high, the S&P 500 is still up more than 32%. To quote Peter Lynch, “The real key to making money in stocks is not to get scared out of them.”

Heico Breaks Out to a New High

Last week, I highlighted one of our Buy List stocks, Silgan Holdings (SLGN). I’m pleased to report that the stock broke out to a new high today.

That’s not the only Buy List stock hitting a new high. Heico (HEI) did, too. This is a wonderful company that still isn’t very well known. Heico is the kind of niche business I love. With investing, the only thing better than a monopoly is a near-monopoly. (The full-on monopolies tend to get too much government attention.)

Heico makes replacement parts for the airline industry. If a commercial aircraft needs some obscure new part, the airline can’t run down to the local hardware store. Instead, it needs to special-order it. Moreover, there’s a great deal of cost pressure on the airlines to keep the older planes serviceable.

Also, the aircraft parts often need to meet strict regulatory guidelines. The part maker really has to know what it’s doing. That’s where Heico comes in. The business is lean and well-run.

I can’t tell the Heico story without mentioning the Mendelson family. Larry Mendelson is the current chairman and CEO. In the 1950s, he took a finance class taught by David Dodd. Fans of value investing will recognize Dodd’s name. He was the co-author of Security Analysis with Ben Graham. Security Analysis is probably the foundational text of value investing.

Mendelson took those lessons to heart. He made a good deal of money in real estate and wanted to diversify his holdings. That led him to invest in an under-performing industrial company. He really didn’t care what he bought, as long as it was cheap and had potential to be retooled for future growth. He chose well.

Heico was originally founded in 1957 by Dr. William Heinicke as Heinicke Electronics. By the 1980s, Mendelson controlled a sizeable share in the company and was able to make himself CEO. The Heinicke family still owns a large chunk of the voting shares, and several family members hold key positions within the company.

When airplane owners need a new part and go back to the original equipment manufacturer (OEM) to get replacements, they’re often charged a steep price. The profit margins can exceed 30%. That provides enormous opportunity for Heico. Consider that many aircraft are over 20 years old.

The aviation industry is broadly diversified, and Heico is also able to get sales from commercial and military customers. That means that if there’s a drop-off on one end of the business, the other side can pick up the slack. Wherever there’s a demand to cut costs, Heico has the potential to do well.

In some respects, I see Heico’s role as similar to that of a generic drugmaker. Heico provides a low-cost copy of the original product, which is regulated by the Federal Aviation Administration. By the way, Heico does more than aircraft parts. They also supply parts for satellites, rockets, missiles and even medical instruments.

Since 1995, shares of Heico are up a cool 51,000%:

Despite rising nearly 10-fold, the S&P 500 looks like a flat line next to Heico.

Heico is in an enviable position and nearly dominates its market. The company sells to 19 of the top 20 airlines in the world, and their customers love them. Like nearly everyone else, though, Heico has felt the squeeze of the economy, and COVID was especially rough on the airline industry.

Still, Larry Mendelson managed Heico well during a rough patch. One month ago, Heico reported fiscal Q1 earnings of 63 cents per share. That’s up from 51 cents per share one year before. Wall Street had been expecting 61 cents per share. Net sales rose by 17% to $490 million, and operating income increased by 23%.

Heico noted that while Covid has been impacting its business, that impact has been gradually declining over time. Heico has now seen “six consecutive quarters of sequential growth in net sales and operating income at the Flight Support Group.”

Heico’s consolidated operating margin improved to 20.2% in the first quarter of fiscal 2022, up from 19.2% in the first quarter of fiscal 2021. EBITDA increased 18% to $122.3 million in the first quarter of fiscal 2022, up from $104.0 million in the first quarter of fiscal 2021.

Heico’s business is divided into two groups: the Flight Support Group and the Electronic Technologies Group. For Q1, the Flight Support Group had sales of $272.7 million, while the Electronic Technologies Group had sales of $222.3 million.

