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It feels like the tide is starting to change.
YES – we probably have a coming recession (if we’re not already in one).
YES – we have seen some of the worst 60/40 portfolio YTD performance in history.
YES – we are at a crossroads in critical energy infrastructure.
But as Harvey Dent once said, “The night is darkest just before the dawn.”
This note will not add to your inbox with more news about politicizing energy through attacks on critical pipelines, whether or not a particular Swiss bank will cause structural failure, or why an eccentric billionaire is getting forced to buy the bird app.
Instead – we’re going to take the “glass half full” approach this week and ask what is going right?
This week, in <5 minutes, we’ll cover Green Shoots:
Inflation Cooling? 👉 Autos, Shipping, Housing
“Spec-Tech” Multiple Collapse 👉 Enough is Enough?
Softening Labour Market 👉 Powell’s Objective Reached? Maybe Not…
CPI Next Week 👉 Best Case Scenario
Let’s get started!
1. Inflation Cooling? 👉 Autos, Shipping, Housing
The dominant narrative in the market has been structural rather than transitory inflation as the Fed has raised rights, crushing equities to get prices under control. We all saw the charts on grocery bills coming up, commodities spiking, and transport costs rising rapidly.
While core inflation is still elevated, we are starting to see some signs of cooling.
Housing
The housing market has been a recipient of booming prices due to record-low mortgage rates fueling demand ever since the ‘08 collapse. Speculators also entered the market, further pushing prices higher as you couldn’t open your TikTok feed without seeing videos of a “can’t-lose” investment property strategy.
Any realtor or homeowner that bought their house in the last 14 years has never seen a bear market.
We’re now seeing complete erosion in buying power on the demand side that will continue to drag home prices down. Being a more illiquid asset, the pending price downturn is yet to be fully realized in major benchmarks, but affordability has completely collapsed which will soon be more accurately reflected in major indices.
One of the best charts lately has been from the Twitter chart-GOAT Liz Ann Sonders and her colleague Michael McDonough:
This is your daily reminder that new homeowners buy a house based on monthly payments, not base prices. Affordability has collapsed on a monthly-payment basis and unless you locked in a long-term fixed rate prior to the mortgage rate spike, you’re in trouble.
Housing prices will continue to come down.
Shipping
Key to the inflation narrative was that the cost of shipping was increasing the pass-through price of everything as exporters face entire ports shut down from Covid and rising fuel costs.
We are now seeing shipping container costs fall off a cliff:
Autos
Another pandemic-fueled boom was the increased cost of used vehicles. Cars utilize so many different parts of the supply chain, AND a lot of people buy cars through either financing or disposable income. So there are a lot of inferences you can make about supply/demand dynamics from a macro environment when it comes to autos.
While not as drastic of a downtick as the previous charts, we are still starting to see some trends in the right direction here.
Under the Radar
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2. “Spec-Tech” Multiple Collapse 👉 Enough is Enough?
The punching bag of a rising rate environment has been the profitless tech basket. These are the hyper growers where most of the intrinsic value of the company is based on future expectations of growth.
These companies have high cash burn in the early days, whether it’s an investment in R&D to fully build out the product or high S&M in order to win a race for a “land grab”.
With cash flows pushed out to future dates, these are longer duration assets and by definition are more greatly impacted by a raise in rates, as we see a strong inverse correlation between tech indices and the US 10yr with a beta well above 1.0.
One of the best charts to try to think about sentiment around this is by Jamin Ball. Ball baskets high growth software companies into high (30%+), medium (15-30%), and low (under 15%) baskets based on projected NTM revenue numbers.
You can see an absolute collapse in the high-growth blue line as sentiment was completely washed out amongst this cohort. It’s tough to pull that chart back further to look at different cycles because most of these companies weren’t even around back then.
While I’m not saying any of these companies will trade back up at 40x EV/Revenue any time soon, I am saying they don’t need to. Some of these companies are mission-critical category-killers that absolutely dominate the niche that they operate in.
It used to be the mantra that these high-growth companies can “grow into their multiple” but now the market favours growth at a reasonable price and it’s safe to stick to companies that have significant upside on operating leverage until the “risk-on” mode is engaged.
At some point, enough HAS to be enough when it comes to multiple compression here.
Before we continue, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel!
3. Softening Labour Market 👉 Powell’s Objective Reached? Maybe Not…
There was a lot of chatter around jobs last week, all centering mostly around this tweet:
We know that the Fed has two mandates – control prices (inflation) and ensure unemployment (jobs) is at its natural long-term level.
During the last FOMC, the Fed officials came out expecting the unemployment rate to jump to 4.4% by 2023 after the central bank raises interest rates by another 1.25% before the end of this year. This is UP from the expectations of 3.9% in June.
This increase to 4.4% in the unemployment rate is still low by historical standards and was the same unemployment rate back in August 2017. But it is higher than the Pre-pandemic level of 3.5% in February 2020.
So why all the chatter last week?
JOLTS (Job Openings and Labour Turnover) is a monthly figure posted by the Bureau of Labour Statistics that many people use as an indicator of employment prospects. Generally speaking, fewer job openings = a tighter labour market.
The number of job openings decreased by 1.1M (10%) to 10.1M on the last day of August. This was also significantly lower than the FactSet expectation of 11.1M and the biggest one-month decline since April 2020 in the early days of the pandemic.
HOWEVER… While the JOLTS figure gave optimism earlier in the week, the week closed out on Friday with a contradicting, and disappointing (strong) jobs figure – the Nonfarm payrolls.
Nonfarm payrolls increased 263,000 (exp. 255,000) in September after a 315,000 gain in August, a Labor Department report showed Friday. The unemployment rate unexpectedly dropped to 3.5% (exp. 3.7%), matching a five-decade low.
The unemployment numbers from the September NFP report are the last release before the next FOMC meeting. If this indicator of the labour market is favoured (which it typically is), the optimism behind the JOLTS number could be faded.
Still, some wood to chop here…
4. CPI Next Week 👉 Best Case Scenario
We have a big catalyst coming up next week on Thursday the 13th, and it will be the only thing that matters – the CPI print. Here’s where we’re at heading into the print:
Last print, we had an upside surprise that sent the markets into a tailspin. Going into next week’s number, expectations are 8.1%. Here is how that expectation is built in Bloomberg:
What we’re looking for here is an inline or lower-than-expected print to get any rally, as well as the components in inflation. Last print, core was higher than expected which is problematic to any Fed pivot.
Grab your popcorn.
Wrapping Up…
There are two idioms that stand out right now:
“Being early is the same as being wrong”
and
“It’s not timing the market, its time in the market.”
While it’s impossible to get timing the bottom right every time, it sure looks like we’re approaching something that looks like it.
I don’t have a crystal ball, so I’m going to be purposely vague: I think we hit a bottom in the next 2-4 months.
Are we there yet? No – there will not be a long-term low while the Fed tightens.
Are we getting closer? Absolutely – read the tea leaves.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
What else we Grittin’ On?
EM. Emerging markets haven't made a new cycle high in 594 days. The previous record was 589 days ending in 2001.
MUSK. Is he or isn't he buying Twitter? Looks like he finally is going through with it.
WOOD. Lumber prices have fallen back down to pre-pandemic levels. Prices are down 34% from a year ago.
KIM K. Kim Kardashian was fined by the SEC for illegally promoting crypto. The reality star will cough up $1.26 million.
AUTOS. Shortages and supply chain snarls are slowing automakers. Buyers are feeling the pinch of rates.
Sources:
https://thehill.com/policy/finance/3654221-fed-sees-jobless-rate-hitting-4-4-percent-by-2023/
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