S Thoughts For Thursday: Keep Your Seatbelt Tightly Fastened

The seatbelt sign is still turned on. With war in Ukraine grinding on, COVID in China and high inflation in the U.S., the sell-off in the market seems poised to continue.

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The S&P 500 lost 66 points on Wednesday, closing well below 4,000 at 3,935. The Dow closed at 31,834, down 327 points and the Nasdaq Composite closed at 11,364, down 373 points. Morning futures action currently points to another down day. Currently, S&P 500 market futures are trading down 26 points, Dow market futures are trading down 166 points and Nasdaq 100 market futures are trading down 134 points.

Yesterday's action was all over the place as you can see from the charts below:

Charts: The New York Times

Kicking off today's round-up, TalkMarkets contributor New Deal Democrat looks at the latest CPI data and notes, With The Fed Already Having Begun To “Stomp On The Brakes”, Inflation Is Still Running Very Hot

"The YoY advance in consumer prices, +8.3%, is down from last month’s 8.6%, which was the highest 12-month rate since 1981. As I suggested last month, “the spike in gas prices may be - to use a recently dreaded word - transitory,” since gas prices had declined 5% month over month at the time of last month’s report. In the April report, energy prices declined -2.7%, and since they are 8% of the total weighted, that was certainly helpful. So far this month they have been more or less steady.

There was also good news in that the price of used cars and trucks fell -0.4% in April, after declining -3.8% in March. They constitute another 4% of the weighting of the CPI. As a result, the price of used vehicles was “only” up 22.7% YoY, vs. 41.2% YoY in February (which was the highest YoY increase in 70 years)"

That is about all the good news to be found in the latest CPI data. The rest of the article gets into the effect of said "brake stomping" on the housing market. If you are looking to buy a new home, rising mortgage rates assure you will "pay more for less", and if you purchased a home in the recent boom, expect to hold onto it for a long time.

"The housing component of the CPI, constitutes 32% of the total input. There, both rent, and the much larger CPI component of owner’s equivalent rent, which is how house prices are figured into inflation, rose 0.6% and 0.5% respectively, for the month, and are up 4.8% YoY, respectively. This is the highest YoY rate of housing inflation for either measure in over 30 years:

I continue to expect the housing component of inflation to worsen considerably. That’s because, as I first pointed out half a year ago, the major house price indexes - the FHFA index and the Case Shiller index - lead owners equivalent rent by roughly 12 to 24 months, particularly in major moves. 

There have been 3 major pulses of house price increases in the last 25 years: in 1997-98, 2004-06, and 2020-present. In each case, after roughly a 12-24 month lag, both CPI rent measures surged as well. That’s because big surges in house prices make renting more attractive (or necessary for those on more limited budgets); this drives more demand for apartments, which drives rent increases.  Further, the current rise in house prices of nearly 20% YoY, is significantly worse than either of the previous two - and has been up almost 20% YoY for the last 8 months running. With CPI housing inflation already at a 20-year high, we can further record CPI housing increases as this year progresses...Unfortunately, even after the record surge in house prices was in full swing over a year ago, the Fed stayed on the sidelines. Now, as both rents and owners’ equivalent rents surge as well, and the Fed has so far only increased rates by 0.75%. 

Last month I wrote that “now the Fed is almost certainly going to stomp on the brakes, with a hard landing to follow;”...It’s too late for this cycle. But with three examples of surging house prices feeding through with a delay into the CPI in the past 25 years, in the future the Fed simply *must* pay attention to house prices as reflected in those indexes. Better a small tamping down of the economy early than a major sudden stop later."

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That's another vote for lack of confidence in the Fed to guide the economy to a soft landing...

Contributor Jharonne Martis writing in Q1 2022 Retail Preview: Inflation And Supply Chain Problems Create A Perfect Storm provides an excellent deep dive into the state of the retail and restaurant segments of the broad consumer goods sector. Below is a short excerpt focusing on the outlook for Retail Q2 earnings.

"Other retailers are delivering similar warnings as they report their earnings for Q1 2022. So far,113 retailers have reported Q1 earnings; of this group, 102 mentioned inflation, and 110 flagged supply chain issues.

In addition to the 24 negative preannouncements and ten positive EPS forecasts in Q12022, 31 retailers posted negative revenue outlooks while 27 offered a positive outlook for revenue (Exhibit 2). The bulk of the Q1 2022 negative guidance (33.3%) has come from the specialty retail sector.

Looking ahead to Q2 2022, 15 retailers issued negative preannouncements, while six issued positive EPS guidance. Of those retailers offering revenue guidance, 14 warned of disappointing results, while 10 said revenue might be better than previously expected. The bulk of Q2 2022 EPS negative guidance (40%) came from the household durables retail sector."

Exhibit 2: Earnings and Revenue Guidance: Q1 2022 And Q2 2022

TM contributor Ironman notes that in March 2022 The Largest U.S. Trade Deficit In U.S. History was recorded.

"In March 2022, the United States imported far more goods than it exported, breaking its previous record for its monthly trade deficit by a wide margin."

"The U.S. exported $179.5 billion worth of goods in March 2022, while importing $297.0 billion. That makes for a monthly trade deficit of $117.5 billion, which is 14.2% larger than the previous record of $102.9 billion set in November 2021."

"The biggest portion of the U.S.' record March 2022 trade deficit was in the category of electric machinery. The second-largest portion was for heavy mechanical machinery...The third-largest category covers vehicles, which is mostly accounted for by imports of foreign-made automobiles and trucks. The large number of imports recorded during the month may be attributable to progress finally being made in unloading the backlog of large container ships that queued up in large numbers outside U.S. seaports during 2021."

In which case April and May should show reductions to the trade deficit...COVID in China withstanding, as well...

