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Morning Briefing Bullet Points & Chart Collections


The Recession Question: Raising the Odds to 40%
Executive Summary: Might the only recession we have to fear be one triggered by recession fear itself? It’s possible that we could talk ourselves into one. So while we still expect the economy to grow through the end of next year, we are raising the odds we assign to a recession scenario from 30% to 40%. That lowers our stock-market sights for this year and next. … We have new estimates for S&P 500 revenues, earnings, profit margins, P/Es, and price targets, which we still see at a new high late next year. … Also, we explain what has caused recessions in the past and why we don’t see those dynamics developing now. We’re far from alone in our optimism: Analysts keep raising their earnings estimates, and insider buying has been on fire.

Bear Anatomy
Executive Summary: History and data offer perspective into what a prospective bear market in the S&P 500 may mean for investors. Today, we examine the past two bear markets’ longevity, quantify the index’s valuation slide to date from its peak, compare component indexes’ performances, and see how much better global stock markets have been faring. … Also: Rapidly rising rent inflation will offset some of the improvement we expect in several other categories of consumer prices. Perversely, the Fed is putting upward pressure on rents by reducing the affordability of buying homes.

Bear Spray
Executive Summary: Today, we zero in on stock market bears—why they’ve been wrong for 13 years (quantitative easing), why they’re right currently (quantitative tightening), and why we believe their outlook is too pessimistic. … Primarily, we don’t expect an imminent recession because conditions aren’t ripe for a credit crunch. Additionally, the recent tech stock weakness is no Tech Wreck 2.0; inflation, looking peakish already, won’t prove intractable; and wage pressures are stoking an economy-boosting productivity boom. … We stand behind our “Roaring 2020s” scenario following a brief interlude in the 1970s. … We’ll be taking bear spray to Yellowstone. … Finally, Dr Ed reviews “Downton Abbey.”

Retailers, Materials & Fintech
Executive Summary: First the good news: Retail sales rose solidly in both March and April. Now the bad news: Two retail giants missed their Q1 earnings marks, causing recession-fearing investors to jettison their stocks. Jackie recaps what their management teams had to say about the quarter. … Also: With recession fears running high among investors, why is the S&P 500 Materials sector in their good graces? It has outperformed the market and most other sectors ytd. Within Materials, we focus on one industry with a shiny outlook, Steel, and a single member, Nucor. … Also: A look at Walmart’s foray into fintech.

Analysts Are from Venus; Investors Are from Mars
Executive Summary: Industry analysts are accentuating the positives of inflation; they’ve been raising their revenues and earnings estimates in response to it all year long. Investors are accentuating the negatives of inflation; they’ve been dropping how much they’re willing to pay for estimated earnings all year long. A recession would prove the investors right, but that’s not our expectation. … We see stagflation ahead, with a slowly expanding economy and slowly moderating inflation. … And: Melissa recaps the UN FAO’s disconcerting analysis of Ukraine war impacts on global food inflation and hunger. … Also: How certain recent Biden administration actions may unwittingly exacerbate both.

Run(off) for the Hills?
Executive Summary: It begins next month: the Fed’s plan to let its maturing securities run off its balance sheet without replacing them—a.k.a. quantitative tightening (QT). How right are investors to be freaked out? How legitimate are their suspicions that the Fed is erring on the side of overkill after having lost ground in the fight against inflation? … Today, we separate the fears from the facts and assess the likely impacts for the federal deficit, fixed-income markets, the stock market, and the economy. … Also: We lay out the runoff plan, review the last QT episode for insights, and put investors’ fears into perspective.

Waiting for Something To Break
Executive Summary: After many years of ultra-easy monetary policy, the realization that it’s going away has frightened investors to a degree unprecedented this early in a tightening cycle. The pre-tightening fear alone burst plenty of speculative bubbles, yet no dreaded credit-crunch/recession scenario has materialized. True, the inflation genie isn’t back in the bottle yet, but we expect it will be in coming months and without crashing the economy. … The Fed’s recently released Financial Stability Report was sanguine as well. … But our soft-landing scenario is a contrary one. So we’re keeping our eyes peeled for signs of both the recession that we don’t expect and the peaking of inflation that we do. … Also, we review “Ozark” (+ + +).

Tech Wreck, China Syndrome & Crypto Crash
Executive Summary: Investors aren’t cutting tech stocks any slack these days. Jackie looks at how the mighty have fallen, with focus on two tech highfliers whose Q1 earnings didn’t make the grade. … The fallout from China’s Covid lockdowns is inflicting damage on sector after sector of the Chinese economy, with no end in sight. The government is stepping in with support programs for businesses and the unemployed. … Also: The innovation once hailed as an inflation hedge has proved to be anything but. Cryptocurrencies have shrunk in recent months to a shadow of their former value. The stocks of companies working in the crypto industry have been clobbered as well. TerraUSD breaks the buck, and investors flee the not-so-stablecoin.

More on Inflation & Stocks
Executive Summary: The S&P 500 is undergoing a correction more persistent than the 72 panic attacks we’ve counted during this bull market, but will it become a bear market? The jury is still out. There is precedent for a valuation-led bear market despite stellar corporate fundamentals, during 1987. There was no recession that time, and the bear market was short-lived. … Is the real earnings yield as bearish as it seems? … Also: We look at what stock markets do during inflationary periods. … And: The collective voice of small business suggests the economy is in a stagflationary funk. … Finally: A look at what’s happening on Japan’s monetary and fiscal policy fronts.

Inflation, Bonds & Stocks
Executive Summary: Since 2008, the Fed’s quantitative easing had kept a lid on bond yields. But with the Fed now tightening—releasing bond yields to move solely by market forces—will yields be pushed above the inflation rate (where they usually reside)? A reversal from negative to positive real bond yields could trigger a credit crisis and recession; but we put the odds of that scenario at only 30%. Rather, we expect a soft landing for the economy, inflation moderating soon, and the Treasury bond yield marking time between 3.00%-3.25%. … For the stock market, high inflation boosts earnings yet depresses the valuations investors are willing to pay for those earnings. The lower valuations reflect investors’ fears that this will all end badly.

