EARNINGS ARE SURPRISING ON THE UPSIDE BUT SO ARE INFLATIONARY COMMENTS

Some have stated the strength of 2Q earnings is surprising.  I don’t agree with this statement for the simple reason for the gazillionith consecutive quarter profits have exceeded expectations.  This environment commenced about 20 years ago with the implementation of Sarbanes Oxley where analysts and companies alike were punished for optimistic outlooks that do not materialize.

I think the surprising aspect of this reporting period are comments about inflation.  A record 87% of companies have stated inflation—both wage and product–has exceeded their forecasts during the last four months and rising prices are impacting margins.

What I think is also significant “a vast majority of manufacturers” have been able to pass these increased prices over to the end user hence suggesting pricing power for the first time in almost two decades.

Yesterday I referenced the forecasted 2022 COLA for Social Security recipitants, the greatest increase since 1983.  When the headlines were released, the bond market radically changed directions.  Long dated Treasuries sold off over a point, selling that accelerated on Wednesday.  Yields are now 20 bps higher in less than two days.  The velocity is incredible.

Will the selloff continue?  I think more are surprised of the 30-45-day rally that sent yields plummeting over 60 bps rather than the two-day selloff.  As noted many times, most were/are at a loss as too the unrelenting advance, not believing the Fed’s “transitory language.”

I have often used the phrase “markets are people and people move markets.”  Perhaps I did not realize this is a vastly outdated phrase.  The correct verbiage is “markets are algorithms written off headlines and algorithms/headlines move markets.”

The SEC has stated 90% of equity trades and 99% of Treasury trades is the result of algorithmic or technology-based trading, trading which is heavily dependent upon “breaking news” and headlines.

I do not know how many times the word “transitory” has been written over the last three-four months but the word was/is in almost every headline about interest rates and monetary policy.

Several iconic bond managers—Gundlach, Arian, Einhorn, etc.–have stated the snap back to reality could be violent, perhaps causing a significant “market dislocation.”

Yesterday the WSJ commented about money supply and monetary velocity as well as possible additional fiscal stimulus.  The Journal writes the unwritten bill provides about $5.5 trillion in additional stimulus, not $4.1 trillion.

I guess this places the infamous Obamacare statement “We have to pass the bill to know what is in it” into a different perspective.  Perhaps today’s verbiage is “lets pass a stimulus bill than we will write the law.”  SPACs—or blank check companies–are the rage on Wall Street. Is the government just getting into the proverbial game?

As widely accepted by those who follow the dictums of Milton Friedman record money supply, accelerating monetary velocity and massive fiscal spending portends inflationary growth.

It is often written the most obvious conclusions are those that ignored.  Perhaps 87% of the corporate chieftains are only citing the obvious.

Commenting about yesterday’s market activity, Treasuries declined about 2 points and equities led by small caps and reflationary companies advanced.  Small caps have had their best back to back days since January.  Last week, the obituary for small caps—especially value small caps which outperformed the last two days by a factor of two—was written.

What will happen today?

Last night the foreign markets were up.  London was up 0.17%, Paris up 0.88% and Frankfurt up 0.95%.  China was up 0.34%, Japan up 0.58% and Hang Seng up 1.83%.

The Dow should open flat.  The -year is off 3/32 to yield 1.31%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.