Wednesday, October 27, 2021

Morning Note: "Are Equities Overlooking a Bigger Issue?"

As I've noted herein a few times heading into this earnings season, we've been keenly concerned with the forward guidance companies might issue in the face of persistent bottlenecks in virtually all things input, including, apparently, labor.

Macro analyst Julian Brigden shares our concern. 

"With equities focused on Tesla, are they overlooking a bigger issue? I.e., how is cost push inflation resolved? Take Spain; PPI jumped 23.6%YoY with more to come!! I see 2 outcomes: 1) Firms push through costs = CPI explodes = CB hikes. 2) Firms eat costs = margins implode!"

Well, suffice to say that firms will push through costs if they can; if their customers have the will and the wherewithal to pay. And, yes, in that event inflation continues to rise. Speaking for the US CB (central bank), interest rate hikes are going to come as gingerly as you can imagine. For, if indeed they hiked to the degree present conditions would historically dictate, well, make no mistake, financial markets would utterly crack. And as we've pointed out herein ad nauseam, that's the Fed's focus these days! 

Here's a bullet point from our own list of reasons we see structural inflation going forward:

"The Fed's fear of bursting present asset and debt bubbles were it to implement traditional inflation-fighting measures -- thus willing to fall notably behind the inflation curve well into the foreseeable future. In fact, I personally place better than 50/50 odds that if indeed a long-term trend of rising inflation emerges, that the Fed will revert to yield curve control (buying up the price (down the yield) of longer-term treasuries) to control lending rates that, were they allowed to rise, would themselves produce a headwind to rising inflation." 

Asian equities leaned slightly red overnight, with 9 of the 16 markets we track closing lower.

Europe's struggling this morning, with all but 4 of the bourses we follow in the red, as I type.

U.S. equities are beginning the day, like yesterday, with bad breadth (only worse than yesterday's). While the S&P clings to a gain, 60% of its members are in the red. The Nasdaq's up a not-small .5%, but down stocks favor up by almost 2 to 1. 

Dow down 77 points (0.22%), SP500 (just turned slightly red) down 0.06%, SP500 Equal Weight down 0.52%, Nasdaq 100 up 0.51%, Nasdaq comp up 0.36%, Russell 2000 down 0.87%.

The VIX sits at 16.13, up 0.94%.

Oil futures are down 1.13%, gold's down 0.24%, silver's down 0.31%, copper futures are down 1.85% and the ag complex is up 0.26%.

The 10-year treasury is up (yield down), and the dollar is down 0.19%.

Led by solar stocks, AMD, Nokia, wind stocks, Latin American equities and ag futures -- but dragged by MP (rare earth miner), base metals futures, Viacom, oil services stocks and ALB -- our core portfolio is off 0.25% to start the session.

I've used these two Howard Marks quotes a few times herein, but they're indeed worth repeating:

" life and in investing, since there can be many different outcomes, uncertainty and risk are inescapable."
"Invariably, investors who disregard where they stand in cycles are bound to suffer serious consequences."

Have a great day!

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