Tuesday I joined Ashley Webster on Fox Business – the Claman Countdown – to discuss the stock market, the Fed and opportunities. Thanks to Liz and Ellie Terrett for inviting me.

Show notes before Segment:

• The WSJ announced that the Fed could leave 75 basis points tomorrow.
• First time since 1994. It was a success. They rose 75 basis points in November 1994. Note that the S&P bottomed out a month later. The S&P finally ended up 1.3% for 1994 after falling for much of the year.

• In July 1995 (8 months later), they started to fall again. Over the next 5 years, the S&P rose an average of 28.7% per year. Soft landing/Recession averted. It’s unclear if they can pull it off this time around given the inverted yield curve signaling a shallow recession.

• Whereas Europe and the United States are getting closer (try slow consumption), there are 2 major economies in the world which are aggressive easing (try increase consumption): China & Japan.
• 3 ways to play aggressive stimulus and easing as China emerges from lockdown:

1. NIKE (NKE) – Nike’s largest stock overhang has been China. China is Nike’s most profitable market with around 20% of global revenue. Expected to increase profits by 22.6% next year.
2. Taiwan semiconductor (TSM) – 50% of the global autochip market. Production up 60% over one year. Unlimited demand/backorders from new car manufacturers. Average EPS growth of 20% per year over the next 5 years. Trades at 13.7x next year’s earnings.
3. Ali Baba (BABA) – bumpy ride but now up around 42% from March lows as tech crackdown winds down and stimulus gathers pace. Expected to increase profits by 20% next year. ANT Financial IPO opportunity – holds 1/3.

While the United States had just closed a bear market yesterday, China now appears to be go out of a pronounced bear market that began 16 months ago.

Recession

The yield curve (2/10 spread) has already inverted and we had negative GDP in the first quarter. The definition of a recession is 2 consecutive quarters of negative GDP growth. Here is the Atlanta Fed’s latest estimate for Q2 GDP:

Here’s a question: what if we had already had the recession and Q2 was negative? How much do you think is already valued given the US indices which already marked a bear market on Monday (down 20% at close)? We believe that most (if not all) of a mild recession has already been priced in. The market is still at its lowest before the data is starting to improve. By the time they announce a recession, the market bottom will already be in the rearview mirror. This announcement could come as early as next month if we see negative GDP in Q2 – or until mid-2023 if not – but our base case is that it will have been/will be shallow.

We covered – last week – the idea of ​​”peak inflation”. While Friday’s CPI report was a train wreck, Tuesday’s PPI report (wholesale prices) told a better story (and is a first indicator):

This is consistent with the view we have expressed that we could peak (as far as inflation is concerned) based on these first indicators:

We discussed the possibility of a better than expected PPI print in 2 interviews on Monday – before the data release (much better than my CPI expectations!). Thanks to Ryan Gallagher and Phillip Yin for inviting me CGTN America Monday Night to discuss :

Show notes before segment:

1) How has inflation impacted the average person? What impact does this have on savings?

• CPI up 8.6% YoY in May. The fastest pace since December 1981.
• Energy up 34.6% year-on-year. West decided to fund Ukraine’s defense with higher prices at the gas pump.
• Grocery up 11.9%.
• Airline fares jumped 37.8% year-on-year.
• Hotel prices increased by 19.3%.
• Restaurant prices rose 7.4%.
• Used cars are up 60% since 2020. They may soon find relief as the chip shortage eases.
• The cash is eroding by 8% per year. Returns on fixed income securities are lower than inflation. The only game is real assets and stocks that can pass costs on to consumers.

2) Should inflation get worse?

• About a third of inflation in the United States is due to new and used cars, all due to the shortage of semiconductors.
• MS (Adam Jonas) Note: 1) The long global automotive chip shortage is getting closer to resolution. 2) TSM (which accounts for approximately 50% of global automatic MCU production) saw significant improvements in Q1 with semi-automatic wafer foundry production up approximately 60% year-over-year.
• This should lead to lower used vehicle prices since “used vehicle prices are still up more than 60% from 2 years ago and only 6% below the all-time high. car price inflation.

Oil (this will take time, BUT…):

• Oil is BACK: Cash $120.67, Dec 23 $92.89, Dec 24 $83
• Rig Count 733 vs 244 low pandemic (792 pre-pandemic). Production returns.
• Softening of many commodities: Wheat, Live Cattle, Cocoa, Lumber, Copper, Soybean Meal, Gold, Palladium prices down in recent weeks and months.
• The war bounty of $20 to $30/bbl disappears with any resolution.

Other inflation factors:

• Biden Admin may remove tariffs on Chinese imports.
• The backlog of freighters awaiting unloading in Los Angeles and Long Beach, Calif., decreased for the fourth consecutive month in May.
• Avg. hourly earnings were lower than expected (Jobs Report).
• Discounts on inventory (categories) built by companies like Target will be disinflationary.
• Retailers from Walmart (WMT) to Gap (GPS) are dealing with a glut of inventory as shoppers ignore categories that were popular during the pandemic. (Sweatshirts & Hoodies outEvening Dresses in.)

Tomorrow:

• PPI producer price index (may show relief – leading indicator).
• PC DRAM contract price (indicator for semi-finals) – down 14% from mid-2021.
• Drewry’s Index (spot rate for shipping containers) – down 26% since September 2021.
• North American fertilizer prices – down 24% from March (all-time high).

3) Fed meeting Wednesday – What tools are available to deal with inflation? How should the Federal Reserve fight inflation?

• Either they can point to PPI and say, it’s going down, let’s be patient, OR they need to take back control of the narrative and push the July highs forward.
• The problem is that it works on a staggered basis, so by the time the consumer sees it at the store, it may be too tight in a recession.
• Leaks today (WSJ) that they could reach 75 basis points instead of 50 basis points on Wednesday. They should just bring July forward and see how it goes.

4) Is there any legitimacy in fearing a possible recession?

• Yes. The yield curve has inverted (difference of 2/10). We are waiting for a shallow recession next year (or before).
• Consumer sentiment lower than 2008-2009 GFC. Exaggerated.
• Despite the pessimism, earnings estimates continue to rise. $251 for 2023. 15x next year’s revenue vs. 5-year average of 18.6x.

Money Mitch

On Benzinga by Mitch Hoch show, we just go with the flow! We talked about Hockey, Energy, Russia, Inflation, CPI, PPI, Opportunities, Sentiment, Multiples, Positioning and more. Do not miss! Thanks to Mitch and Zoltan Suranyi for inviting me.

ALWAYS faded feeling

On Tuesday, Bank of America released its “Monthly Fund Manager Survey” which polls about 300 managers with approximately $750 billion in assets under management. Here is my full summary:

The three key points I want to focus on are:

1) Managers expect inflation to fall. Historically, they were right:

2) Global growth optimism has only been so low at market lows:

3) Everyone thinks oil will continue to outperform. While managers “say” inflation will go down, they continue to chase energy. This makes it the “pain trade” of 2H:

Hmm…

As pessimism continues to climb to a new all-time high – income too! One of the two will have to come down soon. My bet is that the pessimism will diminish more than the benefits:

Now let’s move on to the short-term view of the general market:

In this week’s AAII sentiment survey result, the percentage bullish fell to 19.4% this week from 21% last week. The bearish percentage went from 46.9% to 58.3%. Retail investors are once again extremely fearful.

CNN’s “Fear and Greed” went from 36 last week to 18 this week. It shows extreme fear.

And finally, the NAAIM (National Association of Active Investment Managers Index) climbed 50% this week from 34.33% equity exposure last week.