DAILY DIARY
Enjoy the Holiday Weekend, Until Next Time
I am leaving early for the long weekend.
Thanks so much for providing me with this forum today, all week and since 1997!
Enjoy the holiday weekend.
Be safe.
Succinct Summation of the Week from Boockvar
From Peter Boockvar:
Positives,
1)Headline PPI has now fallen for 3 straight months m/o/m thru December with the one tenth drop this past month. The estimate was for a rise of one tenth. The core rate was flat m/o/m where the forecast was for an increase of 2 tenths. Taking out trade too in addition to food and energy saw a gain of 2% m/o/m as expected. Versus last year, headline wholesale prices are up 1%, by 1.8% ex food and energy and by 2.5% ex food, energy and trade. On the goods side, half of the drop was due to a 12.4% fall in diesel fuel with overall energy prices down by 1.2% m/o/m while food prices were lower by .9% m/o/m. Prices for services were flat driven by a .8% m/o/m fall in trade and a .4% decline in 'transportation and warehousing' while ex the above, service prices were up by .4%. The main drag here was the 1.6% fall in the price of 'truck transportation of freight' and down 9% y/o/y. Prices for air freight fell by .4% m/o/m, though up 5% y/o/y.
2)Initial jobless claims remained low at 202k vs 203k in the week prior but we're still dealing with pre and post holiday data. The estimate was 210k. Continuing claims, less influenced by the holidays fell by 34k w/o/w to 1.834mm but still above 1.8mm for the 11th straight week.
3)The December Atlanta Fed's Wage Growth Tracker held at 5.2% y/o/y for the 4th straight month, still running almost double the pre covid trend.
4)The NY Fed's Consumer Expectations December survey saw a continued drop in expectations for inflation at the one, three and five yr time frames and driven by lower price guesses for rent, college, and food. They were unchanged for gasoline and medical care. Also of note, "Perceptions of credit access compared to a year ago were largely unchanged" but with the drop in interest rates over the past few months, "Expectations about credit access a year from now instead improved."
5)The weekly mortgage applications again is reflecting its poor seasonal adjustment record around new years. They rose 9.9% w/o/w for the week ended 1/5 after falling by 10.7% in the week before.
6)Lower mortgage rates helped to lift the monthly Fannie Mae Home Purchase Sentiment index to 67.2 pts in December, up 2.9 pts m/o/m. "In December, a survey high 31% of consumers indicated that they expect mortgage rates to go down, while 31% expect them to go up, and 36% expect rates to remain the same." Also, "Although consumer perceptions of homebuying conditions remain overwhelmingly pessimistic, that particular component ticked up slightly m/o/m, with 17% of consumers now indicating it's a good time to buy a home, compared to 14% last month, a survey low."
7)The NFIB small business optimism index for December rose to 91.9 from 90.6 and that is the best level since it touched here in July but still well below the 50 yr average of 98. The NFIB chief economist continued to sound grumpy. "Small business owners remain very pessimistic about economic prospects this year. Inflation and labor quality have consistently been a touch complication for small business owners, and they are not convinced that it will get better in 2024."
8)From KB Homes: "As our new fiscal year gets underway, market conditions are improving with rates having declined and consumer confidence increasing, all while resale inventory remains low...As interest rates have now declined since the end of our fiscal year, demand has improved significantly...Our orders in December were higher than November, which is unusual, given that December is typically a slower sales month. To us, this speaks to the pent up demand for home ownership."
9)From Delta, "In 2024, demand for air travel remains strong and our customer base is in a healthy financial position with travel a top priority."
10)From WD-40: "We are encouraged that the improvement in trends we experienced in the 2nd half of fiscal yr 2023 have carried into fiscal year '24. This is the first time since fiscal year 2021 that our business has been firing on all cylinders. We saw volume related sales growth this quarter in all three trade blocks."
11)China CPI in December fell .3% y/o/y vs the estimate of down .4% and was driven by a continued drop in food prices which were down by 3.7% y/o/y. CPI ex food and energy grew by .6% y/o/y for a 3rd straight month so at least some price stability here.
