Tuesday, February 28, 2023

Morning Note: Know the Bent, Keep an Open Mind, and Always Think "Real"

A couple of observations around yesterday's durable goods report: 

The first reminded me to never forget that human nature tends to have one seeing things in the color one's predisposition, or previous prediction, paints... I listened to one of our research providers paint those durable goods results as nothing more than "bad economic data" and "a big miss." 

Well, in reality, not so much.

Granted, the headline number whiffed (-4.5% vs -4.0% expected)... But take out volatile transportation sector numbers and you get a 0.7% rise (vs 0.1% expected)...  And when we single out the important core capital goods results, we get a 0.8% pop (vs 0.0% expected)... 

So, no, all in -- at least at first blush -- I'd say this was actually decent economic data, and, overall, not the "big miss" our presently-bearish resource would have us believe.

Now, knowing that bullish we presently ain't here at PWA, you might think that I'd welcome such a bearish assessment... In which case, frankly, I'd be of little genuine use to you! As you/we can ill-afford to have us interpreting the data in a manner that wrongly validates our existing interpretation of general conditions... That, obviously, would be, well, let's call it simply unproductive, if not dangerous!

Now, the above said, let's think a little deeper about those durable goods numbers... Let's consider the impact of inflation... In fact, let's hear from another of our research providers (BCA) who -- in paragraph 2 below-- did just that:   emphasis mine...

"Although the 4.5% m/m drop in US durable goods orders in January (below expectations of a 4% m/m decline) painted a bleak picture of businesses’ willingness to invest, the contents of the report were significantly more positive. Specifically, a 13.3% m/m plunge in new orders for transportation equipment accounted for the weak overall print. Excluding transportation, durable goods orders’ 0.7% m/m increase beat the anticipated 0.1% m/m rise and was better than December’s downwardly revised 0.4% m/m decline. Moreover, core capital goods orders rebounded by 0.8% m/m, above expectations they would be unchanged following December’s 0.3% m/m decline. Importantly, shipments of core capital goods, which will be used as an input in the Q1 GDP release, rose by 1.1% m/m.

However, optimism from the Durable Goods Report should be tempered by the fact that the figures are reported in nominal terms. Given that producer prices of private capital equipment jumped by 0.8% m/m in January – the highest since April 2022 – the increased values of orders and shipments in part reflect the impact of higher prices. Notably, core capital goods new orders fell below shipments in January, sending a warning about the outlook."

So, okay, while, on a real (inflation adjusted) basis, the core numbers may not be all that rosy after all -- and, therefore, may indeed comport with our present not-rosy economic base case -- they're nevertheless better than perhaps other presently-bearish players might have us believe. 

My point? We gotta always dig below the surface of headline numbers, consider the data in real terms, and know the prevailing bent of the folks we listen to... And, above all, especially when it comes to the economy and to markets, remain open to all possibilities!

Speaking of inflation, while our own current data-and-history-derived bent -- after a potential recession-induced plunge -- has it structurally higher than the past several decades, simple base effects over the next few months are a notable headwind... Before, that is, they become a notable tailwind during the second half of the year.

Per Forbes:

"For the first six months of 2022 the monthly increase in the Unadjusted Index was between 1.605 and 4.015 or 0.56% to 1.37% (see table below). This makes for easy compares or the Base Effects helping to lower the inflation rate in the first half of 2023.

After that the compares are much tougher as the month-to-month readings were two slightly negative readings in July and August, a small increase in September, a slightly larger increase in October and a larger drop in November.

The average change in the Index the last five months is a positive 0.43 with November’s decline of (0.301) or a negative 0.1%. Note that the Unadjusted Index is not seasonally adjusted vs. a seasonally adjusted month-to-month increase of 0.1% that is also announced in the CPI press release.

January: 2.346 or 0.84%
February: 2.568 or 0.91%
March: 3.788 or 1.34%
April: 1.605 or 0.56%
May: 3.187 or 1.10%
June: 4.015 or 1.37%
July: (0.035) or (0.01)%
August: (0.015) or (0.04)%
September: 0.637 or 0.22%
October: 1.204 or 0.41%
November: (0.301) or (0.10)%"
Stay tuned.

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

Same for Europe so far this morning, with 10 of the 19 bourses we follow trading down as I type.

US equity averages are mixed to start the session: Dow down 123 points (0.37%), SP500 down 0.05%, SP500 Equal Weight up 0.03%, Nasdaq 100 down 0.06%, Nasdaq Comp down 0.01%, Russell 2000 up 0.52%.

The VIX sits at 20.86, down 0.43%.

Oil futures are up 1.66%, gold's up 0.07%, silver's up 0.43%, copper futures are up 1.54% and the ag complex (DBA) is up 0.17%.

The 10-year treasury is down (yield up) and the dollar is down 0.18%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 19 -- led by Dutch Bros, Albemarle, base metals futures, communications stocks and silver -- are in the green so far this morning. The losers are being led lower by AMD, utilities stocks, emerging market bonds, long-term treasuries and Nokia.

The following from Charles Goodhart and Manoj Pradhan's enlightening book, The Great Demographic Reversal, will sound very familiar to clients:

"Populism and protectionism have become powerful political influences in the context of economies where real wages have stagnated over the last 30 years."

"...rising unit labour costs, and the increasing relative bargaining power of labour, will curtail profitability, compared with the glory decades of 1980–2020, when globalisation, demography and easy money delivered a capitalist heaven. Those days are swiftly passing by, and the future for capitalist profitability will be becoming much harder earned."

Have a great day!

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