Weighing The Week Ahead: Is It Time To Worry About Inflation?

The lesson of the story is that unrealized gains can quickly turn into losses, while unrealized losses can quickly turn into gains. Stock prices are temporary in nature, but fundamentals are more enduring. Once again, it’s a fact that the market does not always correctly price stocks. This is precisely why I am on record many times of stating that measuring performance without simultaneously measuring valuation is a job half done. But more to the point, when I measure stock performance, I consider whether I am measuring an undervalued opportunity or an overvalued risky investment.

This is all great advice. “Beating the market” involves meeting needs in differing ways and time frames.

Stock Ideas

Artificial Intelligence was the dominant theme at CES2020, writes Kirk Spano. He writes about what he learned, including analyzing several specific stock ideas. I especially liked this quotation from a CES panelist: “The jobs of tomorrow aren’t invented yet.”

Want some energy exposure without the typical volatility? Ray Merola discusses Royal Dutch Shell plc (RDS-A) as a good candidate for those seeking diversification and good yield.

Barron’s suggests Bet on the Big Banks — and Bank of America.

Do you think it is too late to buy Apple? (AAPLBrian Gilmartin channels his inner Peter Lynch to show the potential in new markets.

Eddy Elfenbein provides some color on the annual changes in his buy list.

Is the recent decline in Shake Shack (SHAK) a good entry point? (Stone Fox Capital).

Defense stocks on the rise? Michael A. Gayed evaluates the prospects for United Technologies Corporation (UTX) after the merger with Raytheon (RTN). After examining financials, the defense business, technical analysis, and UTX’s record of integrating acquisitions, he concludes, “All in all, The United Technologies stock is likely poised to post strong gains in the upcoming year and decade.”

Or how about Northrop Grumman (NOC)? (24/7 Wall St.)

The Great Rotation

One element of the Great Rotation is the rising importance of emerging markets. KraneShares provides expert analysis in this sector, especially concerning China. 2020: The Year of The China / EM Comeback provides solid information about events from last year and an interesting prognosis for the year ahead. Their take is that many of the 2019 catalysts will continue. Here is a key quotation:

Another major highlight from 2019 was the announcement on December 13th that China and the US reached a “phase one” trade deal. China has promised to make purchases of no less than $200 billion of US goods over the next two years, including $40 billion in agricultural goods, and lower tariffs on key products including frozen pork and pharmaceuticals. In exchange, the US will lower tariffs from 15% to 7.5% on $110 billion worth of Chinese exports, while additional duties may remain.5 The storm is not over yet, but we can make out clear skies ahead. This year we believe the US-China relationship may stabilize as President Donald Trump focuses on the election and Chinese President Xi Jinping focuses on sustaining growth. We believe neither would like to see tensions rise and trade impeded further.

And later, this great observation:

Morgan Stanley research predicts a recovery in global GDP growth from 2.9% in the fourth quarter of 2019 to 3.4% in the fourth quarter of 2020, suggesting an average growth rate of 3.2% for 2020.9 This pickup may be largely fueled by Emerging Market economies, while Developed Market economies may continue to slow.

The near decade-long S&P rally may be jeopardized in 2020 given the market volatility implied by impeachment, the US election, and the likelihood of no new fed rate cuts in 2020. As such, investors may pivot to Emerging Markets in search of growth. In their 2020 outlook, JP Morgan advised investors to look for dividend, i.e. value, stocks, rather than growth stocks in Developed Markets, and reserve growth strategies for Emerging Markets.13

But you still need to know what stocks to buy.

Keeping in mind what is at stake.

Watch out for

GrubHub Inc. (GRUB). Stone Fox Capital provides a nice analysis of the food delivery business. The growth of competition has hurt GRUB’s profits and market share. See also Taylor Dart’s similar conclusions.

Schlumberger: Eye On North America And Cost Control from D.M. Martins Research concludes that SLB is still not cheap, despite the impact of recent higher oil prices.

Final Thought

Understanding the Fed perspective is a great place to start, but we can do even better. Why am I getting worried about inflation? And when might the Fed join in?

  1. The Fed typically is too slow. Yes, they know that lags in their policies are long and variable. They try to ignore political pressures. Despite that, the history is that they need actual inflation to support action.
  2. The labor market is tightening. The worry should not be slowing growth, but rather finding skilled workers. This creates upward pressure on wages. That is good for workers and maybe for society, but not for investors. This is why the JOLTS report is important. And also the slack in labor force participation. So far, we have been able to draw workers from the sidelines and the gig economy.
  3. Market multiples. I am untroubled by a forward multiple of 18.5. This is what I view as the base case in a low interest rate environment. It can move higher as long as the ten-year note is below 4%, so there is plenty of room. The multiple reflects investor confidence in future earnings and inflation expectations. These are both elements of my weekly update. A good earnings season would help along with the low inflation expectations.

Great Rotation Hint of the Week

Has your portfolio ready for the Great Rotation? Do you have too many expensive stocks? If you are unsure, write for my brief paper on Four Signs of Portfolio Trouble. Just send an email request to info at inclineia dot com.

Some other items on my radar

The need for more workers, including those with particular skills. (Yahoo Finance).

Another Iranian incident.

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Disclosure: Is your portfolio ready for the Great Rotation? Do you have too many expensive stocks? If you are unsure, write for my brief paper on Four Signs of Portfolio Trouble. Just send an email ...

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