Guest Author – Brian T. Szytel – Deputy Managing Partner
Dear Valued Clients and Friends –
Welcome to this mid-week DC Today as we officially kick off Q3 earnings season. There is a ton to dig into today as I dive into today’s latest inflation read, discuss the latest Fed meeting minutes, and reflect on last week’s NYC portfolio manager meeting marathon with the TBG Investment Committee. I share it all from my perspective here, so with that let’s jump right in.
- Dow futures were down roughly 70 points at last night’s low following a down market day and some negative trading in Asia. We rebounded around 2 AM EST to positive territory to then waffled around flat as we hit the open.
- Markets opened slightly positive but faded gains early on as markets continued to digest the headline inflation figures. We traded down by as much as 300 points by 8:15 AM and then regained some upside momentum with positive earnings reports and the Fed minutes released.
- The Dow ended almost exactly flat up .26 points on a fairly volatile trading day, the SP500 was up +.31%, and Nasdaq down +.73%.
*FactSet, DJIA, Oct. 13, 2021
- 10 Year yields retreated 3.6 basis points closing at 1.54% as Treasuries rallied with in line inflation figures and the Fed minutes. Also notable in rates, the 10 YR German Bund today at negative 8 basis points is darn near to getting to positive territory for the first time since 2018, with the yield curve steepening. Tough to celebrate what a 0% 10 YR Government bond yield says about growth across the pond, but hey it beats negative!
Source: Strategas Research, October 13, 2021
- The dollar was weaker by about .3% on the day, gold was up 2%.
- The top-performing sectors today were Technology and Real Estate both up roughly 1%
- The bottom performing sector today was Financials down -.65%
Top News Stories
- Headline Inflation figures came in a bit above expectations up .4% for the month of September and now are up 5.4% year-over-year. Stripping out the more volatile components of food/energy, Core CPI was basically in line for the month up .2%. I put some of this into historical perspective below, but with these numbers, more or less in line on the day with expectations, it felt to me some of the angst over runaway inflation is slowly starting to ebb from markets.
- Q3 Earnings season kicked off today with the largest banking enterprise in the US (and TBG holding) reporting stronger than expected earnings across the board. The investment committee is pleased to have our newest Analyst Associate Liping Ouyang on board who was up bright and early to deliver the results.
- I suspect only one of the two DC Today authors was a Star Trek fan growing up, so I get to sneak this in, but William Shatner, of course, known as James Tiberius Kirk on the original Star Trek series, successfully ventured into space and back today, to go: “Where no (90-year-old) man has gone before”, with Blue Origin’s space crew.
- As mentioned, the biggest news on the economic front today was in-line inflation figures. I have a chart here putting these figures in perspective over the last economic cycle because I do think with all the attention inflation gets in the media thoughts of 1970’s style double-digit runaway inflation fears get stoked. Is inflation higher now than it has been over the last few years, you bet, but it’s near levels we have seen in the recent past too. We are still dealing with large-scale supply chain disruptions and a lumpy reopening of global economies causing these price dislocations. Saying inflation is proving ‘sticky’ and will be around for quarters to come is different than saying it’s structural and long-term.
- The House passed a $480B federal debt ceiling increase yesterday which should take us into December or potentially January before it needs to be addressed again.
- The White House announced today that the Port of Los Angeles is moving all 6 of its terminals to 24/7 working shifts for the next 90 days to help alleviate supply chain bottlenecks.
- The US relaxed non-essential travel restrictions for vaccinated travelers and tourists going to and from Mexico and Canada today, so feel free to plan that next vacay.
Housing & Mortgage
- The average 30-year mortgage rate is up 8 basis points over the past 7 days to 3.19%.
- My good friend and neighbor John Mauldin had a quick snip today on the very low supply of new homes on the market currently that I added below. With support across the board in housing, builders have yet to come back with enough supply to meet demand and I suspect this will take quite some time along with alleviation of some shorter-term commodity input building costs before they meaningfully ramp up.
- Randal Quarles ends his official role as Vice-Chair for Financial Regulation today, now moving to a census with Fed Governors Brainard and Bowman. This opens another Fed chair role for the Biden administration to nominate.
- The September FOMC meeting minutes released today showed the Fed may be interested in beginning to taper the amount of treasuries and mortgages it has been buying each month by $5B and $10B respectively by mid-November. They currently buy $120B per month, so a reduction of $15B is reducing its QE program by just 12.5%, and remember they are still reinvesting all the interest on their present balance sheet of almost $9T. For now it’s status quo with rates and the $120B per month, but seeing them at least start to discuss these next steps is a good thing.
On My Screen
- Friday’s Dividend Cafe encapsulated last week’s annual TBG Investment Committee portfolio manager meeting week perfectly, and if you haven’t had a chance check it out here. It encompasses the major themes and action items the Investment Committee will be acting upon shortly. David discusses both the genesis of the trip, the importance, and all the key takeaways and portfolio action items that the Investment Committee debated with dozens of Portfolio Managers. These meetings not only allow us to challenge our own internal theses, but open our eyes to new ones, and shape portfolio-making decisions for quarters ahead. The time spent with my partners David and Deiya during this week is always one of my very favorite weeks of the year.
Oil and Energy
- With the price per barrel of oil having recovered from $11 at the bottom of the pandemic (futures were actually negative at one point), to roughly $80 per barrel today, CAPEX is picking back in the vitally important US energy sector. The estimate, should prices remain near this level, is that we would surpass 2018 and be at the highest since 2014. As we have said a few times – the cure for higher prices, is higher prices. As opportunity for energy companies to capitalize on higher prices presents itself investment follows, as does production eventually, and the supply-demand equation balances.
- A quick chart below showing total percentage attribution to Dividends paid by the S&P500 with Energy making up 8.3% even though it’s weighting in the index is only 2.4%, so a pretty incredible income-generating machine of a sector.
Source: Strategas Research, October 13, 2021
|Well, the “actuals” for Q3 won’t be known until the actual reports have come, and earning season will last for the next five weeks beginning today. Even then there will be “stragglers” reporting so we won’t have completely final earnings result until the second half of Q4. But as far as “estimating how far off the estimates” are, it is an exercise in futility. If one could “estimate how off the estimates” would be, they would change the estimates. I think the whole point about market impact is that we enter Q3 earnings results season without knowing if analysts have over-estimated earnings for the quarter, or perhaps once again under-estimated. This process has been very difficult with so many companies exceeding expectations post-COVID, but then now facing supply chain disruptions and other idiosyncratic dynamics not easy to “price in.”|
- David is back with you on The DC Today tomorrow.
- On the economic calendar, we have some jobless claims figures and PPI numbers out tomorrow.
That’s it for today folks, thanks for reading, reach out with any questions as always, and have a great week.
Brian T. Szytel
Deputy Managing Partner
The Bahnsen Group
The DC Today features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.