T.G.I.F.
There's A Lot To Consider Worldwide
What a week, eh? I don’t know if this was as crazy of a week for you as it wa for me but without a doubt, from my side it was. Dollar General was just a part of it as they released earnings. On the surface, earnings looked pretty good but when the numbers were parsed during the company’s conference call, attention was paid to their slightly lower gross profit margins and the “proverbial” hit the fan.
Given the stock price is up big over the last few months coupled with the beating its competitor Dollar Tree took the day before, it made perfect sense that what “goes up must come down” and that’s exactly what happened. I’m happy the “GTC” orders were hit and puts are in place across the board protecting the profits earned but really I can’t see a reason for the stock giving back as much as it did. It is a good company that incorrectly bought into “self-service” checkouts as the minimum wage took off as inflation soared. OK, they’ve changed that strategy as did all of it’s competitors but the “street” nonetheless too it out to the “woodshed”.
I’ve got some “option trading” ahead of me today and using the “greeks” as they are illustrated on Barchart will help but in reality, I’m still a long term supporter of Dollar General as “normal” people keep buying their basic products as inflation, in all of its splendor, is here to stay. There’s a few more on my radar so check back this weekend for s couple “paid” Substack postings. They are well worth it as are all of our courses so check them out at www.tickeredu.com and join together with us as we turn you into the “best damn trader or investor” you can possibly be.
Japan Has A Decision To Make
The Bank of Japan will debate ending its negative interest rate policy next week if today's preliminary survey on big firms' wage talks outcome yield strong results. It might even make a landmark shift away from its decade-long stimulus program.
While investors are increasingly pricing in the “chance” of a March policy shift, any such decision could affect global financial markets by altering Japan's status as a lone supplier of massive cheap money. This year's annual wage talks kicked off in full force on Wednesday with Toyota Motor agreeing to give factory workers their “biggest” pay increase in 25 years, heightening expectations that other companies will follow suit with bumper wage increases. Signs of a strong outcome in this year's “annual wage” talks have heightened the chances that the BOJ will phase out its massive monetary stimulus. They’ve been “far too cheap for far too long” but still, remember it’s Japan and no one knows.
The central bank will scrutinize a preliminary survey on the wage talks' outcome in deciding whether conditions to phase out stimulus have fallen into place. There seems to be enough factors that justify a March policy shift but in the end, it’s a judgement call by the nine board members.
An end to negative interest rate, which has been in place since 2016, would mark a landmark shift away from the BOJ's massive stimulus program and would be Japan's first interest rate hike since 2007. A March policy shift, however, is hardly a done deal as some in the nine-member board are worried over recent weak consumption signs that highlight the fragile nature of Japan's economic recovery, they said.
The BOJ may put off the decision until April if policymakers feel they need ore time to scrutinize more data such as the “Tankan” business sentiment survey due on April 1st and the bank's quarterly report on regional Japanese economies. Most of today’s market players expect the BOJ to end negative rates either at its next two-day meeting concluding on Tuesday, or a subsequent meeting on April 25th to 26th.
Upon ending negative rates, the BOJ will ditch its bond yield control and dismantle a framework created to purchase risky assets such as exchange-traded funds (“ETFs”). My good buddy, BOJ Governor Kazuo Ueda signaled this last Wednesday the bank's readiness to phase out stimulus sooner than not. “The outcome of this year's annual wage negotiation is critical”, Ueda told parliament.
I think it’s time for the Yen versus the Dollar to fall from these lofty heights and go back to the 125 level. I’m long the U.S. Government’s bond market as well. Face it, the handwriting is on the wall and change is coming in Japan. When again the old “crystal ball” is a little cloudy but its “clarity” is in the hands of Ueda. He’s played “both sides” of the coin long enough. It’s time to raise rates in Japan. I wonder what they are going to do with the ETF position. I bet Buffett and the “big boys” on the “street” know. If it does not happen next week I’ll increase my position as Governor Ueda has to act and the when is fast approaching.
Oil Prices Keep On Rising
Oil prices have been “strengthening” over the past few weeks. The trend is not of particularly noticeable proportions, with Brent still stuck in the low $80s and West Texas Intermediate hovering around $80 per barrel. This could change later in the year, however, Morgan Stanley’s global oil strategist Martijn Rats has predicted. In fact, prices could rise so sharply that they might take some by surprise. He’s a good long-term analyst and well followed and respected in this industry.
He believes there is a view in the market that the non-OPEC producers can meet all of the demand growth this year. There isn’t much “incremental” room for OPEC oil and that means prices will rely on continued OPEC cuts. Actual reality has proven to be a bit different from that perception. On the “supply side”, we are seeing a slowdown in U.S. shale, a wobbly start in Brazil and Canada. We expected inventories to build, but year-to-date, they are kind of flat to down If at the end of the first quarter, inventories are flat, the summer period draw could significant.
Interestingly, the Energy Information Administration this week revised upwards its forecast for U.S. oil production growth this year, but adjusted its “global production” outlook downwards. The EIA also revised its oil price forecast, now expecting Brent and WTI to end the year on a higher note than previously expected.
The EIA suggested this lower growth contributes to significant global oil inventory declines in the second quarter of 2024. This suggests the overall market’s tightening and like Morgan Stanley’s Rats anticipates, could happen sooner rather than later. This would certainly surprise many who see the oil market as well supplied, not least because of a slew of forecasts pointing to weaker demand from China. This thought or perception of demand weakness contributed to oil prices’ range-bound movement for much of last year despite the physical market’ record demand from the world’s largest importer of the commodity in absolute terms.