12)China's December trade data was better than feared with exports up by 2.3% y/o/y vs the estimate of up 1.5% and imports unexpectedly grew by .2% instead of falling by .5% as expected. Full year exports were lower by 5.5%, the first full year drop since 2016. Exports to Russia are really helping the Chinese to offset continued declines to the US and EU and also a drop to other key Asian trading partners like Japan, South Korea and countries in Southeast Asia.
13)The Bank of Korea left its base rate at 3.50% as expected and as we all debate the timing of rate cuts everywhere, at least in South Korea the Governor there said no time soon. "If you asked me, personally I think cutting the rate wouldn't be easy for at least the next six months or more. We have to see if the inflation trajectory will take shape in the direction we forecast."
14)Taiwan said its December exports jumped by 11.8% y/o/y, more the double the estimate and led by tech shipments to the US (maybe Nvidia orders juiced it). Exports to China fell 6.4% y/o/y.
15)Industrial production in November in France was above the estimate of no change after a .3% drop in October and a .6% fall in the month before. A lift in energy production helped.
16)Eurozone November unemployment rate fell to match the lowest level since the euro was created at 6.4%.
17)There was improvement in the December European Economic Confidence index as it rose to 96.4 from 94 and better than the estimate of 94.2. Most of the m/o/m gain was due to a jump in the services component as well as in retail. Consumer confidence and construction confidence rose too and there was a slight gain in manufacturing, though remaining near the lows.
Negatives,
1)December CPI headline and core both rose .3% m/o/m with the former one tenth above the estimate and the latter in line. The y/o/y gains are now 3.4% and 3.9% vs 3.1% and 4.0% in November. Energy prices rose .4% m/o/m after the big declines in the prior two months but still down 2% y/o/y. Food prices grew by .2% m/o/m and the monthly gains have been at a pretty consistent .2-.3% pace. They are up 2.7% y/o/y. On the services side, ex energy prices rose .4% m/o/m, the same pace seen in November and 5.3% y/o/y. On the goods side, core prices were unchanged m/o/m and up .2% y/o/y.
2)In the NY Fed's consumer Expectations survey, one year spending expectations fell to the lowest level since September 2021. The percentage of those who don't expect to make a minimum debt payment over the next 3 months saw its 2nd highest print since the Covid shutdowns at 12.42%. Adding to the consumer worries, expected earnings growth decreased by .2 percentage point to 2.5%, the lowest level since April 2021. "The decline was driven by respondents with at most a high school diploma."
3)In the November consumer credit data we saw the biggest one month increase in revolving credit outstanding, mostly credit cards, since November 2022 at $23.7b.
4)The Philly Fed released its Q3 credit card data and while it is dated, it is still worth pointing out. They said "Large bank credit card nominal balances continued to grow in the third quarter of 2023 after surpassing pre-pandemic levels in 2022." This is what stands out the most, "All stages of delinquency rates now exceed pre-pandemic levels for the first time and are approaching the series highs since 2012. In response to this deterioration, banks are granting fewer credit line increases and reducing credit lines more frequently in the recent four quarters."
5)The World Container Index updated its shipping price figures and for the week ended 1/11, the Shanghai to Rotterdam container price of a 40 ft box rose to $4,406 from $3,577 which compares to $1,667 in the last week of December. The Shanghai to Genoa saw prices jump to $5,213 from $4,178 last week and vs just $1,956 in the week before. The Shanghai to LA container cost was up more modestly to $2,790 vs $2,726 in the week before and vs $2,100 in the week before that.
6)The US November trade deficit was about $1.5b narrower than expected at $63.2b BUT for not good reason as both exports and imports fell by 1.9% m/o/m.
7)From CEO of Neiman Marcus on CNBC: "When we look at our performance in the holiday, we are in the luxury market and that market is experiencing a slowdown and it's also a market that is promotional specifically online...we experienced low single digit negatives compared to the prior years but which is still up when compared with 2019."
6)From Burberry: "We experienced a further declaration in our key December trading period and we now expect our full year results to be below our previous guidance."
7)From KB Homes: "In the fourth quarter, our overall average selling price of homes delivered decreased to approximately $487,000 due to both mix shifts and the impact of pricing adjustments and other home buyer concessions, such as mortgage rate locks and buy downs." Their gross margins fell too to 20.8% from 23.9%, "mainly due to price decreases and other homebuyer concessions, along with higher construction costs."
