Alan's Alert 7-13-2021

 

Panic might not be the right word but when I see charts like this cross my screen:

I know something is up. That is a whole lot of contracts changing hands in the gold futures market.

The Consumer Price Index (CPI) was posted this morning and traders made some knee-jerk moves. Gold wasn’t the only one to see some wild swings. Needless to say, the CPI was shockingly high.

It came in at 5.3% on a year-over-year basis. That is an increase of 0.9% month-over-month (that’s 10.9% annualized!). This is well above the forecast of 4.9% year-over-year. Hence the knee-jerk

reaction by traders. This is the 6^th month in a row that the CPI has printed higher than the month before. When the “core” CPI is teased out. It printed at a spicy 4.5%. Remember, the “core” CPI is the CPI without those pesky food and energy numbers. This is the largest 12-month increase in the core CPI since November of 1991. Just looking at energy, it was up 24.5% year-over-year and food was up 2.4% in the same comparison. Here’s the Bureau of Labor Statistics’ (BLS) full breakdown.

Another item that stood out to me was that used vehicles continued their rise. I anticipate that those categories that are hot now will cool and the categories that have been slow (food especially), will begin to get hot. Inflation doesn’t attack every component at once. It moves higher in a stop-and-go fashion. This is one of the reasons that the common man has such trouble figuring out what is going on. Few can detect that the reason the prices are going up is that the money in their wallet is worth less. It still looks like a $20 bill but when you compare what it can buy, you realize something is wrong.   

In the grand scheme of things, we are very early on this trend. It takes a special individual to be able to; see a trend, know it will take place, get in position for it, and… sit tight. That last part is the hardest. It was described exceptionally well in Edwin Lefevre’s “Reminiscences of a Stock Operator” which was inspired by the life of stock trader Jesse Livermore.

“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.”
― Edwin Lefèvre

I’m of the mind that we have seen a trend coming. We are now getting confirmation that it will be taking place. I think we have some good positions to take advantage of it (though I’m looking at a few more) and then we have to “sit tight”.

The Bureau of Labor Statistics (BLS) will be releasing the Producer Price Index (PPI) tomorrow. I do not believe that it is a coincidence that we have Fed Chair Powell in front of Congress on the same day. In fact, I’ve got a man on the inside. He gave me a preview of what Jerome is going to say.

The Fed has to come out and tell everyone they have it under control. If they don’t, there would be panic and chaos. This would not be conducive to a slowly rising stock market and lower unemployment figures. Privately they could be frightened of losing control but they have to put on a good face for the public. They have to say things like; this inflation is transitory, it is well within our new framework, we see no reason to worry. Otherwise, the jig is up.

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Alan's Alert 7-1-2021

 

Oil is acting erratically this morning. I had crude futures up to $76.22 this morning before taking a tumble. As I send this out, it currently stands at $75.14. The oil market is really tight due to an influx of swing/momentum traders. I believe the current volatility is here to stay and should be taken advantage of. Big one day drops can be great opportunities to go long. Ultimately, we are going to be running into a large market deficit because of supply constraints, lack of new well development, and OPEC. Current rumors are flying around about OPEC’s meeting. Previous production deals could turn out to be less than previously advertised. Also, there is a rumor that the current production cut will be extended to the end of 2022 (it was going to end in April 2022). OPEC could be testing the waters here to see if shale producers will administer a healthy dose of self-control in the face of higher prices. If so, this will give the cartel a green-light to keep edging the price higher.

ISM put out their latest report on Manufacturing and it’s a wild ride. While the top number edged down (60.6 in June vs 61.2 in May), we are still in expansion mode (remember, anything above 50 indicates expansion). The number that really stood out to me was the change in price pressures which surged from 88 to 92.1. Now this data is considered “soft” data, as opposed to “hard” data. The difference being that soft data is based on surveys and hard data is based on actual numbers of sales or price changes. Still, this price pressures reading was the highest since July 1979.

Backlog of orders also decreased from 70.6 to 64.5. Inventories also kicked up 0.3 percentage points. This tells me that bottlenecks are starting to be alleviated.

Timothy Fiore, the Chair of the ISM Manufacturing Business Survey Committee had this to say about the report, “Business Survey Committee panelists reported that their companies and suppliers continue to struggle to meet increasing levels of demand. Record-long raw-material lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy.” 

This continues to play into the perpetual inflation thesis. It also leads to the investment thesis that shipping companies like Costamere (CMRE) are the place to be. I know a lot of the easy money has already been made in the shipping companies:

I don’t think the story on these guys is over yet. We are still seeing high prices for sea freight, port backlogs, and long lead times for new ships to be built.

Finally, I want to discuss the article in Zerohedge from last night, “Welcome To the Post-COVID Luxury Spending Boom”. This article dovetails nicely with Bank of America’s analysis of the US Personal Savings rate data. BoA examined the numbers and estimated that Americans were sitting on $2.3 to $3.5 trillion in excess savings.  

All that stimulus money has been piling up in bank accounts. BofA explained it as consumers “saving for a sunny day”. Now that we are seeing more states opening up, sunny days are arriving. Robert Wenzel predicted this when he said that the real fireworks for the precious metals would be occurring shortly after the 4^th of July fireworks. I’m keeping a close eye on some of my favorite luxury goods brands as they could provide an opportunity for a good trade.

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