Alan's Alert 7-16-2021

 

Fed Chairman Jerome Powell sat down at his computer for the zoom call with the Senate Finance Committee.  It went off without a hitch.  He was grilled further about monetary policy and inflation but was able to run out the clock on any difficult questions.  Like a good government employee, he was able to avoid taking any blame and stressed that the shutdowns were “unique” and that “opening up” the economy caused this “transitory” inflation.  Nothing to see here people, move along.

Retail sales numbers came out this morning.  They are up month-over-month by 0.6%.  This beat expectations of -0.4%.  Consumers have money to burn in their accounts and they are looking to spend it.  I came across this article about this summer’s suitcase shortage.  I expect random shortages to be a regular occurrence.  Inputs have gotten expensive and so has warehousing.  Retailers and producers are trying their best to keep their businesses afloat and keep product on the shelves.  The port slowdowns were putting a real crimp in their supply chains but now the railroads are seeing “significant congestion”.  This will be a big boon for Warren Buffett, who owns the BNSF railroad.  Continued congestion and slowdowns will only exacerbate the bottlenecks in the economy. 

 

The University of Michigan also put out their preliminary consumer expectations report.  It came in at a five-month low of 80.8.  Low morale among consumers was “largely due to less favorable prospects for the national economy” according to Richard Curtin the chief economist.  Growing concerns about inflation was also a concern.  He went on to say, “Consumers’ complaints about rising prices on homes, vehicles, and household durables has reached an all-time record (see the chart).  Purchase rates, however, have benefitted from record increases in accumulated savings and reserve funds.”

Finally, I was going through the previous weeks’ worth of reports from Bank of America.  They put out a report on the 13^th of July titled, “Goldilocks and the Three Bulls”.  Included in the report is an insight that I found very interesting:

“Massive bank balance sheets are parked at the Fed today, instead of being lent out, and corporate bonds are enjoying the greatest upgrade cycle in history.  All that dry powder means the financial system is primed for productivity.  As employment stabilizes, the capex cycle will accelerate, and lending should pick up shortly thereafter.”

They see the current time as a calm before the storm.  That “dry powder” in the financial system is really inflationary powder.  When it finds it’s way into the system, big fireworks will be happening.  I agree with BofA and believe we will see a big lull before the powder ignites.  The CPI and PPI could flatline and begin to drop.  “Transitory” inflation believers will tout it as a big win and a “told you so” moment.  There could even be a big rush out of commodities and into the growth stocks.  This will be a prime buying opportunity.  The Fed will begin its victory lap but halfway through, the other shoe will drop.  When September comes around, the bonus unemployment relief will be ended.  The fall looks prime for something dramatic to happen.

 

 

Alan's Alert 6-15-2021

 

One of these things is not the like other, one of these things just doesn’t belong. Can you tell which things is not like the others, by the time I finish my song? Did you guess which thing was not like the others?

 

Above are the charts for retail sales/food services, used cars, and the inventories to sales ratio.  Consumers have come back in droves to retail and food establishments.  They have also not balked at the high prices for used cars.  This has caused the bottom chart (inventory to sales) to drop to a record low.  Usually, I like to look at most charts in a percent change year/year or month/month but with these three, it’s important to see the trend before 2020 and what has been happening since.

With consumers ready to spend, businesses have sold them everything they have on the shelves.  Businesses have been operating on the just-in-time inventory system where management would minimize inventory and reorder when demand required it or projections forecasted it.  This would allow businesses to run leaner on inventory costs and would order from suppliers on a more regular basis.  This management style was pioneered by Toyota in the 1970s and perfected by Walmart.  Unfortunately for retailers, the shutdowns have turned this management practice upside down.

You can see the large spike in inventories to sales as the lockdowns started.  This caused retailers to sit on their inventories as consumers stayed home.  As things have opened up, sales have spiked and retailers are having a hard time securing product for their shelves.  Back-orders, shortages, and shipping delays are regular place now.  

The producer price index printed today.

It came in at 3.2% change month/month (which is 38.4% annualized!), and 19% year/year.  Thankfully we aren’t in uncharted territory here.  Unfortunately, the previous history with PPI this high compares more closely to the early 1970s or the first half of 2008.

Finally, I want to touch on the uranium story that took place yesterday.  Uranium miners had a terrible day as all went down substantially.  The story starts at a nuclear power plant in China.  A French company named Framatome partners with the China General Nuclear Power Group (CGN) to maintain the nuclear power plant at Taishan.  Framatome reported a build-up of noble gases in a reactor at the plant.  Framatome then alerted US authorities to this build-up and subsequent release of gas.  The mainstream press went into meltdown but the reality is that this is a big nothing-burger.  Framatome does business in both China and the US.  They don’t want to be hiding secrets from either partner and want to be transparent.  They also needed US-derived technical information and needed a waiver for that information from their US counterparts.  They wanted to be sure that the releasing of the built-up gases would solve the problem that they encountered.  What was the problem? Cracked fuel rods.  Cracked rods are actually a common problem (usually due to manufacturing defects).  So, what did we learn?  The news obfuscates the truth and yesterday was a day to buy uranium.  I picked up NXE at $4.45/share.  I expect this story to hang around a little bit, so you’ve got time to add to your portfolio, as the uranium story is still intact.