Alan's Alert 7-6-2021

 

The IHS Markit and ISM non-manufacturing reports came out this morning and they were striking in their disappointment.

 

The Markit Services PMI was forecast at 64.8, with an actual at 64.6.  ISM PMI was forecasted at 63, with consensus estimates at 63.5, and came in at 60.1.  ISM non-manufacturing activity was forecasted at 65.7 and had 60.4 as the actual.

 

While these numbers coming in were disappointing to those that forecast and estimate these figures, we are still in expansion mode.  Remember, these are diffusion index reports.  This means, anything above a score of 50 indicates expansion and any score below 50 indicates contraction.  We are still well in the expansion end of the survey. 

 

Respondents to the ISM survey indicated that sales and demand are strong.  This doesn’t mean the service sector is trouble free.  Anthony Nieves, the chair of the ISM Service Business Survey Committee stated, “The rate of expansion in the services sector remains strong, despite the slight pullback in the rate of growth from the previous month’s all-time high.  Challenges with materials shortages, inflation, logistics and employment resources continue to be an impediment to business conditions.”

I bolded what Mr. Nieves stated were the challenges.  I thought it was remarkable that he would state inflation as a challenge.  Apparently, Mr. Nieves didn’t get the memo from the Fed that this inflation is merely transitory.

 

Chris Williamson, the Chief Business Economist at IHS Markit, commented on his company’s report stating that, “Some of the easing in the rate of expansion reflects payback after especially strong expansions in prior months as the economy opened up from pandemic-related restrictions, especially in consumer-facing companies. However, many firms reported that business activity had been constrained either by shortages of supplies or difficulties filling vacancies. Backlogs of uncompleted orders are consequently rising at a rate unprecedented in the survey’s history, underscoring how demand is outstripping supply of both goods and services.”

 

I believe this backlog that Mr. Williamson alluded to, is going to be with us for some time.  Over the weekend, Zerohedge posted an article about the congestion in the Outer Pearl River Delta in the South China Sea.  Their piece was focused on the Yantian port which is running at 40% capacity and is seeing delays of more than 16 days.  The Pearl River Delta is home to the 4^th (Shenzhen), 5^th (Guangzhou), and 8^th (Hong Kong) busiest container ports in the world.  To catch up, these ports are going to have to run at ludicrous speed to clear their backlog.

 

Finally, I want to touch on the Logistics Managers’ Index (LMI) for June, which came out this morning.  The LMI report came in at 75.0.  This is the second highest reading in short history of the index (which has only been around since 2016).  The survey writers keyed in on inventories which they state are up 1.3% from this same time last year.  What they discovered was that “a high volume of inventory is moving through supply chains at a significant velocity.  This velocity has led to low available capacities and high costs, including an all-time high for Warehouse Prices, up (+2.3) to 85.4.  Increased logistics costs are a primary culprit behind the 5% increase in consumer prices for the 12-month period ending in May – the sharpest increase since 2008.  Consumers have not been deterred by these price increases, the US economy grew at a rate of 6.4% in Q1 2021, and economists expect consumer spending could be up 9% this year – the highest levels since 1946 – the year after the end of World War II.”

 

I have stated before in my alert, that consumers were not being discouraged by higher prices.  Pairing this report with the port slowdown makes me wonder what will be on store shelves 1 month, 3 months, and 6 months from now.  Those retailers that can keep product available will be big winners if their competitors can’t.  These reports also make me believe that we are staring stagflation directly in the face.

 

Today’s Market Action

 

We are witnessing some strange action in the market today.  After OPEC ended their meeting without a new resolution, crude oil futures (/CL) rocketed higher to $76.98.  Then they dropped to $72.94.  Presently they stand at $74.18.  I believe this illustrates my point from before, we have momentum/swing traders that have moved into this market.  This is going to cause some wild swings and we need to be prepared to take advantage of them.

 

 

Important and Potential Market Moving Events This Week

 

Tuesday, July 6
5.45am Markit (June)
6am ISM Non-Manufacturing Report (June)
 

Wednesday, July 7
6am JOLTS Job Openings (May)
10am FOMC Meeting Minutes released
 
Thursday, July 8
4.30am Initial Jobless Claims
7am EIA Crude Oil and Gas Stocks Change
11am Consumer Credit (May)
 
Friday, July 9
6am Wholesale Inventories (May)
9am Baker Hughes Oil Rig Count

 

 

 

 

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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Alan's Alert 6-3-2021

 

 

By Alan Baerlocher

 

 

Employment Reports

 

 

This cartoon pretty much sums it up.  We still have a large section of the population that feel it makes more sense for them to stay home than to search for work.  The ADP employment report, the initial claims report, and the continued claims report all reflect the same info. 

 

 

 Bah, what ugly charts.

Payrolls up-ticked, new unemployment claims down-ticked, continued claims stayed flat.

I’m sure the financial press will tout this as a big win (almost 1M jobs added!), but in reality, the economy is struggling to get back to pre-pandemic levels of employment.

 

The increase in employment was led by the services sector (850k jobs added). 440k were added to leisure & hospitality portion of the services sector, which was the hardest hit of all employers with the government shutdowns. The good-producing sector added approximately 128k workers, meaning supply bottlenecks will continue.

