We publish on a 3-day a week schedule:
– Sun eve/ Mon am
– SKIP MON
– Tue eve / Wed am
– SKIP WED
– Thu eve / Fri am
___________________________________
Our latest “Fundstrat inflation dashboard” is updated.
- Used car prices, per Manheim, softened even further in August YoY down to +8.8% (slide 27)
- Airfare tanking even further (slide 32)
- Hotel rates jumping, though (slide 32)
- Gasoline $3.90 per gallon, wow (slide 22)
- Global inflation “surprise” rolling over = good (slide 9)
___________________________________
Sentiment among our clients has not changed much. The plurality of our clients remain skeptical and see a multitude of problems ahead (see discussion below). But our view remains that we see a 2H rally leading to new highs for the S&P 500. We believe this will be led by FAANG/Large-cap Technology and Growth. And while we like Energy for next 2-5 years, we see headwinds unless oil recovers strongly.
- This tweet shared by @krugermacro Alex is hysterical
- But actually reflects our view
- Inflation was the single biggest headwind for markets in 2022 and the inflection is the key to market recovery
- hence, our inflation dashboard remains an important part of the toolkit
Chicken wing prices fall -62% from peak to below pre-pandemic = deflation. Is inflation not as “sticky” as many fear?
Market Rebellion @MarketRebels posted this tweet below quoting NBC News:
- chicken wing prices have dropped below pre-pandemic levels
This is outright deflation. Prices falling to 2019 levels is a 3-year decline.
In fact, chicken wing prices are down 62% from their peak in 2021.
- yup, down -62%
- that is not “cooling” inflation
- that is deflation
August Philly Fed better than expected on activity + price
And the August Philly Fed is overall encouraging. As shown below:
- activity has recovered to positive +6.2 vs -12.3 in July
- Prices paid and received have both declined
- Prices paid fell -9.6 to 43.6 (below 50)
- Prices received fell further to 23.3 and down -10 from prior month
Again, pointing to the fact that prices are not as “sticky” as consensus believes.
Many believe today is analogous to 2008, where economic weakness was only “set to worsen”
This week, in multiple conversations with investors, many were quick to cite that:
- in August 2008, economy was still posting growth
- therefore, the fact that the US economy has not faltered yet, doesn’t mean 2022 will not turn into calamity
- investors cite the above to explain their “bearishness” on fundamentals today while markets seem “oblivious”
While many might think investors were “oblivious” to the coming decline in August 2008, that is not the case. Take a look at the jobs market, for instance:
- labor markets stalled in June 2006
- jobs growth turn negative in July 2007
- by August 2008, the economy was 26 months into sustained and visible economic weakness
In other words, by August 2008, any expectation for a soft landing was counter to prevailing trend. This is not necessarily the case today.
Too many are carrying 2008 hammers
Taking a step back, we have many investors who believe 2022 is a more dangerous situation than many times in “one’s career” because:
- Fed raising rates
- Inflation still out of control
- Russia-Ukraine war will not end soon
- China is weak
- US economic data about to “fall off a cliff”
- Stocks still expensive with P/E >12X
While the above might indeed become a formula for sustained weakness, this is not necessarily the case today. But we can’t help feel investors are still quick to pull out their “2008 hammers”
- this was the case in March 2020, when investors said this was only the start of a bigger decline ala 2008 and 1929
- now with markets bouncing, there are too many saying this is a “head fake” and similar to 2008
HOUSING: Housing is weakening, but not falling from the same heights as 2008
The latest existing home sales data (July) shows further signs housing is cooling.
