Wealth Accumulated

By D J Thomas, a large-cap stock market value investor and financial writer

The Fed

Pause and reflect

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Time out

Most of the mainstream financial media are consumed with the debt ceiling talks.

Sometimes China is mentioned, referencing the PRC’s One China policy and the ramifications for the global economy if China were to gain control of the world’s supply of semiconductors.

The buzzword is ‘deglobalisation’, a de-coupling of international trade where the CHIPS act and similar state investments into the manufacture of semiconductors from governments around the world have started to gain pace.

But I’m getting ahead of myself.

Today’s post highlights the two macro themes present in todays markets.

It’s an exercise I do periodically to think about the market ‘as is’ and deny Dementors access to my psyche.

Don’t fight the Fed

I get it.

It is cliched and low-hanging fruit. So I’ll pass you over to a Wall Street veteran:

What I like about Ichan’s self-assessment is that he is able to have an open and frank discussion about his shortcomings.

‘Don’t fight the Fed’ would have saved Ichan’s ass $9 billion.

However overused the phrase has become, ignore the substance of its meaning at your peril.

When the Fed injects liquidity, stocks go up. When it tightens, stocks should decline.

But right now, the Fed is tightening, banks are failing, and stocks are going up which leads me to…

Why tech has led the YTD returns v the S&P 500

An overdone selloff in tech in 2022 encouraged many investors to hark back to the bad old days of the dot com minnows at the turn of the millennium.

Today’s tech stocks have become titans, leviathan entities that actually have earnings, and have woven themselves into the fabric of the global economy.

A far cry from the 2000s when the words ‘dot com’ in your prospectus would get you a listing and a centuries high price-to-earnings ratio.

Tech titans make so much money, they can afford to overhire, spend money on vanity projects and woke initiatives then cut back on both headcount and ‘non-core priorities’ making investors and the market happy again.

It reminds me of how rappers, ever boastful about how much money, houses, cars, women, and narcotics they can amass, metaphorize their excess:

There’s so much coke that you could run the slalom

Jay Z

Pause and reflect

Tech and the excess cashflows it generates are here to stay, AI is the next tech frontier and the race for global dominance has already begun.

Position your portfolio accordingly.

PS Wealth Accumulated and its author do not in any way sanction the use of narcotics, but we do think it’s funny that you could go skiing on it due to the excesses of recording artists

Happiness is a warm rate rise

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Powell’s remarks yesterday on the FOMC’s anticipated decision to raise rates by 25 basis points speaks to sticky inflation and the Fed’s willingness to continue raising, even in the face of regional bank failures.

“We on the committee have a view that inflation is going to come down not so quickly”

Jerome Powell

For all the negative discourse that permeates the Twittersphere on Powell and the Fed, I actually respect the fact he has learnt his lesson from 2015 and remains steadfast in his mission to curb inflation.

So far it has worked. Slowly.

Most commentators seem to miss the fact that the regional banks that are failing decided to take on massive interest rate risk at a time when rates were near zero.

Short-sighted management of banks are to blame for this current round of failures; it was infantile to presume that interest rates would remain at zero ad infinitum.

And Powell is clear on where we go from here:

“Inflation has moderated somewhat since the middle of last year, nonetheless inflation pressures continue to run high and the process of getting inflation back down to 2% has a long way to go.”

Jerome Powell

Regional banks are undervalued

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Matthew Fox of Business Insider recently posted a superb article on the reasons why the stock market bottomed in October 2022.

Interestingly he lists 6 reasons why – all valid, but for me there was only one, the first one that Matthew lists: inflation seemingly under control from the Fed’s aggressive money tightening policy.

As we continue to see the economic damage from high interest rates in the form of regional bank failures, then it would be silly not to search for value in the regional banks.

Perhaps I’ll take the lazy way out and simply purchase the regional banking spider/ETF as I’m unfamiliar with valuing banking stocks on an individual basis other than via quant methods.

But it’s clear that regional banks are suffering and will continue to suffer as the Fed continues to raise rates.

To that end, it’s inconceivable that all regional banks decided to grow aggressively when interest rates were low and take on interest rate risk such as those that have failed already.

Warren Buffett is holding a boatload of cash

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Warren Buffett

Berkshire Hathaway’s cash increased to $128.65 billion in the fourth quarter of 2022 up from nearly $109 billion in the third quarter according to the latest Berkshire Hathaway annual letter. Even more astonishing is Apple represents nearly 40% of Berkshire’s portfolio, a stock that he purchased more of in Q4. My favourite quote from the annual letter: “When you are told that all (stock) repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive)”. Read the full letter here.

US inflation in January rises higher than expected

The Fed’s preferred measure of inflation – the core personal consumption expenditures price index increased 4.7% from a year ago adding to the expectation that the Fed will have to keep rates higher for longer. Inflation as we all know and love it including food and energy rose 5.4%.

HSBC profits from higher interest rates

Quarterly pretax earnings came in at $5.2 billion versus $2.7b billion for the same period last year. Full-year profits at $17.5 billion were lower than last year’s $18.9 billion due to the costs of selling a French bank. Rising credit losses were blamed on higher inflation.

Walmart and Home Depot: the consumer is under pressure

Walmart CFO John David Rainey: “The consumer is still very pressured… and if you look at economic indicators, balance sheets are running thinner and savings rates are declining relative to previous periods. And so that’s why we take a pretty cautious outlook on the rest of the year.”. Home Depot Chief Financial Officer Richard McPhail: “We’ve seen an increasing degree of price sensitivity as the year’s gone on, which is actually sort of what we predicted in the face of persistent inflation.”