Inflation Peak-a-Boo
Executive Summary: We concur with Fed Chair Powell that getting inflation back to Earth needn’t crash our strong, liquid economy. The Bond Vigilantes aren’t as far behind the inflation curve as the Fed: They’ve already tightened credit conditions in the financial markets significantly. We expect inflation to peak this summer between 6%-7% and to recede to 3%-4% next year with no recession. … We may have spotted the first signs of peaking inflation already, in lower three-month than y/y rises of several price and wage measures. … But there are certainly plenty of indicators that cast doubt on the peaking-soon scenario. … Also, a movie review: “Summit of the Gods” (+ + +).

Powell, Travel, Forward Earnings & Quantum Sensors
Executive Summary: Investors liked the middle-of-the-road approach Fed Chair Powell laid out after yesterday’s FOMC meeting. We did too. … Travel-related industries are booming! Their Q1 earnings calls were brimming with optimism. Yet investors seem to have missed the memo: The share price indexes of most travel-related S&P 500 industries have plunged ytd ..: And it’s not just a travel thing: Most industries are seeing disconnects between earnings prospects and share price performance. Someone’s wrong: Either industry analysts are too optimistic in their estimates or investors too pessimistic about valuations. … Also: A developing technology with diverse potential uses: quantum sensors.

Fed Set To Hike By 200 Basis Points
Executive Summary: The financial markets have thoroughly discounted the Fed’s plan to raise the federal funds rate incrementally by a total of 200bps, so why not dispense with the increments and go for it? That’s not in the Fed’s data-dependent DNA. … Today, we examine the case for investing in bonds: The Fed is bound to tame inflation one way or another. If inflation drops back to 3.0%-4.0% next year and 2.0% in 2024, as we expect, then a 3.00% 10-year Treasury bond yield is quite interesting. … Also: A look at the ECB’s policy playbook, which is much less hawkish than the Fed’s.

Too Much Pessimism?
Executive Summary: To look at analysts’ record-high and rising estimates for the companies they follow, you’d never guess that investors are sweating bullets over prospects for the US economy. But are their fears of imminent recession justified? Today, we tackle that question, assessing both the negatives that investors are accentuating as well as the positives that some economic indicators are signaling. Importantly, the US economy is shipshape. … And we remind readers: Corrections, such as the S&P 500 is in now, tend to turn into bear markets only when investors’ recession fears materialize; when they fail to, valuation multiples tend to rebound.

The Big Leak
Executive Summary: Spooked investors have driven valuation multiples down to the low end of our projected range and deposited the Nasdaq in a bear market and the S&P 500 back in correction territory. … Today we examine the causes and effects of global inflation. … Excessive US fiscal and monetary stimulus ignited the US inflation conflagration by triggering a demand shock that triggered a supply shock. When much of the stimulus leaked abroad (confirmed by trade data), it fueled global inflation. … Inflation has been deflating consumer spending on goods but not on services. But soon we expect durable goods inflation to peak and drop. Inflation has a history of being spikey. … Finally, movie review: “WeCrashed” (+ + +) is about WeWork, not the stock market.

China, Tech & Electricity
Executive Summary: With nearly a quarter of China’s people locked in their homes by strict Covid policies, China’s economy is suffering, its policymakers are reacting, and ripple effects are spreading throughout the globe. Today, we examine some of these effects on US companies with business ties to China and on financial markets. … Also: Investors have sent tech stocks to the doghouse, their collective performance down nearly 20% ytd, and the MegaCap-8 hasn’t been spared. Indeed, Netflix and Meta are down 67% and 46% ytd. … And a look at virtual power plants, making electricity demand as adjustable as solar/wind supply is intermittent.

Inflated Economy
Executive Summary: Inflation is inflating corporate revenues: All 11 sectors of the S&P 500 boast rising forward revenues ytd, eight of them to record highs. It’s also inflating nominal economic growth even as real economic growth slows. This is bullish for earnings provided that companies can keep offloading higher costs to customers via pricing and provided that no recession comes along to stop that. … Also: We review the latest economic releases, which jibe with our stagflationary outlook for 2022. … And: The global food crisis. Food shortages and food inflation are bound to worsen, with dire implications for poorer nations around the world.

Waiting for a Break
Executive Summary: Investors are fretting that the Fed will slam on the monetary brakes, sending the economy hurtling down a ravine, but how legit are their concerns? Historical behavior of stock valuations and earnings estimates prior to feared and actual recessions offers perspective. Corrections usually reflect false alarms about impending recessions, whereas sustained bear markets reflect the real thing. … We also check more conventional leading economic indicators for perspective. … Plus: Fresh supply-chain disruptions resulting from China’s widespread lockdowns could trigger a recession there and potentially weigh on growth here. … And: We examine the latest stats on another of China’s homegrown problems: its birth dearth.

The Forces of Inflation vs The Forces of Deflation
Executive Summary: The stock market is correcting again, fear is rising again, and valuations are sagging under the weight of a hawkish Fed and rising bond yields. Yet consensus expected S&P 500 earnings continues breaking records. With 2022 shaping up as a volatile year for stocks, we anticipate a rally following the current selloff. … Also: Might “stayflation” frustrate the Fed’s 2.0% inflation goal? … We explain our view of inflation as a tug-of-war between four inflationary forces and four deflationary ones. … And: Treasury Secretary Yellen calls for a new world order featuring a “unified coalition of sanctioning countries,” the exclusion of pariah nations, and the “friend-sharing” of supply chains. Movie: “Inventing Anna” (+ + +).