For fiscal Q1, Flight Support saw its operating income soar by 103% and net sales rise by 37%. That was driven by a 48% increase in organic net sales for its commercial-aerospace parts and services. Flight Support’s operating margin improved to 19.2%. That’s up from 13.0% in the first quarter of fiscal 2021.

Electronic Technologies’s sales for Q1 dropped a small amount. That was due to “decreased demand for our defense and space products.” Electronic Technologies had a Q1 operating margin of 25.0%.

The stock hit a new high today of $155.45 per share. If you want to learn more about Heico and the other stocks on our Buy List, please sign up for our premium service.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Morning News: March 22, 2022
Posted by Eddy Elfenbein on March 22nd, 2022 at 7:08 am

Central Banks Grapple With Dual Threat of Slowing Growth, Rising Inflation

Powell Says Fed Will Consider More-Aggressive Interest-Rate Increases to Reduce Inflation

Shale Companies Drilling More, but Oil Output Growing Little

Bitcoin Miners Want to Recast Themselves as Eco-Friendly

East Coast Ports Rushed to Attract Mega Ships. Now, One Is Stuck Outside D.C.

The S.E.C. Moves Closer to Enacting a Sweeping Climate Disclosure Rule

For Companies Still Selling in Russia, ‘Essential’ Is a Loose Term

LME in Talks with Governments on Whether to Block Russian Metal

Arcelormittal Removes Russian Materials from Steel Supply Chain

How One Oligarch Used Shell Companies and Wall Street Ties to Invest in the U.S.

Cattle Ranchers Take Aim at Meatpackers’ Dominance

Buffett Thumbs Nose at Goldman Bankers With Quirky Deal Price

Alibaba Upsizes Share Buyback by Two-Thirds to Record $25 Billion

‘Red Flags’ as Some China Property Developers Say They Can’t Release Earnings On Time

Boeing Faces New Upheaval After Crash of Chinese Airliner

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Powell Strikes a Hawkish Tone
Posted by Eddy Elfenbein on March 21st, 2022 at 2:32 pm

Federal Reserve Chairman Jerome Powell spoke today before an economic policy conference. Powell sounded markedly more willing to use interest rates to combat inflation.

In particular, he said that the Fed could start using 0.5% rate increases. Before last week’s increase, which was the first in more than three years, there had been some speculation that the Fed would increase by 0.5%. Ultimately, the Fed raised rates by just 0.25%.

I think the Fed is making two errors. The first is that the inflation threat is more serious than they realize. Their latest economic projections are evidence of that. The other issue is the threat of an economic slowdown, though not necessarily a recession.

Finally, what will it take to restore price stability? The ultimate responsibility for price stability rests with the Federal Reserve. Price stability is essential if we are going to have another sustained period of strong labor market conditions. I believe that the policy approach that I have laid out is well suited to achieving this outcome. We will take the necessary steps to ensure a return to price stability. In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.

That’s good to hear that they are aware of the problem. However, too often Fed chairs rely on tough talk rather than concrete action. Powell also said that the Fed could soon start unwinding its ginormous balance.

Bonds Hit the Skids
Posted by Eddy Elfenbein on March 21st, 2022 at 9:43 am

The stock market has had a nice rally over the last four days. The S&P 500 managed to close above its 50-day moving average on Friday. Still, I’m skeptical that this burst will last.

For one, it’s been a dramatic spike upward. That’s usually not a good sign of lasting strength. Also, it’s heavily tied to high beta stocks. The low volatility names haven’t moved that much. I’d much rather see a rally that lifts many boats.

This morning, Berkshire Hathaway said it’s buying insurance company Alleghany for $11.6 billion. That works out to $848.02 per share in cash. By the way, Alleghany has one of the coveted single-letter ticker symbols, “Y.” I wonder if anyone will go for it.

The real action lately hasn’t been in the stock market but in the bond market. Bonds are having one of their worst stretches in years. Here’s a chart of the Treasury Bonds ETF (TLT):