8)From Microchip: "The weakening economic environment that our customers and distributors faced during the December 2023 quarter resulted in many of them wanting to receive a lower level of shipments as they took actions to further de-risk their inventory positions. Many customers also had extended shutdowns or closures at the end of the December quarter as they managed their operational activities. The impact of these and related factors was that certain backlog that we had planned to ship when we provided our guidance on November 2, 2023 did not ship to customers before the end of the December quarter. As a result, our preliminary revenue indication for the December 2023 quarter is to be down sequentially about 22% compared to our guidance of down 15% to 20%, which we provided on November 2, 2023."
9)From Extreme Networks: "Our revised fiscal quarter outlook reflects industry headwinds of channel digestion and elongated sales cycles. In late Q2, we saw multiple large deals pushing out to future quarters."
10)From Delta: "Our March quarter faces headwinds from three dynamics when compared to last year. These include higher international mix, the normalization of travel credit utilization, and lapping a competitors' operational challenges."
11)From MSC Industrial: "On our last call, which was midway through October, we described the sequential softening of demand that began in September. The causes included reduced spending due to sustained high interest rates, the ripple effects of the UAW strikes, inventory burndown, and an overall caution among our customer base. Following our call, we experienced an even softer back half of October, resulting in another sequential step down in our growth rate." In that prior quarterly call they expected October sales growth of up 1-2% over the prior year. Instead it came in down over 1%, "which demonstrates just how soft demand was in the back half of October vs our expectation. That softness carried into November, and as you can see on the operating stats into December as well."
12)From Container Store: "The challenging business trends we experienced in the 2nd quarter continued. General merchandise categories underperformed compared to our expectations and were relatively consistent with our 2nd quarter performance."
13)We heard mixed messages from Lorie Logan and John Williams on the fate of QT.
14)Aggregate financing in China in December totaled 1.94 trillion yuan vs the estimate of 2.162 trillion yuan. That is down from 2.454 trillion in November but up from 1.31 trillion in December 2022. Money supply growth as measured by M2 slowed to 9.7% y/o/y growth which is the slowest since February 2022.
15)China PPI fell 2.7% y/o/y vs the estimate of down 2.6% and where prices continue to be pressured by the manufacturing recession and lower raw industrial prices.
16)Japan reported that November base pay rose 1.2% y/o/y vs 1.3% growth in October and 1% in September. These figures are still well below inflation.
17)The December Tokyo CPI ex food and energy was up 3.5% y/o/y as expected vs 3.6% in November. The headline print was 2.1%, slowing from 2.3% and also in line.
18)Both November German factory orders and industrial production were weaker than expected.
From Datsun to TikTok: Peak Hollywood
Professor Galloway's No Mercy No Malice.... "Peak Hollywood."
Locomotion!
This is the first trading day in months when I am trading so rapidly and the markets are moving so quickly that I can't keep up with my posts in my Diary.
Doubling Up
I doubled up on my short trading rental of a package of high octane large-cap techs just now.
Short Exposure
I substantially raised my short exposure on the ramp higher this morning - as noted in my Diary.
Boockvar on Wholesale Prices
From Peter:
Headline PPI has now fallen for 3 straight months m/o/m thru December with the one tenth drop this past month. The estimate was for a rise of one tenth. The core rate was flat m/o/m where the forecast was for an increase of 2 tenths. Taking out trade too in addition to food and energy saw a gain of 2% m/o/m as expected. Versus last year, headline wholesale prices are up 1%, by 1.8% ex food and energy and by 2.5% ex food, energy and trade.
On the goods side, half of the drop was due to a 12.4% fall in diesel fuel with overall energy prices down by 1.2% m/o/m while food prices were lower by .9% m/o/m.
Prices for services were flat driven by a .8% m/o/m fall in trade and a .4% decline in 'transportation and warehousing' while ex the above, service prices were up by .4%. The main drag here was the 1.6% fall in the price of 'truck transportation of freight' and down 9% y/o/y. Prices for air freight fell by .4% m/o/m, though up 5% y/o/y. Rail prices were flat. Juicing prices was in part due to the rebound in financial markets as "prices for securities brokerage, dealing, and investment advice" jumped by 3.3%. Prices related to vehicles fell.