LNG, Credit & Green Buildings
Executive Summary: Natural gas prices are higher than they’ve been in over a decade owing not to demand but supply issues. The crux of the problem: Europe’s need to find non-Russian sources of gas. Jackie reports on the factors that have been turning the screws on the natural gas market and looks at where the S&P 500 Energy sector stands after its huge runup. … Also: A look at how the high-yield, asset-backed, and municipal areas of the bond market are faring with the Fed in tightening mode. … And: Some innovative green buildings blur the lines between indoors and out.

Corporate Finance In Focus
Executive Summary: Today, we roll up our sleeves, lift the hood, and take a close look at the mechanics of corporate finance. … We show how corporate America’s record levels of profits and cash flow are deployed. … We also show how a lack of understanding of corporate finance has given rise to some blatantly false notions of progressives—e.g., that share buybacks drive better stock-price performance and that money used repurchasing shares and paying dividends detracts from what’s available to spend on workers and capital investments.

How Will the Fed Stop The Wage-Price Spiral?
Executive Summary: Can the Fed pull it off? Can it surgically subdue inflation without inflicting much collateral damage on the US economy? The now unanimously hawkish FOMC intends to try. Their current game plan seems to anticipate five increases of 50bps each, possibly at the next five FOMC meetings. … Meanwhile, we are on the lookout for signs of peaks in the latest inflation indicators; used car and truck prices are the first. … Rent and wages, on the other hand, are spinning upward along with prices in a mutually reinforcing spiral—calling into question the Fed’s optimism. … Also: A look at the causation loop between inflation and fiscal policy. … Movie review: “Super Pumped: The Battle for Uber” (+ + +).

Inflation, Semis, Banks & Grocery Shopping
Executive Summary: We’ve been on the lookout for signs of peak inflation, and we are deflated to report none to be seen in the latest PPI and small business survey releases. Instead, they telegraphed higher-for-longer inflation in a weakening stagflationary environment. … Semiconductor-related stocks have been beaten down ytd, but analysts expect double-digit earnings growth this year and next, aided by some fast-growing end markets. … Also: Expect smaller domestically focused banks to report stronger Q1 results than their big multinational counterparts. … And: Grocery shopping with no waiting in checkout lines or schlepping bags to the car? Yep: The supermarket industry is going high tech.

On the Lookout For Peak Inflation
Executive Summary: War, supply-chain disruptions, soaring labor and commodity costs, monetary tightening causing possible recession—pshaw! All the disturbing global and US economic developments of late haven’t shaken industry analysts’ confidence that their companies are headed for record revenues, earnings, and profit margins over coming months, as passing inflated costs through to customers has been a cake walk. Our analysis of forward revenues and earnings reveals that and more. … Also: We slice and dice March CPI data, inflation expectations, and wage inflation—ever on the lookout for “peak inflation,” which may show up in June or July. … And: Is the housing market cooling off?

TINAC: There Is No Alternative Country
Executive Summary: Why is the stock market defying the gravity of extremely grave situations? “TINA” may hold the answer: “There is no alternative” to stocks. … But now she’s been joined by “TINAC”—“there is no alternative country.” Global investors may be taking refuge in the US stock market as a safe haven in an unsafe world. … Today, we comparison-shop equity markets around the world and conclude that foreign stocks are cheaper but for several good reasons. … And: We look at why the US dollar is strong at a time of soaring commodity prices when usually the reverse is true.

Don’t Fight the Fed When the Fed Is Fighting Inflation
Executive Summary: The war in Ukraine has heightened the odds of higher-for-longer inflation, tighter-for-longer monetary policy, and recession in the US and Europe, which we peg at 30% and 50%, respectively. … The global economy is stagflating, indicators suggest. … Will reining in inflation take just a nudge from the Fed or an all-out recession-triggering shove? We hunt for the answer in FOMC officials’ recent views and the latest inflation data. … Also: The Bond Vigilantes are back in the saddle again. … And: Stock investors are trying not to fight the Fed as it fights inflation—which should make for a volatile but upward climb to our 2022 and 2023 targets. … Movie review: “Against the Ice” (+ + +).

Fed’s Hawks, China’s New Priority & Europe’s Gas Seekers
Executive Summary: The newly released minutes of the FOMC’s March meeting suggest that even the Committee’s long-time doves now are hawks. So expect upcoming rate hikes of 50bps, not 25bps. The Fed aims to tamp down inflation without igniting a recession; investors are skeptical, but we expect inflation will moderate later this year, bringing the doves back. … Also: Can China achieve its heady economic growth goals amid a Covid resurgence, strict lockdown policies, and all the economic disruptions caused by both? We doubt it. … And: A look at the odds arrayed against EU countries trying to wean themselves off Russian oil and gas.

Another Earnings Season Seasoned with Inflation
Executive Summary: Investors should have lots of questions for company managements during the upcoming earnings calls season. First-quarter macroeconomic and survey data paint a picture of modestly improving supply-chain problems but still high costs for manufacturers. For services providers, supply-chain and cost issues continue to strain their ability to meet demand. Profit margins should hold steady this year provided that price increases offset cost increases as we expect. … While earnings and revenue growth rates probably peaked during Q2-2021, analysts’ estimates suggest both remain solidly positive during Q1. … Also: Why the job market in Europe withstood the pandemic better than in the US.

Certainly Lots of Uncertainties
Executive Summary: There’s lots of uncertainty about what’s going to happen next in a slew of areas pertinent to investing, including whether the US economy is heading for a recession, how high inflation will go and what the Fed will do about it, how the world order is changing, and how to value stocks amid all this flux. The many unknowns have made for a volatile stock market so far this year. Today, we run through nine uncertainties that have been keeping investors guessing, sharing our analysis of each to shed what light we can. … Also: More on the “CFO Put”—the notion that corporations flush with cash are providing stock market support via buybacks, dividends, and M&A.

Inflating Earnings
Executive Summary: Crosscurrents should continue to buffet the S&P 500’s forward P/E multiple in both directions, but the earnings portion of the equation should rise in the higher-for-longer inflationary environment we project. The S&P 500 is a good inflation hedge provided that the downward-blowing crosswinds continue to be offset by inflating earnings. … Today, we detail all the variables that go into our stock market assessment—including our stagflationary economic outlook; our estimates for corporate revenues, earnings, and profit margins; our target ranges for the S&P 500’s forward P/E and price levels this year and next; and the assumptions we’ve made to derive those targets. … Movie review: “The Dropout” (+ + +)..

