Focus On Fundamentals, Not Red Screens

|
Posted: Jul 14, 2021 1:46 PM
Focus On Fundamentals, Not Red Screens

Source: AP Photo/Eugene Hoshiko

It was another seesaw session, which finished slightly lower across the board, but there was significant damage during the day.

Decliners led advancers 3:1 on the New York Stock Exchange and the NASDAQ Composite. Internals have been ugly for weeks, but yesterday was acute.

I know it’s frustrating when most of the ideas in your portfolio are in the red during a given session. But I implore everyone to get out of the mindset of beating the market day-to-day. This is the time you MUST check the underlying fundamentals and individual business trends to remain steady. Just because your positions are down doesn’t mean they are ‘sells’.

Be careful with these urges to blink. 

There are several exogenous factors nudging the market around, and most have nothing to do with fundamentals. The biggest is the inflation/Fed/tapering guessing game.  Ugh…I want to say, “rip off the band-aid already.” 

Here’s the thing, folks: they will never rip the whole thing off. And I’m not sure they will make any adjustments. The Fed has created an infinite loop with the federal government engaged in a real-life experiment that allows unbridled government deficit spending.

The result is massive debt and interest rates that must be paid at low-interest rates (see Japan).

Market Breadth

NYSE

NASDAQ

Advancing

835

1,063

Declining

2,484

3,299

52 Week High

140

128

52 Week Low

19

75

Up Volume

951.29M

2.16B

Down Volume

2.72B

2.28B

Inflation Concerns

In the most recent New York Fed Consumer survey, consumers see inflation racing to 4.80%. However, a breakdown of key demographics reveals a wide range of concerns, with younger, better educated, and higher-income folks being the least fearful of inflation.

Demographics

<40

40-59

>59

Age

3.8%

4.7%

5.7%

 

Demographics

HS

Some College

BA +

Education

5.7%

5.1%

4.0%

 

Demographics

<$50K

$50K to $100K

>$100,000

Income

4.9%

5.0%

4.7%

 To see the chart, click here.

By the way, flexible inflation (transitory) continues to spike while the sticky stuff remains tame.

TREASURY AUCTION RESULTS

Upon the June inflation numbers (Consumer Price Index) release, bond yields edged up a tad, and equities lurched lower a tad. Then traders combed the data closer, seeing that most of the upside pressure came from obviously flexible sources while rents and owners’ equivalent rent (OER) (homeownership) came in relatively benign.

Then the 30-year bond auction (29 years and ten months) went off. And it was a dud. The results were a slight disaster, signaling a sudden loss of appetite that sent shockwaves through all markets.

What if no one except the Fed wants our bonds?

The market must know the Fed will hike rates, even if the Fed doesn’t want to hike rates.

30 Year Bond Auction

Tendered

Accepted

Primary Dealer 6

$31,608,000,000

$5,347,580,800

Direct Bidder 7

$6,141,700,000

$3,989,841,500

Indirect Bidder 8

$14,882,050,000

$14,661,125,000

Total Competitive

$52,631,750,000

$23,998,547,300

The shift was on as the ten-year yield climbed from 1.343 to 1.420, finishing up by 3.82%. The bias has moved to the upside (top part of the chart) over the last few days. But it remains to the downside (bottom of the chart) over the past three months.

Message of the Market

S&P 500 Index

 

-0.35%

Consumer Discretionary XLY

 

-1.20%

Consumer Staples XLP

 

-0.03%

Energy XLE

 

-0.76%

Financials XLF

 

-1.08%

Health Care XLV

 

-0.09%

Industrials XLI

 

-0.97%

Materials XLB

 

-0.91%

Real Estate XLRE

 

-1.30%

Technology XLK

+0.41%

 

Utilities XLU

 

-0.76%

Fin Tech (FINX) Leads Technology

While Goldman Sachs (GS) and JP Morgan Chase (JPM) struggled despite big beats, Apple (AAPL) announced it was getting into the super-hot ‘Buy Now, Pay Later’ (BNPL) space (with Goldman facilitating), and that helped all the financial tech names lead Technology (XLK).

I like this space long-term, and I want to get greater exposure.

Mastercard Inc  (MA)

3.22%

375.56

+8.15

+2.17%

Visa Inc  (V)

3.94%

237.87

+4.48

+1.88%

Autodesk Inc (ADSK)

0.63%

291.93

+4.49

+1.54%

Microsoft Corp (MSFT)

20.47%

277.32

+3.66

+1.32%

Western Union Co (WU)

0.09%

23.20

+0.27

+1.16%

Fiserv Inc (FISV)

0.64%

108.83

+1.26

+1.16%

Fidelity National Information (FIS)

0.88%

145.04

+1.19

+0.82%

Adobe Inc. (ADBE)

2.81%

600.20

+4.81

+0.80%

Global Payments Inc (GPN)

0.55%

189.60

+1.50

+0.79%

Apple Inc. (AAPL)

22.21%

144.50

+1.14

+0.79%

Inspiration

Yesterday, a package arrived at my office from UPS, and the driver struck up a conversation with me – asking if I was that guy on TV talking about AMC Entertainment Holdings (AMC). When I told him I was, he was thrilled. Originally from the Dominican Republic, he began trading the market seven months ago.  Like so many young adults, he wants to control his financial freedom, and not spend the next 30 years breaking his back.

He told me his job was physically "hard." Nevertheless, he is looking for financial freedom, and I salute him and all new investors looking to change their lives.

Today’s Session

Bank earnings continue to pour in, and they continue to crush estimates. But there are concerns, including loan to deposits (only rich people are taking out loans) and not enough spending.

Example:  Bank of America

  • Deposits +21% = $979 billion
  • Card Use +16% = $200 billion
  • Loans & Leases -12% = $282 billion

There are whispers that maybe banks will have to stop accepting deposits…there is no doubt after just getting the greenlight to increase dividends and buybacks this will catch the attention of Congress and regulators.

Inflation Sizzles

June Producer Prices surged 7.3% from a year ago coming in above consensus of +6.7% to its highest annual rate since November 2010. 

Core PPI continues to soar much faster than anticipated:

  • +5.6% from year ago – consensus 5.1%
  • +1.0% from month earlier – consensus +0.5%

So, we got another strong surprise with the strength of inflation and the bond market reacted with a yawn…retreating almost 4.0%.

It’s clear, the ten-year yield is trapped in a downward channel making lower highs and lower lows.

Portfolio Approach

We closed a position in Consumer Discretionary in our Hotline Model Portfolio this morning.