Bottom line, we'll of course have to see how things play out in the coming months but a key drag in today's PPI data was related to trade and transportation and we of course are seeing now what is going on in the Red Sea which is not captured in this data. Shipping costs are spiking, air freight prices are about to jump as shippers shift from ships. Truck pricing will stabilize this year as more trucking companies go out of business. Thus, I'll call PARTS of today's wholesale data as old news and maybe too with yesterday's goods portion of CPI.
The TIPS market might agree as while PPI was below expectations, the 5 yr inflation breakeven is higher by 2 bps to 2.23% which quietly is at the highest level since mid-November.
Selected Premarket Movers
Upside
- (FLXS) +14% (earnings, guidance)
- (WIT) +8.0% (earnings, guidance)
- (ZIM) +7.4% (strength following airstrikes against Houthi rebel targets)
- (CCJ) +5.7% (Kazatomprom identifies production shortfall in uranium for 2024 due to sulphuric acid availability)
- (UEC) +5.2% (Kazatomprom identifies production shortfall in uranium for 2024 due to sulphuric acid availability)
- (URA) +4.4% (Kazatomprom identifies production shortfall in uranium for 2024 due to sulphuric acid availability)
- (IFF) +4.3% (appoints J. Erik Fyrwald as CEO and Board Director and affirms FY23 guidance; Jefferies Raised IFF to Buy from Hold, price target: $112 from $73)
- (BBCP) +3.2% (earnings, guidance)
- (BK) +2.4% (earnings, guidance)
- (CIEN) +2.3% (Evercore ISI Institutional Equities Raised CIEN to Outperform from In Line, price target: $57)
- (C) +2.0% (earnings, guidance)
- (JPM) +2.0% (earnings, guidance)Downside
- (MNTS) -38% (substantial doubt regarding Company's ability to continue as a going concern)
-VCIG -35% (prices $2.8M public offering of ordinary shares at $1.25/shr)
- (FTFT) -19% (SEC charges future CEO Shanchun Huang with fraud for using an offshore account and disclosure failures)
- (DAL) -5.8% (earnings, guidance)
- (ELV) -5.7% (lower in sympathy with UNH)
- (HUM) -5.6% (lower in sympathy with UNH)
- (UNH) -4.9% (earnings, guidance)
- (ETNB) -4.8% (RBC Cuts ETNB to Sector Perform from Outperform, price target: $15)
- (CNC) -3.8% (lower in sympathy with UNH)
- (CI) -3.1% (lower in sympathy with UNH)
- (TSLA) -3.1% (cuts prices in China)
- (BAC) -2.4% (earnings, guidance)
- (BA) -2.0% (FAA to increase oversight of Boeing)
The Book of Boockvar
From Peter:
Just as supply chain challenges and nightmares for many during Covid were being fully resolved the rash is acting up again with the Houthi's screwing with the delivery of goods. Just a thought here on how companies might respond and just maybe this actually lifts global manufacturing out of its doldrums. I say this because after a notable decline in inventories since last summer, the just seen wholesale inventory to sales ratio is just off the lowest since July 2022, could it be possible that the de-stock to re-stock transition that hasn't happened yet maybe begins again as companies don't want to get flat footed again with missing supplies.
Not that this would speed up the delivery from ships being diverted from the Red Sea but if one is going to order 10 items for example normally, maybe they order 15 just in case. Just something to watch and if the case, along with rising transportation costs, this lifts goods prices after the big fall off its peak highs.
As we absorb the earnings from the big banks today, the Philly Fed released its Q3 credit card data and while it is dated, it is still worth pointing out. They said "Large bank credit card nominal balances continued to grow in the third quarter of 2023 after surpassing pre-pandemic levels in 2022." This is what stands out the most, "All stages of delinquency rates now exceed pre-pandemic levels for the first time and are approaching the series highs since 2012. In response to this deterioration, banks are granting fewer credit line increases and reducing credit lines more frequently in the recent four quarters."
On to the banks, BoA said its net interest income fell 5% "as higher deposit costs and lower deposit balances more than offset higher asset yields." Their provision for credit loses rose a touch, by $12mm to $1.1b. Net charge offs rose y/o/y. Average deposits rose 2% q/o/q but were down y/o/y. And, "average loans and leases of $1.1 trillion were modestly higher vs Q3 '23."