Financials, Defense & Fusion
Executive Summary: Today, Jackie takes a timely look at prospects for the S&P 500 Investment Banking & Brokerage industry. If the buoyant reception investors gave to Jefferies’ challenged but better-than-expected Q1 results is a bellwether, the industry may be poised to reverse its sector-lagging streak. … Also: A look at how the fiscal 2023 defense budget may take shape as it winds its way through Congress. … And: Fusion holds immense promise for producing carbon-free energy—if scientists can clear a big hurdle. They’re making progress.

It’s Still a Bull Market
Executive Summary: March 8 may have marked the stock market’s bottom for this year; it now seems rapidly to be approaching a new record high as investors turn to stocks as an inflation hedge. The fog of war had masked the outlook, but the long-term bull market, punctuated by panic attacks, remains intact. We peg the S&P 500’s upside potential at 5000-6000 next year. … Also: We examine how the S&P 500 has performed historically during ups and downs of both the business cycle and the monetary policy cycle. … And: Melissa examines the economic toll Putin’s war is taking on Europe and how European policymakers are responding.

Three Related Delusions
Executive Summary: The ripple effects of three delusions held in high places have triggered a host of interrelated global problems. Putin’s delusion about Ukraine’s sovereignty has led to war and related supply shortages of crucial commodities, which are exacerbating runaway inflation. … Powell’s delusion that the inflation outlook is more benign than it really is has misled bond investors. … But the bond market is finally shedding its delusions and acting more predictably. … How high might the 10-year Treasury bond yield go during this year of rising interest rates and stagflation? We project 3.00% by year-end.

Twists & Turns of the Yield Curve
Executive Summary: Two different yield-curve spreads are sending contradictory signals, and one of them is giving some investors the recession heebie-jeebies. But the other, more “official” yield-curve spread suggests no recession in sight, and ditto most other leading indicators. We see a stagflationary environment this year, with real GDP growing an average of 2.0% per quarter and inflation remaining persistent. … Also: A couple of short-maturity spreads relative to the federal funds rate likewise signal no recession. And we look to the Fed for insights on its chances of executing a soft landing and on the significance of various spreads.

Cybersecurity, Transports & Food
Executive Summary: Corporate America’s cybersecurity budgets are bound to rise after the White House warned that Russian cyberattacks appear imminent and briefed the likely targets. So Jackie examines the implications for cybersecurity software providers. … Also: The transportation industries—rail, truckers, and airlines—are staring up a mountain of challenges. Yet the S&P 500 Transportation index has been outperforming the broad S&P 500 index so far this year. … And: The Ukraine war is highlighting vulnerabilities in global food distribution systems. Vertical indoor farming could be part of the solution—eventually.

War & Peace
Executive Summary: Horrific as it is, Russia’s war in Ukraine hasn’t stopped the US stock market from advancing; investors know that geopolitical crises can present buying opportunities. The war has had significant impacts on commodity prices, inflation expectations, and certain stock market sectors. … The Energy and Materials sectors are benefiting from analysts’ higher revenues and earnings sights, and so are companies generally. Faster inflation is boosting revenues expectations to record highs, and the fact that earnings are following suit suggests most companies are able to pass their higher costs on to customers. … Also: For auto makers and their suppliers, the war is escalating already extreme supply-chain challenges and upending the global playing field in multiple ways.

More Inflationary Developments
Executive Summary: No matter how Putin’s War is resolved, the global world order will continue to face new challenges by the autocrats governing China, Iran, North Korea, and Russia. These Axis of Evil countries won’t stop trying to upend the post-WWII order established and implemented by the US. We look at the ramifications of that reality for globalization, inflation, and the investment outlook. … Also: New kinks in the supply chain mean that supply disruptions won’t be abating anytime soon, which will only increase inflationary pressures. … And: Powell’s speech yesterday confirmed his new, more hawkish stance. But an important yield-curve spread may be on the verge of inverting.

A Very Brief History of The Rise & Fall of Modern Monetary Theory
Executive Summary: Now that the Fed is tightening, US monetary policy is no longer bullish for stocks; the “Fed Put” is dead. Replacing it: the “CFO Put,” i.e., the market-buoying activities of corporate CFOs. But the tug-of-war between bearish and bullish forces may not be won decisively by either side in coming months; we see a volatile sideways-trading S&P 500. … Yield-curve inversion fears are misplaced. Inversion doesn’t cause a financial crisis/credit crunch/recession scenario but predicts one. And more convincing predictors are flashing no-recession signals—including the Fed’s lack of inflation-fighting gusto. … Also: Policymakers implemented Modern Monetary Theory during the pandemic, revealing the folly of the theory.

Peace, Defense & the Metaverse
Executive Summary: Hopes of a ceasefire in Ukraine have buoyed the stock market; but what comes after a ceasefire? Geopolitically, we expect a new world order to emerge. For the S&P 500, we see valuations pressured by higher-for-longer inflation and the Fed’s lame response. But for now, Panic Attack #74 is probably over… The Fed’s baby-step tightening move yesterday shows it’s in no hurry to corral inflation. … Also: Jackie examines the rising defense-spending plans domestically and abroad, the companies that would benefit, and the implications for the S&P 500 Aerospace & Defense index. … And: South Korea invades the metaverse.

Wage-Price-Rent Spiral
Executive Summary: Company fundamentals have been scaling dazzling new heights since mid-2021, yet stock market valuations have toppled ignominiously from their 2021 peaks last spring. That disconnect reflects a tug of war between the opposing effects of high inflation and excess M2 liquidity on valuation multiples. … We have two big concerns about higher-for-longer inflation: Rent inflation is getting uglier, and the wage-price spiral is spiraling faster. In fact, we now see potential for a wage-price-rent spiral. … And: Melissa examines why rents have gone through the roof.

