By Ross Silver
In the immortal words of Simon & Garfunkel, “Hello darkness, my old friend, I’ve come to talk with you again…” Oh yes sports fans and animal lovers, the up has turned to down and the down has come on fast and furious. What seemed like a head fake in equities in October has turned into what I believe is a real downturn and loss of confidence here in November and beyond. As Biggie once said, “Things Done Changed.” What is happening to stocks?
The reason equities aka stocks are selling off is due to a downturn in the housing market (see any housing stock chart from the past 30 days); both new starts and sales have fallen. Exports have fallen and imports have risen, apparently because of worsening terms of trade, most likely due to the strong dollar. Most recently, manufacturers have drawn down inventories, and there is a fall in orders and shipments for durable goods. There are no dramatic drops, but it all adds up to a gradual economic slowdown.
Going back to trade for a second, the trade tax (not a war, just another tax for U.S. consumers) with China is impacting the U.S. in a couple of ways as I see it:
- The trade “tax” has raised input prices for American businesses, increasing their operational costs and has put pressure on profit margins (we are seeing this with retailers). This is likely to feed through into weaker wage and employment growth, leading to poorer retail sales and declining economic growth. It also will lead to layoffs and unemployment rising.
- Looking into the future, I assume the trade “tax” will raise headline CPI inflation. How much inflation will rise depends on the extent to which producers are able and willing to absorb higher costs rather than passing them on to customers. Initially producers will absorb costs but eventually they will be passed along to consumers are a time when demand is tightening, not a recipe for success. The Fed may respond to rising cost-push inflation by increasing the pace of interest rate rises. This will dampen consumer demand at a time when it was already under pressure because of the wage and employment effects of the tax. Fed interest rate policy has previously accelerated consumer demand slumps, most recently in 2006-7, when the Fed continued to raise interest rates despite rising unemployment, falling house prices and weakening consumer demand. Sounds like what we are about to walk into tight?
I am hopeful the Fed will be smart, but they are way too backward looking when it comes to data. Also, Fed Chair Powell is in a pissing contest with President Trump and I am sure he wants to flex his “independent” muscle to spite President Trump who has been telling Chairman Powell how to do his job.
What does this mean? It means the memory of the stock market 10 years ago is still a fresh memory and as such people are fleeing to cash and defensive names. If you want to stay “safe” in equities, getting into consumer staples might look very smart 3 months from now. For those of us who are looking to hit the ball out of the infield aka looking for outsized returns, I am hopeful stupidity and panic selling will ensue over the next month or two and provide some excellent buying opportunities once the dust settles. I am guessing we will see a DJIA down 1,000 point day before the end of the year given a little bit of selling can really trigger these program based algos to the downside viciously. I will be buying puts on the Russell 2000 and I have some names I will be adding to our portfolio on the website over the coming months that I hope will provide alpha. We will see how this shakes out and see if I can keep my Ross-trodomous title for calling equities correctly.
In the past I have viewed Thanksgiving as a day to watch football and eat turkey and saying a few thank you’s just because I felt that was appropriate. With age comes maturity and with this new found maturity I appreciate life much more and am very thankful for my life and the people in my life that are family and friends. Last week fires burned through Malibu, where I grew up and nearly destroyed my parents’ home as well as my Godparents’ home. They also took the homes of many people I grew up with and the devastation these fires caused is beyond comprehension. Sylva will be making a donation to the rebuilding effort in Malibu and should; it is my duty to help the community that helped me grow up. Community is the people in it and the people embracing it don’t look for someone else to lift if you won’t yourself.
On October 17th, Cannabis became Federally legal in Canada, which was a watershed event for the cannabis industry. Our favorite pick in the Canadian market is still Emerald Health Therapeutics (EMHTF). Emerald is a Health Canada Licensed Producer of medical cannabis, and the company has recently secured recreational sales licenses with several provincial governments. Emerald is vertically integrated, seed-to-sale enterprise, with a 50-50 joint venture ownership in a one of the largest indoor cannabis grow operations in the world. The company has a stellar management team, that is driving the business towards creating cannabis-based formulations for proprietary consumer and medical products. You can read our latest article on Emerald here.