Looking at the intersection between the general economy and the stock market, contributor Jill Mislinski looks at Market Cap To GDP: April Buffett Valuation Indicator.

"Market Cap to GDP is a long-term valuation indicator that has become popular in recent years, thanks to Warren Buffett. Back in 2001, he remarked in a Fortune Magazine interview that "it is probably the best single measure of where valuations stand at any given moment." 

With the Q4 GDP Third Estimate and the April close data, we now have an updated look at the popular "Buffett Indicator" -- the ratio of corporate equities to GDP. The current reading is 205.1%, down from 216.4% in the previous quarter."

See the article for additional slices and dices of the data.

In Crypto news contributor Crispus Nyaga writes BTC/USD Forex Signal: Sell-Off Sees No End.

"The biggest story in the cryptocurrency industry has been the implosion of Terra and its ecosystem. LUNA, which was one of the top-ten cryptocurrencies, declined sharply after its main stablecoin lost its peg...the BTC/USD pair has crashed as investors worried about contagion in the blockchain industry because of the important role that stablecoins play in the sector.

The BTC/USD pair has been in a spectacular crash in the past few months. The pair managed to move below the important support at 30,000 as the LUNA implosion continued. It is now trading between the third and second support lines of the standard pivot points.

The pair has also formed a bearish flag pattern and moved slightly below the 25-day and 50-day moving averages. Oscillators have all moved lower. The pair will likely keep falling as sellers target the key support level at 25,470, which is the third support. "

Stepping away from the bad news we conclude today's column with a nod to better times ahead as contributor Andrew Gordon gives Five Bold Predictions For The Future Of Crowdfunding.

"I expect crowdfunding to continue to grow at a 50% to 100% annual rate. That’s an easy prediction. But what else is in store for this still-emerging investing space? "

Image Source: Pixabay

Here are five more things to watch out for in the next 10 years.

  1. Things will go global. With a few exceptions, anybody from anywhere can invest in an American startup’s crowdfunding raise. But non-U.S.-based startups can’t crowdfund in the U.S. They remain tantalizingly out of reach for American investors. But things are changing. The European Union is harmonizing crowdfunding rules across its 27 member countries. Republic has bought UK startup portal Seedrs. And its co-founder will guide Republic’s entry into Europe. Republic has also bought a Korean startup portal. The startup world is getting smaller. The rules will have to continue to evolve, following the EU’s example. And I think they will. I also believe the wait will be shorter than you think. There are already workarounds. A company currently raising on Wefunder — Expert DOJO — has made 100 startup investments in more than 30 countries. Another startup, Untapped Global (which I recommended to our First Stage Investor members a few months ago), “taps” into low-risk, solid-growth entrepreneurial opportunities in several emerging economies. And there’s nothing preventing the most promising early-stage overseas startups from incorporating in the U.S. in order to tap into the growing pot of crowdfunded capital. We should see more of that too.
  2. Institutional FOMO will strike. Crowdfunding doesn’t need a pension fund’s stamp of approval. It’s grown rapidly without the participation of institutional investors, thank you very much. But the financial rewards will prove too tempting for institutional investors to ignore much longer. It’s just a matter of time before they join the party. Right now, the fit is still awkward. Institutional investors don’t like risk — especially risk that’s difficult to measure or predict. And that pretty much describes startups. But you could say the same thing about bitcoin and other major cryptocurrencies. Yet institutional FOMO has finally arrived in the crypto space. Even Goldman Sachs has taken the plunge. I don’t think early-stage startups are far behind. Startup risk isn’t particularly transparent or easy to understand. But with some basic education and more tools to work with, institutional investors will figure things out. And more tools are coming. The data-driven analytical tools being developed by KingsCrowd (the company that owns Early Investing) are a great example of this.
  3. The accredited investor definition will expand and eventually disappear. The accredited investor tent is getting bigger. And that’s a good thing. In 2020, the SEC expanded the definition of accredited investors to include investors “based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth.” And the SEC is encouraging the public to submit proposals for other certificates, designations, or credentials to be considered. But there’s already a strong odor of arbitrariness to these qualifications. Why does $1 million in net worth qualify someone and not $1.2 million or $900,000? Why do certain licenses (Series 7, 65, and 82) qualify someone and not others? It’s going to get even more random. Moving forward, we’ll be asking ourselves why some tests and credentials qualify some individuals but not others. The more people who are allowed inside the tent, the more arbitrary the requirements are going to feel. It’s bound to reach a point where the definition of accredited investor becomes so arbitrary that it loses its meaning… and usefulness. That’s when the SEC will drop the accredited investor category altogether. It’ll happen toward the end of the next 10 years. 
  4. The portals will get bigger… and smaller. There are already too many crowdfunding portals. Most won’t survive next 10 years. A handful will become dominant. They’ll attract huge communities of investors… raise huge sums of money… and cover a multitude of verticals. Other portals — by choice or circumstance — will become more specialized, or boutique portals, and cater to a smaller universe of investors. They will specialize by sector (robotics, for example), type (moonshot opportunities), geo-location (Miami startups), or verticals (collectibles), just to name a few. We’ll have very big and small portals. And the middle will disappear.
  5. The demand for secondary markets will remain low. For better or for worse, the big quest for liquidity continues! And I say for worse. Access to up-to-date information will dramatically improve. So investors will have a better sense of how a startup is performing at any moment in time. But then what? If it’s doing well, why sell? And if it’s doing poorly, why buy? This quest is going nowhere.

So there you have it. Please refrain from making bets based on these predictions. They’re just one semi-demented person’s sense of what may come. I make no promises except this one: I’ll get back to you in 10 years. And we’ll see how I did."

Thanks Andrew Gordon for providing us a little levity. 

I'll be back on Tuesday.

Have a good one.

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