Jamie Dimon said this in the JPM press release:
"The US economy continues to be resilient, with consumers still spending, and markets currently expect a soft landing. It is important to note that the economy is being fueled by large amounts of government deficit spending and past stimulus. There is also an ongoing need for increased spending due to the green economy, the restructuring of global supply chains, higher military spending and rising healthcare costs. This may lead inflation to be stickier and rates to be higher than markets expect."
"On top of this, there are a number of downside risks to watch. QT is draining over $900 billion of liquidity from the system annually, and we have never seen a full cycle of tightening. And the ongoing wars in Ukraine and the Middle East have the potential to disrupt energy and food markets, migration, and military and economic relationships, in addition to their dreadful human cost. These significant and somewhat unprecedented forces cause us to remain cautious. While we hope for the best, the past year demonstrated why we must be prepared for any environment."
He also railed against the Basel III and other regulatory proposals.
Their average loans were up by 4% ex First Republic while deposits were down by 3% also ex First Republic. They added $598b to their net reserve build. They do expect net interest margin to reach $90b in 2024 which is above expectations and why the stock is popping pre market.
In the Wells release, this stuck out, "We are closely monitoring credit and while we see modest deterioration, it remains consistent with our expectations."
Their NIM fell 5% "due to lower deposit and loan balances, partially offset by the impact of higher interest rates." Average loan growth was down a touch both q/o/q and y/o/y and consumer deposits were lower too. Provisions for credit losses grew by 7% q/o/q and by 34% y/o/y "driven by credit card and CRE loans, partially offset by a lower allowance for auto loans."
Net charge offs were .34% (annualized), up from .13%, "driven by higher CRE net loan charge offs, predominantly in the office portfolio. The consumer net loan charge off rate increased by .79% (annualized), up from .67%, due to higher net loan charge-offs in the credit card portfolio."
Bottom line on what's been seen this morning and of course we'll get a lot more info in the conference calls, loan provisions and net charge offs are rising (as are delinquencies according to the Philly Fed data), deposits are down y/o/y but steady q/o/q and loan growth is sluggish.
I mentioned the comments from the CEO of Neiman Marcus earlier this week where he highlighted some slowdown in higher end spend. Today the stock of Burberry is lower by 7.5% as it cut its earnings forecast after the holiday season. The CEO said "We experienced a further declaration in our key December trading period and we now expect our full year results to be below our previous guidance."
The December credit data out of China was below expectations. Aggregate financing totaled 1.94 trillion yuan vs the estimate of 2.162 trillion yuan. That is down from 2.454 trillion in November but up from 1.31 trillion in December 2022. Money supply growth as measured by M2 slowed to 9.7% y/o/y growth which is the slowest since February 2022. China is in some sort of liquidity trap where they need, and in some places are, delevering but at the same time are trying to ease the access to credit to support the economy. It's a tough balancing act but at least the delevering in the residential property market is well needed however painful.
China also reported its CPI and PPI figures and they were about as forecasted. CPI in December fell .3% y/o/y vs the estimate of down .4% and was driven by a continued drop in food prices which were down by 3.7% y/o/y. CPI ex food and energy grew by .6% y/o/y for a 3rd straight month so at least some price stability here. PPI fell 2.7% y/o/y vs the estimate of down 2.6% and where prices continue to be pressured by the manufacturing recession and lower raw industrial prices.
Finally out of China, its December trade data was better than feared with exports up by 2.3% y/o/y vs the estimate of up 1.5% and imports unexpectedly grew by .2% instead of falling by .5% as expected. Full year exports were lower by 5.5%, the first full year drop since 2016. Exports to Russia are really helping the Chinese to offset continued declines to the US and EU and also a drop to other key Asian trading partners like Japan, South Korea and countries in Southeast Asia.
The market response to all of the Chinese data is a drop in the offshore yuan, another fall in Chinese stocks, though modest and commodity prices that are up today but we know oil is in particular being driven by geopolitics.
We of course anxiously await not just the Taiwanese election tomorrow but the Chinese response to it.