Worries about the global economy also served to fuel this perception that oil prices have limited upward potential. This worry has had a more solid grounding with a lot of countries struggling with post-pandemic lockdown recoveries and others, notably in Europe, reeling from an energy crunch that began in late 2021. This basic attitude, however, may be changing, too. OPEC, in its latest oil market report, sounded a note of optimism on economic growth, revising its forecast for this year by 0.1% to 2.8%. The IMF was even more optimistic last month when it revised its own global GDP growth for this year to 3.1%, a 0.2% upward revision from its previous projection.
So hold on to your hats folks. Inflation is far from dead and a primary price driver, the price of oil just may “fuel” round two. Given it’s political season in the United States, there are a few wrenches that could get thrown into the mix. As a hedge, I own 2024 August 100 calls on crude oil. If its price soars I’m a hero. If not, like I always do and try to teach you, I’m hedged against the “out-of-nowhere” events and rising oil prices just might be one of them.
Retail Sales
Frictionless transactions are common in today’s economy, you can wave your cell near a cash register, press “buy” on Amazon without knowing which “credit card” you’re charging and send money to a stranger via your phone without having met them in person.
These new technologies, often referred to as “fintech,” for financial technology, make spending easier than ever before, and there's growing evidence that they’re making us shell out more than we realize. With so many different accounts to keep track of and so many merchants smoothly debiting what we owe every month, we simply keep on spending, whether we can afford it or not.
U.S. consumers spent a record $19 trillion in December 2023, up 6% from a year prior and 29% from February 2020. Spending has soared despite high inflation, high interest rates and repeated commentary from economists that this ebullience cannot continue.
There are, of course, a few reasons why people are spending a lot of money right now. Consumers saved a lot of money when they were stuck at home during the pandemic, and now they’re making up for lost time by traveling, eating out and doing things they couldn't’ during quarantine. The government helped consumers feel flush by sending out stimulus checks and pausing student loan payments. After years of very slow wage increases, workers’ payments are finally growing more quickly than prices are, giving consumers extra pocket money.
But there’s one factor that has changed since the beginning of the pandemic, people are more accustomed to using financial technology to pay for things, which eliminates barriers that might have once slowed their spending. Convenience makes it far much easier to enjoy the process of shopping, removing the additional difficulties of buying things. Research shows that using this frictionless payment method “entices” people to spend more money.
By 2023, 73% of consumers had paid for something through a website or browser on a phone or computer, up from 46% in 2019. People are more “comfortable” using mobile payment apps like Apple Pay, Google Pay, PayPal and Venmo. More than 53% of those surveyed said they used digital wallets more often than traditional payment methods. Paying with a mobile phone is faster than using a credit card, it takes an average of 29 seconds versus 40. That speed and convenience accelerates spending.
The result is a “cycle of tech” adoption that has “loosened” customers’ wallets. Once consumers started using mobile payments, they became much more comfortable with making credit-card payments on their computers. They started moving more money digitally and once they were comfortable spending money digitally, they all started spending more money overall. Maybe it’s time to get the to quit.
Politics Are Real
Where’s the third party when you need it most. Bring back Ron Paul is a ‘rallying’ cry I’m hearing more often. It’s bad enough that the race for President goes through a few people who are old enough to be great grandparents. There is something very wrong here but at this time, that’s the choice we are faced with. We can do better, eh?
Our political system is in shambles. When people talk about lower rates, the very first thing that surfaces is whether Jerome Powell is going to run the Federal Reserve as its Chairman going forward. If Biden wins the race and keeps Janet Yellen in her current Treasury position, it’s a given, “blue mushrooms” for everyone. Trump’s out on the old trail looking to “clean house”. If he wins, Yellen is gone but in all sincerity, Powell has been a pretty good Chairman. It might be harder for Trump to throw Jerome Powell to the dogs as it was Trump, in November of 2017 who appointed him. Change is often a good thing but maintaining the integrity of the Federal Reserve during this inflation based challenging time makes sense as well. Again, where is Ron Paul. If it were up to him the Federal Reserve would become a footnote just like Janet’s mushrooms.
We have one hell of a year in front of us, well at least about seven to eight months as we choose between two candidates, each of whom think the other is a crook. When I think about it, given politics as I understand it, being a “crook” is a requirement to be elected so in that manner we are in good shape. Isn’t there any way however, that we could have a choice between candidates in, say their forties or fifties instead of those approaching senility? Face it, no one who thinks that the Beatles and the Stones are just as good now as they were in the 1960s is thinking a bit incorrectly, eh?
In 1978 Styx came out with “Crystal Ball”. If you listen to the lyrics you’ll find out that their “crystal ball” was a little bit cloudy too. If there is anyone out there with answers to the world’s problems let me know. As a matter of fact let all of those geoeconomics analysts know as well. Certainty is a good thing. Because the macroeconomic trends we watch today are “uncertain” at best it makes a lot of sense to “hedge” outcomes. I see it this way, the probability of something happening can be measured. Once that takes place, the chance of something else happening can be hedged. A final outcome is going to surface and one side of the equation is going to offset the other. Keep this all in mind the next time you trade or invest. I’ve done it for years and it works.