 

Tomorrow the unemployment rate will be released.

 

This gets back to what I’ve been saying the past two days.  Labor conditions remain tight.  To coax workers out of hibernation, employers will need to raise wage rates.  The other option for employers, is to wait it out in hopes that your state will end the emergency unemployment benefits early.  There is going to be a red state vs blue state battle with workers and businesses as the pawns.  As a reminder, the first states to end the bonus unemployment payments will be Alaska, Iowa, Mississippi, & Missouri on June 12.

 

I anticipate that the next employment report (due out on June 30^th), will be a lot more interesting.

 

 

ISM Services

The Services PMI came in at 64%!  A record high! This shows expanded activity in the service sector of the economy which is also reflected in the employment data that came out today.  All industries reported growth! Respondents to the survey were experiencing increases in activity with frustrations at delivery delays and labor issues.  Optimism in the services sector is running high with pent-up consumer demand coming back strong. A few respondents also mentioned concern with escalating prices for inputs and material shortages.  The list of commodities up in price and commodities in short supply is shocking.

Gold and Silver

 

Gold and silver sold off heavily this morning.  This looks like a technical pull-back to me.  I always relish the opportunity to add on red days and sell on green ones but I think patience should be used.  A better deal could show up tomorrow or early next week while a new support is found.  I think gold will find that support around $1850.  Consolidation needs to happen before the next move higher. 

 

Silver has gotten stuck at this channel between $26.50 and $29.  The last time we had $30 silver was February of 2013. I think the move higher in silver is going to be soon.  We seem to be slowly marching higher since the low at the end of March.  I think the next time $30 gets challenged, a breakthrough will happen.  I’m looking to add to my positions of CDE, FSM, AGQ, and PSLV.

Alan's Alert 6-2-2021

 

 By Alan Baerlocher

OIL!

 Black gold has broken through the final resistance of the past year which was $67.98 on 3/8.  Americans came out in force on Memorial Day to remember that people have died for their freedom to travel, camp, and BBQ.  TSA reported a traveler throughput of 1.9M on 5/31.  This is still below pre-pandemic levels of 2.5M but far exceeds the 350k in 2020.

 Looking at a longer dated chart of oil futures, the $65-$70/barrel price was a sticky point from July-September in 2018.  Oil eventually peaked at $76.90 in October of 2018 before the shale revolution ran the price back into the $50-$60 range.

 

Putting a cap on yesterday’s oil run was OPEC.  They announced a production increase in July.  OPEC is aware of US shale producers and have butted heads with them before.  They want oil prices to rise but they don’t want to push the price to a height that would cause shale producers to come out of hibernation and kick production into overdrive.

 

Another factor in the oil picture is Iran, and that country’s potential return to the international market.  In 2018, Iran was producing up to 5M barrels per day.  Their current output in somewhere around 3.5M bbd.  Stacking up against OPEC+, they would be the 5^th largest producer behind Saudi Arabia, Russia, Iraq, and the UAE.

You can see from the chart above that inventories are quickly dropping to their pre-pandemic average.  Even with the potential production from Iran and US shale, I foresee an oil price that continues to climb the “wall of worry”.  I wouldn’t rule out $80+ by the end of summer.  If inflation really gets hot, it could climb to triple digits.  To me; USO, BNO, Crude Futures, & producers still have room to run.  I still like Continental (CLR), Marathon (MRO), and Cabot (COG).  If you are high risk, Diamondback Energy (FANG) has a high debt load and a high weighted average cost of capital, but a great operating margin. Things could really turn in their favor with high inflation (reducing the debt) and a high oil price.

 

 

ISM Manufacturing

 

I want to touch on the data coming out of the ISM.  Manufacturing PMI came in at 61.2%.  Anything above 50% indicates expansion.  New orders, production, & employment were all growing.  Deliveries are slow and backlogs are growing.  The bottlenecks are still in the economy with workers incentivized to stay on the couch.  Many respondents to the ISM survey conveyed a similar response.

·         “…struggling to find employees..”

·         “…finding workers at the factory and warehouse level is not only impacting our production, but suppliers’ as well..”

·         “…lack of qualified candidates to fill both open office and shop positions..”

·         “labor shortages impacting internal and supplier production.”

 

It’s obvious that this problem won’t solve itself until one of two things happen.  1) Unemployment benefits are cut or 2) Wages raise to a level that entices workers to find work.  All commodities were up in price except acetone.  Thirty-two commodities were in short supply including;

·         aluminum

·         corrugated boxes

·         electrical & electronic components

·         lumber

·         MDF

·         plastic products

·         PVC

·         circuit boards

·         semiconductors

·         steel & steel products

·         and wood pallets.

 

ISM services survey comes out tomorrow.  I am guessing it will be a lot of the same.  The ADP employment report also comes out tomorrow.  It will be interesting to see what it holds in store for us.

 

 Construction Spending

Lastly, the total construction spending report was posted yesterday.  We continue to see spending on construction increasing.  Spending was up 9.8% Y/Y and .2% M/M.  We are well into the boom phase of the business cycle.  Both labor and raw materials are still tight, yet spending continues to creep up.