If what I wrote in the first paragraph does happen, Chinese manufacturing should get off the mat while just maybe we'll see a less bad residential real estate market and a consumer that gets less nervous in spending money. This could lead to a rebound in the Chinese economy and stocks too, particularly those in Hong Kong where I still expect a better year in 2024 notwithstanding the tough start.
Our Tweet of the Day
Oil Vey! (Part Deux)
Like I Said, Oil Vey!
Repeating for emphasis, Surprise #2 in my 10 Surprises for 2024:
The West continues to lose patience with how the war is going with Ukraine as the U.S. backs off of its support. Negotiations on a territorial split begin and Ukraine is forced to give up the East of the country to Russia.
Surprise #2. In part to due fear that Democrats will continue to hold on to the Presidency, foreign powers step up military confrontations.
North Korea, with support from Russia, undertakes skirmishes in the Demilitarized Zone and makes threats to invade South Korea. Iran completes its nuclear buildup which provokes a direct attack from Israel. Though China doesn't invade Taiwan it continues with aggressive war game tactics in the South China Sea.
The global economy is more susceptible to supply shocks than is generally believed. With Russia and Saudi Arabia conspiring on production cuts, the price of oil exceeds $110/barrel and the price of a gallon of gasoline in the U.S. approaches $6. Shares of Exxon Mobil (XOM) , Occidental Petroleum (OXY) and Chevron (CVX) each rise by over one third next year.
Precisely
Programming Note
Given the plethora of bank reports there will be no Futures column this morning - as I have too much "digging."
Market Risks Rise
* As investors ignore growing headwinds
Last night's expansion of the Middle East war is exactly what I have been warning about -- and why, in part, I have expanded my short exposure (yesterday I shorted a basket of high beta Nasdaq stocks) and why I have escalated my energy purchases ( (OXY) , (XOM) and (CVX) ).
As I will note in a summary of my market outlook next Tuesday (Monday is a national holiday) more unpredictable military actions can be expected in the Middle East:
* The price of oil is likely to rise. (This morning Brent crude is $2.58/barrel and over $80)
* As oil rises, shipping costs will also climb and supply chains will get disrupted further.
* February inflation will probably advance relative to expectations.
* Interest rates may be headed back up.
* The Federal Reserve is likely to hold back their rate cuts.
Meanwhile, consumer debt defaults are at record highs, excess savings has been depleted, jobs in the private sector are getting scarcer, manufacturing job growth is about to turn negative, the deficit is out of control and Congress is headed for yet another standoff.
Equities are at spitting distances from new highs even though no one can predict where the Mideast goes from here. (I would note that this is not about rationality of ideology as was the case even in the Cold War when the Soviet Union had a different economic and political system which resulted in a clash of ideology. This is Islamic Jihadism -- which has no rational context).
It is now thinkable that the ultimate conclusion may that this all devolves into war with Iran.
Black Swans are multiplying -- even as talking heads in the business media (who know everything about price but little about value) have their collective heads in the sand as they grow more confident with rising equity prices and continue to preach a "soft landing."
These multiple headwinds are all coalescing at a time in which, contrary to the perma bulls protestations -- the market is not broadening out and, is in fact, growing more narrow in its advance. As I noted yesterday -- the equal weighted S&P, the Russell Index and financials all appear to be rolling over in price.
With an unfavorable reward v. risk, higher than typical cash reserves seem a sensible position to take.
Stock Portfolio & Free Lunch Updates: January Effect Fading
And finally,"Jazzy" Jeff Hirsch on the January Effect:
When we prepared the monthly January Almanac Issue in late December, we noted that January has been weaker in election years and January's overall historical strength has been fading due to declines in thirteen of the last twenty-four years. January's recent weakness, since 2000, also appears to be having an impact on the "January Effect." In the 2024 Almanac on pages 112 and 114 the January Effect is defined as the tendency for small-cap stocks to outperform large-cap stocks from around mid-December through mid-February (mid-month uses the 11th trading day close of the month). In the Almanac we use the Russell 1000 as the large-cap benchmark and the Russell 2000 as the small-cap benchmark. Small-cap outperformance occurs when the Russell 2000 gains more than the Russell 1000 or when the Russell 2000 declines less than the Russell 1000 from mid-December through mid-February.