Wage-Price Spiral Spiraling
Executive Summary: Today we examine Putin’s War from several angles: The ceasefire demands that Russia has put to Ukraine, the requests for assistance that Russia has put to China, and reasons for surging US gas prices. … We also examine runaway inflation from several angles: What the Fed could do about it, what it will likely do instead, and why the wage-price spiral won’t be stopping anytime soon.

Inflation, Liquidity & Valuation
Executive Summary: The big question before stock investors now is: With inflation likely to remain troublesome, are valuations still too high or will ample M2 liquidity keep them elevated? We examine a handful of indicators that shed light on the relationship between inflation and valuation. … Will chronic labor shortages fuel a wage-price spiral over the rest of the decade, as predicted by Charles Goodhart? Our money remains on businesses deploying productivity-enhancing technology to get around their labor-supply challenges. … And: Putin’s War should mean more gradual interest-rate increases ahead, for now. …Also: Dr. Ed reviews “Vikings: Valhalla” (+ + +).

Stagflation, Russian Oil & Gas, And Carbon Credits
Executive Summary: Stagflation—higher inflation with slower economic growth—may be upon us, suggests the NFIB’s February survey of small business owners. Most are struggling to fill open positions, which is perpetuating a wage-price spiral. Earlier this week, we raised our inflation outlook and dropped our GDP forecast—resulting in lower expectations for the stock market this year. … And: How will the US and Europe meet their energy needs with less reliance on Russian oil and gas imports? Jackie looks at this question from multiple angles. … Also: How is the EU carbon credit market weathering its first war? Spoiler alert: Not well.

Commodities Go Limit Up
Executive Summary: Is China’s President Xi able to stop Putin’s War? With high stakes for both China’s economy and its reputation on the world stage, he has every reason to try. The Dragon must restrain the Bear. … The CRB raw industrials spot price index typically peaks and troughs in lockstep with business cycles. This time is different: The CRB’s vertical ascent reflects not booming global demand as usual but looming supply crunches. … And: Blocking Russian exports from global markets will mean painful supply constraints for the rest of the world, not only of oil and gas but also of metals and agricultural products.

Past & Future Earnings
Executive Summary: Today, we examine the fundamental data that drive the stock market, as just reported for Q4 and as projected by industry analysts and by us for this year and next. S&P 500 companies’ Q4 results show record highs for revenues and earnings, but the profit margin continued to edge down from the Q2 peak. … Our stagflation economic forecast prompts us to raise our S&P 500 revenue, but not earnings, estimates. We expect relatively flat S&P 500 profit margins around 13% this year and next. … Also, we look at what declining forward P/Es have meant for the four major investment styles.

It’s a Mad, Mad, Mad, Mad World
Executive Summary: With the whole world at the mercy of Mad Vlad, the pandemic now seems like a walk in the park. A nuclear power plant catastrophe has been narrowly averted, but Putin’s war has melted down Russia’s stock market and currency. … For the US economy, we now see stagflation, with persistently higher inflation and less economic growth than expected before the war. A recession can no longer be ruled out. … For stock investors, we think 2022 will continue to be one of this bull market’s toughest years. We’ve dropped our year-end 2022 and 2023 S&P 500 targets to 4000, a 16% decline, and 5000, a 25% rebound to a new record high.

Sentiment, Retailers, China & Crypto

Executive Summary: Bargain buying now for the long term may make sense, suggests the Bull-Bear Ratio and lessons from past geopolitical shocks. A caveat: This time may be different given coming interest-rate increases and the potential for disrupted energy markets. … Retailers’ recent earnings reports have been decidedly optimistic, but stock investors aren’t convinced. Why are they spooked when the C-suite folks are sanguine? … China’s President Xi may have a change of heart about former BFF Putin; we explain why we think so. … And: Cryptocurrencies’ new wartime uses.

The Case for a Ceasefire
Executive Summary: The Cold War is back on. What’s next in the hot war between Russia and Ukraine? Major considerations include whether Russia gains the upper hand militarily, the fact that it is losing much economically, and whether negotiations will provide an exit for both sides. … Longer term, Russia’s future is bleak if demography is indeed destiny. … And: What’s with all the slicing and dicing of apples and oranges that Fed banks do to understand inflation? We’d toss out most of the concoctions.

Inflation in the Second Cold War
Executive Summary: The end of the Cold War in the late 1980s was very disinflationary—perpetuating freer trade, greater global prosperity, and lower inflation. Will February 24, 2022 mark the start of Cold War 2.0 and with it the Great Inflation 2.0? To answer that, we look at the history of inflation from a geopolitical perspective before we examine four powerful constraints on inflation, the “4Ds”—some of which have been weakening. … Also: a look at what’s been keeping frackers from fracking more oil.

‘Stop the World—I Want To Get Off!’
Executive Summary: “Buy to the sound of cannons, sell to the sound of trumpets.” That advice worked on Thursday as Russia invaded Ukraine. What about that shocking day reassured investors enough to drive the stock market up? We take a look. … Also working that day was the Bull-Bear Ratio’s contrarian buy signal. … Economically, the war may bring heightened global inflation, more supply-chain disruptions, and possibly higher energy prices. For the US economy, stagflation could result, but we still don’t expect a recession. … And: Is madman Putin’s plan already doomed? … Finally, Dr. Ed reviews “CODA” (+).

Sentiment, Industrials, and Crispr
Executive Summary: Stock market bearishness is increasing, which is bullish from a contrarian perspective. The Bull/Bear Ratio has dropped close to levels that have heralded great buying opportunities in the past. That doesn’t preclude further stock market declines, but it does suggest that bargain buying for the long term makes sense. … A confluence of trends points to boom times for manufacturing industries and the businesses that support them. Some of these trends are industry specific, some apply to manufacturing broadly. … Also: a look at exciting new medical applications for disruptive technology Crispr.

