by Jason Bodner
September 19, 2023
Everything is in interpretation. One great example of this is when Kentucky Fried Chicken started expanding to China in the 1980s. They tried in earnest for a literal translation to Mandarin of their famous slogan: “It’s Finger Lickin’ Good!”, but instead it came out more like “Eat Your Fingers Off!”
That doesn’t exactly scream ‘delicious’ … well unless you’re a cannibal. My point is that two different perspectives can interpret the same data with two different meanings. Stock market analysis is the same. Oftentimes the mainstream hears “Eat Your Fingers Off!” when I am hearing “Finger Lickin’ Good!”
I’ve harped on the media’s penchant for doom and gloom so often that I must sound like I’m constantly repeating himself. I may sound like a broken record, but I don’t really blame the media. We humans are a funny breed – we’re attracted to negative stories because counterintuitively, it makes us feel better about ourselves. Since the 1850s, Germans called this Schadenfreude, literally finding joy in others’ misfortune.
Spewing negative stories serves a purpose, though – to help advertisers sell us countless products and services. The news makes money by selling advertising, and advertisers pay for slots where more eyeballs see their ads. Sadly, happy stories don’t draw viewers the way tragedy and terror do.
Long ago, I realized that to understand markets and investor psychology, I must cut through the noise of media and spin, and analytically decipher objective data. That’s why I developed quantitative systems to help view market action without bias. This is done through the lens of unusual, outsized trading activity.
Our current news cycle is dominated by hurricanes, auto-union strikes, political scandal, inflation, war, and even click-bait headlines like Mexican Congress’ hearings on 1,000 year-old aliens. It’s a drag!
The stock market tuned into the news, with a lame September thus far. Historically speaking, August and September are the worst two months of the year for stocks, so stocks aren’t really underperforming – they’re actually just doing what they usually do. In other words: we must wait out the usual volatility.
The good news is that October through December is historically the strongest time of year for stocks, with substantial positive performance. The major story for investors remains pesky inflation and the difficulty to wrangle it under control. The Fed continually references its long-term goal of 2% inflation as a healthy level. Jerome Powell will surely mention it in his press conference after the FOMC meeting next week.
Let’s look at that for a moment: When Powell speaks, maybe the world hears him saying, “Eat Your Fingers Off,” but I am hearing something else. First, inflation has fallen over 6% from its peak. Currently it sits at 3.7% in the latest reading of the Consumer Price Index. Yes, that’s a meaningful uptick from June’s reading of 3%. But even a shallow look beneath the surface reveals that energy is the main culprit.
Energy commodities, like Gasoline, and Fuel Oil (highlighted in yellow, below) spiked hugely last month:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
However, the energy categories (highlighted in amber, above) are still down substantially for the past year. Utilities, used cars and trucks and medical care services are also down for the last 12 months. Energy and food costs are volatile, which is why there is “core” CPI that omits those line items. When energy and food are removed from the equation, all items rose only 0.3% in August.
Now let’s discuss shelter costs. Owners’ Equivalent Rent (OER) is the Fed’s favored metric for housing costs. It is hypothetical rent paid to yourself if you were a landlord. It is deeply flawed, and is essentially fictitious. As pointed out by Economics Professor (emeritus) Robert F. Stauffer of Roanoke College in The Wall Street Journal: No One Pays Owner’s Equivalent Rent: “If the fictional ‘owner equivalent rent’ (OER) were removed from the consumer-price index, the year-over-year inflation rate falls from 3.2% to about 1.5% (for July). The Fed’s preferred measure, the personal-consumption expenditures price index, would decline from 3% to about 2.2%.” This implies that inflation has fallen a lot more than the CPI says.
So, if the CPI for July is arguably lower than the published number, due to OER and volatile energy, then we are potentially below the Fed’s 2% target rate. That 2% target is like “Eating Your Fingers Off” instead of “Finger Lickin’ Good.” I looked at the CPI data since 1960 (from fred.stlouisfed.org) and found that the average CPI reading from 1960 through this year is 3.77%, far higher than 2%. Moreover, the average CPI since rates fell artificially to zero in December of 2008 is 2.32%. So, even when rates were the lowest ever historically, the CPI average was well above the Fed’s target of 2%. We see below that the fed funds target rate is substantially above the latest CPI readings, even with the uptick in energy costs:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Make no mistake, the recent energy spike is showing up in unusual buying in stocks, too.
First, we see that energy has risen to the top sector:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
As we look at unusual buying and selling, only energy has seen substantial buying in recent weeks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Since August 8th, WTI crude has risen by 17%, driving the sector – and future profit margins – higher:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
September volatility is here. News headlines will take every advantage to leverage attention. This invariably drives stock market volatility, but there seem like two opposing stories going on. From one point of view, the VIX (CBOE Volatility Index) recently was at its lowest levels since the pandemic:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
A low VIX for an S&P 500 that returned -1.5% thus far in September is odd. This could mean we are in for more volatility, especially with a falling BMI:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
But then again, that’s what we expect this time of year. That only paves the way for Q4: a big lift!
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I believe inflation isn’t as bad as the media echo chamber. I also believe we will not fall into a recession and stocks will lift by year’s end. Is it “Finger Lickin’ Good?” or “Eat Your Fingers Off”? I guess it depends on who is looking. It’s not always clear, and perspective matters a lot. As Friedrich Nietzsche said: “…those who were seen dancing were thought to be crazy by those who could not hear the music.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Inflation is Rapidly Receding – Except for Energy Prices
Income Mail by Bryan Perry
America Desperately Needs Lower Rates to Pay its Rising Bills
Growth Mail by Gary Alexander
Rising Debt, Fewer Workers and Slower Growth Since 2001 – Why?
Global Mail by Ivan Martchev
Bonds and the Dollar Suggest a Further Correction in Equities
Sector Spotlight by Jason Bodner
The Market Often Surges or Sinks on Misinterpreted Words
View Full Archive
Read Past Issues Here
Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT
Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner
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