Tesco, ASDA and Morrisons don’t want you to eat real food

The rising costs of production such as energy have curtailed the supply of fresh fruit and vegetables to UK supermarket shelves. As a result, they’ve limited what consumers can purchase. ASDA has introduced ‘MAX3’ – “We have introduced a temporary limit of three of each product on a very small number of fruit and vegetable lines, so customers can pick up the products they are looking for.”

Intel cuts dividend by 65%

There is now open talk of NVIDIA replacing Intel in the DOW after its stock plunged from $68 a share in April 2021 to $25 this week. On top of cost cuts, CEO Pat Gelsinger intends to grow the dividend over time after a drastic cut – “The board and I continue to view the dividend as a critical component to the overall attractiveness of Intel”. A declining PC market and demand for its own products – its customers simply have too many chips and need to work through their own inventories. “While we know this dynamic will reverse, predicting when is difficult”. 

Fed minutes: the inflation fight continues

There are signs that inflation is falling, but labor markets “remained very tight, contributing to continuing upward pressures on wages and prices“. Members believe that ongoing rate hikes will be necessary because more evidence of progress across a broader range of prices would is required. A few members of the FOMC members wanted a half-point or 50 basis-point rather than the recently announced quarter-point rise a few weeks ago.

St. Louis Fed President James Bullard wants rates north of 5%

“We have a good shot at beating inflation in 2023”. Bullard wants rates to go higher now so that in his opinion, the FOMC has a better chance of beating inflation in 2023. “Our risk now is inflation doesn’t come down and reaccelerates, and then what do you do? We are going to have to react, and if inflation doesn’t start to come down, you know, you risk this replay of the 1970s … and you don’t want to get into that. Let’s be sharp now, let’s get inflation under control in 2023.”

Why Adidas is a relatively unpopular large company

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An adidas trainer, black and white

Adidas reeling from Kanye colab

“The numbers speak for themselves. We are currently not performing the way we should,” CEO Bjørn Gulden said in a press release this week that also alluded to its inability to sell its Yeezy inventory with a potential impact of $1.3 billion. Last October the firm severed ties with Yeezy’s founder Kanye West after his well-publicised antisemitic tirades. In July 2021, shares traded at EUR319, today they’re at EUR139, with a dividend yield of 2.37%, and a PE ratio of 19. Adidas has all the hallmarks of a relatively unpopular large company.

Rinse and repeat

As if we didn’t get it first time around last week when the fed increased interest rates by 25 basis points, Fed chair Jerome Powell at the Economic Club of Washington said “the disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector, which is about a quarter of our economy,”. Of the labor market, Powell ‘didn’t expect it to be this strong’ after a 517,000 print for jobs added in January. Those damned workers are just fouling the recovery. “My guess is it will take certainly into not just this year, but next year to get down close to 2%.” That’s a bet I’m willing to take.

Record profits at BP

Like ExxonMobil and Shell last week, the energy sector continues to reap the benefits of lockdowns and Putin’s invasion of Ukraine creating massive demand for oil with BP announcing record profits that more than doubled to $27.7bn (£23bn) in 2022. In the fourth quarter of 2021, Chief executive Bernard Looney said: ‘When the market is strong, when oil prices are strong and when gas prices are strong, this is literally a cash machine.’

A high dividend yield at Barrett Developments

With a dividend yield of nearly 8%, property developer Barratt Developments released its half-year results this week and decided to cut its dividend. David Thomas, Chief Executive said ‘Whilst we have seen some early signs of improvement in current trading during January, we will need to see continued momentum over the coming months before we can be confident that these challenging trading conditions are easing’. Pre-tax profits, earnings, and revenue all increased versus the same period last year. Forward sales were reported as 10,854 homes v 15,736 last year and the firm pointed to the pressure first-time buyers are under, roadblocking a clear pathway to recovery in 2023. Barratt has a PER of 5.78 and a price to tangible book of 1.03.

Disney cuts 7000 from workforce, proxy fight is over

Activist investor Nelson Pelz bought Disney stock at $92 a share in November 2022 for $865 million, launched a proxy fight and now the stock is worth $118 a share – a paper profit of $154 million after his stake increased in value to $1.1 billion. Peltz called off the fight this week after the announcement of a cost-cutting plan to the tune of $5.5 billion and a headcount cull of 7000 employees. Disney announced quarterly earnings per share of 99 cents, beating expectations, and revenue and subscriber numbers that came in as expected. Bob Iger said that “We believe the work we are doing to reshape our company around creativity, while reducing expenses, will lead to sustained growth and profitability for our streaming business, better position us to weather future disruption and global economic challenges, and deliver value for our shareholders”.

Bellway’s strengthening balance sheet

Like Barratt Developments, Bellway’s forward sales have declined and its customers are struggling with increased pressure from higher mortgage rates. Like all good housebuilders, it has large cash reserves and expects revenue to increase throughout 2023 despite the economic backdrop. ‘As the near-term economic outlook remains uncertain, we continue to take actions to maintain the Group’s balance sheet resilience. The measures include a freeze on new recruitment, limiting land approvals and a highly disciplined approach to production expenditure, as we align investment in work-in-progress to sales demand.’ When interest rates decline, you’ll find that demand for their homes will start to increase. In this climate, its easier for housebuilders to build their balance sheets rather than homes.

UK avoids recession

GDP fell 0.5% in December but that was not enough to impact growth for the final three months of 2022, coming in at 0% growth for the quarter. Last week The Bank of England said that it still expects a recession for the UK in 2023, but at a reduced severity than their previous forecast. The Office for National Statistics said that there were falls in services, education, and transport. Britain is scraping along the bottom quite nicely thank you.