Inflating Fundamentals vs Deflating Valuations
Executive Summary: The Ukraine crisis has triggered the stock market’s 74th panic attack of this bull market, by our count. Coming on the heels of the 73rd panic attack, the two together qualify as a correction. Could it become a bear market? Perhaps if much higher oil and gas prices result from the crisis, but that’s hard to conclude. What we do expect over the near term is more of the same sideways trading with volatile swings. Notably, however, geopolitical crises have often been buying opportunities for stock investors. … And while valuations have been deflating lately, fundamentals—revenues, earnings, and profit margins—have been inflating dramatically. … Also: What members of the “Federal Open Mouth Committee” have been saying about the course of monetary policy.

Pieces of the Economic Puzzle
Executive Summary: Are consumers more depressed about inflation or more optimistic about employment? Our Consumer Optimism Index, which captures both trends, stands well below pre-pandemic levels, suggesting the former. In fact, January’s strong retail sales may reflect inflation-driven behavior, i.e., the inclination to buy in advance of price rises. … We also examine what’s happening behind the data for industrial production, inventories, transportation, construction, capital spending, and trade. … And: What’s the Fed’s take on the inflation problem? Officials have abandoned the term “transitory” but apparently not the hope. We have only one word for that: “delusional.”

Insurance, Tech & EVs
Executive Summary: Visions of higher interest rates to come are stoking investors’ optimism about prospects for financial services companies, fueling the S&P 500 Financials sector’s impressive ytd outperformance. Within the sector, the insurance industry has been faring well by both earnings and share-price measures as pricing power and strong investment returns have helped to offset higher costs and losses. … Also: Washington has guns out for Big Tech; we recap recent regulatory and (bipartisan!) legislative initiatives afoot. … And we survey the playing field for electric vehicles after their starring roles in Super Bowl ads.

Will Inflation Persist Along With Labor Shortages?
Executive Summary: Putin must be day-trading oil futures. … Why the inflation story is one of countervailing forces: Consumers’ inflation expectations have been edging down even as price pressures continue to ramp up. Supply-chain disruptions should continue to ease as the pandemic abates, but labor shortages will persist for the foreseeable future. Wages and prices have been spiraling upward together recently, and productivity growth can’t improve fast enough to slow the wage-price spiral for now. … Also: As the world braces for a wave of monetary tightening after years of ease in the extreme, we examine which of the major central banks likely will make their moves when, and why.

Yes! We Have No Bananas
Executive Summary: With the Fed far behind the inflation curve and the yield curve spread rapidly narrowing, are fears of an imminent recession (a.k.a. “banana”) justified? For now, we’re singing the 1923 hit song with the ambivalent message “Yes! We Have No Bananas.” That’s because most indicators don’t point toward the prospect of a recession but a couple do: the fastest business cycle in history and inflation rates that could lead to a Volcker 2.0 scenario. We also consider what’s up with this yield curve. And we explain why we’re maintaining our long-standing recommendation to overweight US stocks in global portfolios.

Putin & Inflation Remain Persistent
(1) Putin says collapse of USSR was geopolitical disaster. (2) He wants to put Humpty Dumpty back together again. (3) War is imminent, maybe. (4) A message to other former Soviet states. (5) Higher oil prices, higher S&P 500 Energy stock prices. (6) Tweaking odds from 65/35 to 60/40 on Roaring 2020s vs Great Inflation 2.0 alternate scenarios. (7) No sign of peak in CPI, though base effect may still be having an effect. (8) More upward pressure on energy, metals, and food prices. (9) 1970s déjà vu all over again in some respects. (10) Fed has never been further behind the inflation curve, while hoping it will bend. (11) Paying the price for the Fed’s original sin. (12) Movie review: “Nightmare Alley” (+).

What’s in Style?
(1) Work in progress. (2) Overweight stocks and cash, but underweight bonds. (3) Key assumption: Inflation peaks soon. (4) Risk is it doesn’t. (5) Record negative real interest rates. (6) OMG moment ahead? (7) Cash for buying cheaper stocks and bonds. (8) The “CFO Put,” again. (9) Fundamentals still looking great. (10) Three favorite S&P 500 sectors. (11) The MegaCap-8 still have a huge influence. (12) Hard to overweight them. (13) SMidCaps are still cheap. (14) Why we are not fans of Growth vs Value. (15) Gentler robots.

Europe’s Cold Winter War
(1) Upward payroll revisions suggest Fed stayed easy for too long. (2) Small businesses facing labor shortages and cost increases. (3) No sign of a peak in NFIB prices index. (4) Europe needs Russian gas, and Russia needs European customers for its gas. (5) Is Germany a weak link? (6) Winter will be followed by spring and summer. (7) Russia likely to make good on contractual deliveries. (8) Nord Stream 2 trump card.

Anatomy of a Correction
(1) Invitation to register for video podcast on “Predicting Inflation.” (2) The latest mini-correction lasted 24 days. (3) Fed fooled by a few weak employment gains last year that were revised much higher. (4) When in doubt, predict volatility. (5) The most negative real fed funds rate since start of data in 1960. (6) Will the inflation curve bend? (7) Wage-price spiral would be nightmare scenario for the Fed, and investors. (8) Sentiment: more in correction camp than bear camp. (9) Lots of cash to fuel another record year for M&A. (10) Assessing the valuation correction.

Another Year of Living Dangerously
(1) Here is how the federal government mucked up the labor market and Fed policy. (2) Subsidizing unemployment creates more unemployment. (3) Lots of workers out sick during January. (4) Earned Income Proxy at record high, but inflation erodes its purchasing power. (5) Big upward revisions in payrolls. (6) Nearing full recovery in full-time jobs. (7) Early in a productivity growth boom ignited by chronic labor shortages. (8) Through a dark mirror and things that go bump in the night. (9) The cases for several bad happenstances. (10) Another oil shock combined with wage-price spiral? (11) Axis of Evil. (12) Movie review: “Help” (+ + +).