- total sales down to 4.81 million vs 5.12mm last month and 4.86 million consenus
- difficult for anyone to make the case housing is set to accelerate again
- but makes sense with higher interest rates and tightening lending standards, home prices and home activity will be cooling
HOUSING: Redfin data shows many cities showing record number of homes with “price drops”
Our data science team, led by tireless Ken, has updated the latest listing data from Redfin. The table below is based upon city/metro area and sorted to show which metro areas/cities with the largest share of price drops:
- Formerly red hot cities top the list of cities with price cuts
- top of the list is Boise, ID at 71%
- And similar to other data, shows housing prices are weakening
- this reflects the simple fact that with higher mortgage rates (impacting affordability) along with tighter lending and less certainty, selling prices need to decline
And below are selected instances of the trends in some cities:
- Boise
- Austin
- Las Vegas
- These 3 cities were among the hottest in 2021
DISINFLATION: Cooling housing should lead to falling CPI
There is a lag, but as shown below, as housing cools, so will CPI related to housing. In other words, those arguing that CPI will stay elevated for a long time are overlooking that CPI for shelter will respond to housing softness:
- there is a lag, and per our data science team, as much as 24 months
- but this lag is arguably a statistical artifact
- the “real” leading indicator is home price
…and this is not lost on the Fed
And this is not lost on the Fed. As this below report by Dallas Fed shows, they see a roughly 19 month lag between home prices and OER/rent inflation:
- they see a 19-month lag
- if so, then Fed will not be solely looking at CPI rent/OER
- they will look at leading indicators
This is a reminder that the Fed is not only watching “hard” data reports like CPI. But all the leading indicators.
But just because housing is cooling, doesn’t mean this is 2008 again
But just because housing is weakening, doesn’t mean this is 2008 again. Take a look at residential construction as % of GDP, since 1951:
- Today, construction is 4.69% of GDP, below the 75-yr average of 4.91%
- In 2005, this figure posted the highest ever share at 6.68%
- and with GFC, this fell to 2.5% or down 4.31pp of GDP
- This is the reason housing crushed the economy and households in 2008
- In 2022, housing activity is still below long-term average
In other words, we think it advisable for investors to not view the world through the lens of 2008.
STRATEGY: 2022 Bear market was 164 days, or 25% duration of prior bull
Our data science team put together the comparative duration of bull markets and bear markets, and the corresponding ratio:
- since 1942, there have been 14 such cycles
- median ratio of bear vs bull is 31%, meaning a bear market is roughly 1/3 duration
- since 1982, this ratio is only 15%
- in 2022, the preceding bull market was 651 days
- the current bear market was 164 (using 6/16)
- or 25% ratio
As seen below, this ratio is solidly within the ranges seen since 1982.
- many investors think “more time” is needed for this bear market
- but given the shortness of the preceding bull market 651 days versus 1,309 median
- the corresponding bear market should also be shorter
BUY THE DIP REGIME: Stocks already saw fundamental capitulation
And we want to revisit the chart below, which looks at the internals of the S&P 500 — the % stocks >20% off their highs, aka % stocks in a bear market.
- this figure surged to 73% on 6/17
- this was only exceeded 3 times in the past 30 years
- each of the 3 prior instances was the market bottom
- we think this is the 4th instance
BUY THE DIP: forward returns strong
And stocks have the best forward returns when this figure exceeds 54% as shown below:
- in 3M, 6M and 12M
- the best decile for returns
- is when this figure is oversold >54%
- hence, buy the dip regime is in force
33 GRANNY SHOTS: Updated list is below
The revised 33 Granny shots are shown below. The list is sorted by the most attractive (most frequently cited) to least. To be a “Granny shot” the stock needs to appear in at least two portfolios:
- $AAPL in 5 of 6 portfolios
- $GOOGL $MSFT in 4 of 6 portfolios
- $AMZN $META in at least 2
- This reinforces our favorable view of FANG in 2H2022
33 Granny Shot Ideas:
Consumer Discretionary: $AMZN, $AZO, $GPC, $GRMN, $TSLA
Information Technology: $AAPL, $AMD, $AVGO, $CSCO, $KLAC, $MSFT, $NVDA, $PYPL, $QCOM
Communication Services: $GOOGL, $META
Energy: $CVX, $DVN, $XOM
Financials: $ALL, $AXP
Real Estate: $AMT, $CCI, $EXR
Health Care: $ABT, $BIIB, $ISRG, $MRNA, $REGN
Consumer Staples: $BF/B, $MNST, $PG, $PM
_____________________________
33 Granny Shot Ideas: $AAPL, $GOOGL, $MSFT, $ALL, $BF/B, $CSCO, $NVDA, $PG, $PM, $ABT, $AMD, $AMT, $AMZN, $AVGO, $AXP, $AZO, $BIIB, $CCI, $CVX, $DVN, $EXR, $GPC, $GRMN, $ISRG, $KLAC, $META, $MNST, $MRNA, $PYPL, $QCOM, $REGN, $TSLA, $XOM
_____________________________