a hop, skip, and trip? ?3

09:26 14-Jun-23

The May PPI report has been published and it shows a headline decline of 0.3% versus expectations for only a one tenth drop.  The core number rose 0.2%, in line with forecasts, but down by a then sequentially.  Most of the difference is again due to declines in fuel prices, but I think that the big decline in Nonfood Less Energy is also indicative of flagging consumer demand as inflation outpacing salaries begins to filter into credit.

American equity futures have given back a little of their positive bias, but that's likely just caution ahead of the Fed.  The market typically pays less attention to this data than I do, and the Fed generally refrains from publicly acknowledging its forward-looking value.  A few pundits have returned to postulating that it may be done with hikes in the wake of yesterday's CPI, but I find the proposition of Powell limiting its options by signaling that ridiculous.  Consequently, I think very short term index risk is weighted slightly to downside from here, even though this is a positive report that probably pushes the chances of any real market danger out past the October government shutdown crux discussed below.

Only after that might the Fed move the goal posts by changing its inflation or employment targets, or its calculations.  Otherwise, I still worry about it having to do an eventual double take.  In the meantime, I expect to see balances rising in the market leverage data as money moves back into equities.  However, unlike preparation for market drops, that data will be too trailing to be useful for a short term market up cycle.  We're likely already seeing the effects of such activity in the exuberant recapitalization of beaten down stocks like LUMN and AMSC.  I am still not inclined to chase either for further gains that could prove temporary.

To add to theme of this update ahead of PPI tomorrow morning, we have a House budget proposal that seems sure to extend the dysfunction in D.C.  The move is McCarthy's concession to conservative House members with whom he had cut deals to become Speaker, and it increases the risks of a government shutdown in October.  While I'm inclined to be cynical about such things, and do thing that some compromise will be reached, today's I-95 collapse is a reminder that government action is occasionally required.

In corporate news, Energy Recovery's CO2 pressure exchanger was awarded Refrigeration Innovation of the Year Award at yesterday's Atmosphere America Summit.  Vuzix also issued a press release that came close to including meaningful numbers... its follow-on HUD defense order "brings the total contract value to Vuzix thus far closer to a mid-six-figure level."   That's enough to move the needle, with delivery expected over the next several months, but neither of these developments are nearly enough to get me interested in the shares.

There is also a report that this week's E.U. action against Google could go so far as to order a breakup of the company's advertising business.  That would be a major development meriting a separate note, but we'll see what the actual details are.  On the other hand, I've come to regard something like this as a question of when, not if.

On 6/13/23 09:26, Esekla wrote:

After a quiet week of waiting, May CPI numbers are finally out and they come in mostly in line with expectations.  The headline number was 0.1%, which represents a significant sequential drop, but the core number remained steady at 0.4% as food prices rose 0.2% and Shelter was the largest contributor.   The big difference between the two is primarily due to energy and in particular, plummeting oil products; Brent/WTI had already dropped to bracket $70 ahead of the report.  Natural gas also fell, but much less, at $2.33.  Going forward, I think we'll have to watch how risky Europe chooses to get with its storage, but I remain more than willing to take the chance on NFE.  By contrast, I think KNTK has risen to at least fair value.

American equity futures jumped and were back above €/$1.08 in response to the CPI report, but I think any sustained move would wind up being a mistake.  The jobs data was more important, with the devil being in the details.  It leads me to reiterate my caution against megacaps like GOOG as they suffer from the repercussions of rising government debt.  So far the Treasury market has absorbed almost $200b in debt ceiling catch up without much trouble, and I doubt another $101b today will change that.  However, I think it's important to keep in mind that we're on untrod ground here.  The Fed is still likely to pause tomorrow, but ultimately what we're seeing is that its measures are proving ineffective at actually changing economic conditions.  That may not stop it from eventually fudging the numbers and declaring victory as usual, but such a move doesn't mitigate the real economic problems.  Thus, I also return to my medium term preference for Yield over Growth or GRoDT.  Over the long term, the odds of the Fed having to do an eventual double take and move us into my Volcker scenario are increasing, yet market seems utterly unprepared for that.  Again, the most likely time for that is after the 2024 Presidential election, which I probably won't start handicapping until early next year.  In the meantime for me, it's increasingly a balance between gathering dry powder and taking advantage of current values like TU, VIRT, LUMN and its bonds.

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