Coming Home
(1) Looking at positive possibilities. (2) An end to Covid, an unkinked supply chain, and peaking inflation. (3) More US manufacturing bulks up at home. (4) Billions earmarked for new semi plants. (5) Auto companies retooling old plants, building new ones. (6) Bills would offer enticements to onshore. (7) Small manufacturers jump on the trend, too. (8) Robots counter rising labor costs. (9) Stretch helps DHL in warehouses. (10) Introducing Elon Musk’s Optimus robot. (11) Robots pouring coffee and mixing cocktails at the Olympics.

Great-Looking Fundamentals
(1) January was bad for stock prices but good for their fundamentals. (2) Omicron didn’t infect analysts’ outlook for earnings. (3) Neither did supply-chain disruptions. (4) Both pandemic and supply problems may be receding. (5) Record highs, again, for S&P 500/400/600 forward revenues, earnings, and margins. (6) NRRIs and NERIs declining but remain positive. (7) M-PMI implies slower growth in revenues and earnings—and smaller stock gains. (8) Searching for hints of a peak in latest inflation data. (9) Rapidly rising home prices: Rounding up all the suspects. (10) Plenty of business for both single-family and multi-family homebuilders.

The Big Chill? Not!
(1) Blaming the slow-acting Fed for volatility. (2) The arithmetic behind our new S&P 500 targets. (3) No change in our outlook for revenues, earnings, or margins. (4) Lowering our forward P/E assumption. (5) Making the case for relatively high P/E. (6) A minor correction for the S&P 500, so far. (7) Businessweek cover showing bull buried in snow is bullish. (8) Home, sweet home. (9) Indecisive excerpts from Powell’s presser.

‘Humble & Nimble’
(1) The case for a neck brace. (2) The S&P 500 may have adjusted for this year’s tightening round, but we’re pushing 5200 target into early 2023. (3) Record forward earnings and profit margins for all major S&P indexes. (4) The air has come out of several speculative bubbles without serious consequences. (5) Three measures of sentiment. (6) BBR is bearish, which is bullish. (7) VIX in correction territory. (8) Credit yield spread remains calm. (9) Nothing new decided at latest FOMC meeting. (10) March FOMC meeting should be decisive. (11) The Fed’s runoff issue. (12) Soft landing ahead? (13) Movie review: “The Power of the Dog” (- -).

The Fed, Stocks & CBDC
(1) Fed Chair Powell fails to calm investors’ nerves. (2) Bracing for higher interest rates and balance-sheet reductions. (3) The cloud, 5G, and consumer spending boost earnings of Microsoft, Corning, and AmEx. (4) The average stock not down as much as index performance would suggest. (5) The MegaCap-8 stocks take their toll. (6) Athletes can try China’s digital currency—the e-CNY—at the Olympics. (7) The Fed is STILL studying a digital dollar. (8) Assessing the digital dollar’s impact on banks, monetary policy, privacy, and money laundering.

The Monetary Policy Cycle
(1) More on Panic Attack #73. (2) How is this taper tantrum different than the previous three? (3) From cooing doves to squawking hawks. (4) Tracking the Fed’s monetary policy cycle. (5) Bond yields rise during tightenings, fall during easings. (6) Yield-curve spread usually widens late during tightenings; this time, it’s been narrowing before tightening has even started. (7) Stocks have rallied before and early during tightenings. (8) The P/E tends to rise and fall as the federal funds rate falls and rises. (9) A déjà vu of 2000 all over again? (10) S&P 500 forward revenues, earnings, and margins all at record highs. (11) Tracking Covid around the world. (12) Learning to live with the pathogen.

(1) With benefit of hindsight, MAMU is dead. (2) Retreating speculative excesses is a good thing as long as nothing breaks. (3) Taking some air out of MegaCaps is also good for the long-term health of the market. (4) Lots of bearish sentiment in options market and in Bull/Bear Ratio. (5) Can the Treasury market absorb an extra $175 billion per month? (6) A short history of Quantitative Tightening. (7) Xi wants Powell to cease and desist. (8) Record-low births of Chinese babies in 2021. (9) World’s largest nursing home.

Superbubble Bursting or Just Another Panic Attack?
(1) Grantham’s superbubble. (2) Is the fourth superbubble bursting? (3) Back to 2500 on S&P 500? (4) Eight counterpoints. (5) The causes of bear markets. (6) The case against a recession. (7) Air is coming out of speculative bubbles without adverse economic consequences. (8) A correction in MegaCap-8 valuations. (9) Sentiment getting very bearish. (10) Geopolitical risks. (11) Panic Attack #73 is all about the Fed, and it might linger. (12) What does the Fed’s balance-sheet runoff mean for the Treasury and for liquidity? (13) Movie review: “Munich: The Edge of War” (+ +).

Jan 20, 2022

Meta’s Foes
(1) Throwing the book at Meta. (2) Meta keeps regulators around the world busy. (3) FTC antitrust case allowed to proceed. (4) Congress wants Meta and Big Tech to end anticompetitive practices and protect children. (5) State attorneys general target Meta too. (6) UK regulator requires Meta to sell Giphy. (7) EU considers the Digital Markets Act. (8) Lawsuit aims to sidestep Section 230. (9) Microsoft’s Activision deal should boost revenue and increase its gaming content. (10) Race to fill the metaverse with content. (11) Metaverse “land” prices skyrocket. (12) Walmart appears ready to jump into the metaverse, too.

A Very Brief US History Of the Postwar 1940s
(1) Winston Churchill and Mark Twain on history. (2) The best of times or the worst of times? (3) Factions, partisanship, and the Constitution. (4) The system works best when it doesn’t work for any one faction. (5) WWII was followed by labor strife, racial strife, and a red scare. (6) Inflation soared during the second half of 1940s. (7) Comparative inflations. (8) Meet Joe Manchin, again. (9) Sinema is in the same opposition party as Manchin. (10) Alternative outcomes for BBB.

Mega Valuation
(1) The valuation question, especially about the MegaCap-8. (2) Buffett Ratio off the charts. (3) Forward P/S well exceeds forward P/E because forward profit margin has been rising to new record highs. (4) MegaCap-8 forward P/S and forward P/E are elevated, but so are their margins relative to the rest of S&P 500. (5) Only three MegaCap-8 stocks are in tech sector of S&P 500. (6) Record worldwide demand for semiconductors. (7) US computer output at record high. (8) A whiff of stagflation last week. (9) Omicron less lethal, but spreads faster and disrupts business. (10) Retail sales weakness should be offset by inventory restocking. (11) Durable goods inflation not likely to persist, while rent inflation could do so. (12) Movie review: “Ray Donovan: The Movie” (+ + +).

Financials, China, and Wireless Charging
(1) Higher interest rates boosting Financials. (2) Commercial and investment bank stocks at or near highs. (3) Jefferies’ earnings disappointment spooks market. (4) Could SPACs be to blame? (5) China roiled by Covid shutdowns. (6) The push for Olympic blue skies disrupts plants in northern China. (7) China’s property developers still digging out from debt. (8) Keeping an eye on hypersonic missile developments in China and North Korea. (9) Pulling the plug on electricity outlets. (10) Wireless electricity transmission at home, in space, at the office, and on the road.

Earnings Season Starting
(1) Latest earnings reports should beat expectations again. (2) Real Q4 GDP tracking at 6.8%. (3) S&P 500 forward earnings at another record high. (4) Our latest forecasts for S&P 500 earnings and the stock price index. (5) Profit margins likely to stall at record high. (6) Consumers shopped and borrowed at solid paces during Q4. (7) Homebuilders seeing demand and raising prices. (8) US petroleum usage at record high. (9) Financials boosting profits by reducing loan-loss reserves. (10) Industrials experiencing record new orders, especially for capital goods. (11) Global M&A likely to continue to boom in 2022.

Is the Party Ending Or Just Moving?
(1) Drinking the Fed’s punch. (2) Party getting out of hand. (3) Fed will soon stop filling up the punch bowl, but there will be lots of liquidity left in there. (4) Inflation spiked by spiked punch. (5) FOMC minutes’ talk about paring Fed’s balance sheet shocks investors. (6) Bond Vigilantes no longer punch drunk? (7) Expected inflation is up, but prices-paid index is down. (8) Are rising bond yields so bearish for Growth? (9) No, but they are bullish for Financials. (10) Mag-8 accounts for almost 50% of Growth’s market cap. (11) When in doubt, diversify with Energy, Financials, and the Mag-8.

The Markets, the Fed, and Jobs
(1) Investors discounting more hawkish Fed. (2) A week of rotation from Growth to Value. (3) Growth P/E down, Value up. (4) Lots of chatter, again, about a great rotation. (5) Stay away from disruptive hyped-up tech stocks. (6) FOMC agrees: “Transitory” is out, “persistent” is in until further notice. (7) Discussing normalization. (8) Powell mentioned paring Fed’s balance sheet late last year. (9) Labor market is booming. (10) More full-time jobs replacing part-time ones. (11) Real wage rate stalls at record high. (12) Alternative wage measures. (13) Movie review: “King Richard” (+).

All Things Tech
(1) Checking out CES, virtually. (2) Autos are the new tech. (3) Semis introduce new chips as global sales keep climbing. (4) Check out Gallium’s new AR headset, an app for dog nose prints, and a digital frame for your NFTs. (5) Tech had a great 2021, but a rough start to 2022. (6) A look ahead at Tech industries’ earnings estimates. (7) SenseTime—China’s Google—is spreading around the world. (8) SenseTime’s facial recognition and AI expedite purchasing, fight Covid-19, and make cars smarter. (9) China may also be using it to track the country’s Muslim minority. (10) SenseTime’s shares rally after Hong Kong IPO.

Covid-19, Mag-8, And FOMC-19
(1) Powell’s pivot on inflation puts contrarians on alert. (2) Alternative bets. (3) M-PMI prices-paid index recedes. (4) Omicron and done? (5) The fastest-spreading virus on record. (6) The wild brushfire analogy for optimists. (7) Milder symptoms. (8) Herd immunity, here we come? (9) Cases soaring in US and Europe. (10) The Magnificent 8 were magnificent again in 2021. They might be again in 2022. (11) Growth isn’t cheap. (12) Rearranging the deck chairs on the USS FOMC. (13) Biden likely to choose more progressives to fill Fed vacancies. (14) Meet Sarah Raskin.

Bonds Have More Fun With Old People
(1) Enlightening students about “entrepreneurial capitalism.” (2) Will bond market conundrum persist in 2022? (3) Two-year Treasury note anticipating three rate hikes this year. (4) Gravitational pull of near-zero yields in Germany and Japan. (5) Bearish indicators for bonds remain bearish. (6) Age Wave remains bullish for bonds. (7) Chronic labor shortages should stimulate productivity. (8) Bond funds had record inflows in 2021! (9) Will the worst S&P 500 industries in 2021 be among the best in 2022? (10) Last year was another good year for Stay Home investors. So should be 2022.

Happy 2022!
(1) Santa outpunched the two Grinches. (2) Omicron spreading like wildfire, and could burn out quickly. (3) Biden hands the pandemic back to state governors. (4) The Fed should be done tapering by March. (5) Whose afraid of 75bps? (6) Yield curve says don’t fight the bond market. (7) Santa’s earnings-led meltup. (8) Fewer kinks in supply chain. (9) Lots of booming economic indicators. (10) Plenty of liquidity, which is more liquid than it was before the pandemic. (11) The case against Volcker 2.0. (12) Durable goods prices soaring after deflating for many years. (13) Rent inflation will remain troublesome. (14) Inflation may be peaking according to regional business surveys. (15) Movie review: “Being the Ricardos” (+ +).