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In the above table we have the full history of the "January Effect" along with the performance before and after 2001. This year as of the close on January 10, 2024, is included in the table, but is not used in Average, Median, and % Higher stats as the full period is not complete. When comparing the years 1979-2001 to 2022-2023 there has been a decline in the average small-cap advantage and frequency of occurrences. The average advantage has slipped from 3.41% to 1.10% while frequency has fallen from 81.8% to 63.6%. The "January Effect" is still happening, it is just not as pronounced or as consistent as it once was.
One likely reason is the notable weakness in January that also began in 2000. Another likely contributing factor is the rise of exchange-traded funds (ETFs) and index-based investing styles. Concentration of market leadership is another potential factor. The Magnificent 7 (Apple, Alphabet, Microsoft, Amazon, Meta, Tesla and Nvidia) is the current example. Before the "7" it was FAANG, FANG, FAAMG, MAMMA and going back even further, the Four Horsemen (late 90s and again in 2007). Undoubtedly there are even more possible reasons. Nonetheless, the Free Lunch strategy has historically benefited from the "January Effect" and languished when it did not materialize.
Bank Stocks
Bank of America (BAC) missed on several metrics - including higher charge offs and a bunch of non recurring charges related to regulatory changes.
Note: I sold my last bank holding, BAC, last week - near its recent high.
I would avoid most bank stocks.
More to come.
January Barometer Basics, Free Lunch & Stock Portfolio Updates
More from "Jazzy" Jeff Hirsch and The Stock Traders Almanac:
January Barometer: The Basics - Why It's So Important
First off, we've heard some misconceptions out there about how to calculate these indicators and how to calculate market performance in general and our January Indicator Trifecta readings specifically. To clarify, daily, weekly, monthly, and annual performance as well as our indicator readings are not calculated from the open to the close. They are calculated from close to close. This is standard operating procedure for all performance numbers throughout the industry.
Perhaps not in the day trading or crypto circles, but when you talk about an index's percent change, gain or loss, it's from the close on one day to the close on the other day. Not after-hours trading, not pre-market trading, not the open to the close, it is the close to the close. For example, the S&P 500 index's performance for 2023, is calculated from the close on the last trading day of December 2022, the official stock exchange market close to the close on the trading day of December 2023: i.e. from the 3839.50 close on 12/30/2022 to the 4769.83 close on 12/29/2023, S&P 500 was up 24.2% for 2023.
For the calculation for the First Five Days (FFD) Indicator, you take the close and the last trading before the first trading day of the year to the close on the fifth trading day of the year: from the 4769.83 close on 12/29/2023 to the 4763.54 close on 1/8/2023 S&P 500 was down -0.1% so the FFD was down. Using indicators like our January Trifecta is a bit of an art. Readings are not binary. It's not one-dimensional where it triggers a buy or sell like MACD does with our Best Months Tactical Switching Strategies. It does not signal a bull or bear market has ended or begun. It's a warning to use other analyses, wits and experience to adjust our outlook and portfolio positions if needed.
Why is the Trifecta so important? With 2023 in the books and the Trifecta scoring another win, since 1950, when all three January Indicators, Santa Claus Rally, First Five Days and the full-month January Barometer (JB) are up, S&P 500 is up 90.6% of the time 29 out of 32 years for an average gain of 17.7%. When one or more of the Trifecta are down the year is up only 59.5% of the time, 25 of 42, for a paltry average gain of 2.9%. 2022 was a perfect example. We did come into the year with a cautious outlook as it was a midterm year where many bear markets occur and bottom. The Santa Claus Rally was positive in January 2022, but FFD and JB were negative and we called the bear in February 2022 and the bottom in October 2022.
JB Holds the Key
As we discuss in our January 8 issue, even though the SCR and FFD were negative, a positive January Barometer could salvage the Trifecta and boost prospects for full-year 2024. Following the previous three occurrences when the SCR and FFD were negative and the January Barometer was positive, S&P 500 advanced three times over the remaining eleven months and the full year with average gains of 15.1% and 19.9% respectively. The December Low Indicator (2024 STA, page 36) should also be watched with the line in the sand at the Dow's December Closing Low of 36054.43 on 12/6/2023.
At this juncture we remain bullish, and our base case scenario outlined in our 2024 Annual Forecast is still in play. In our forecast, we noted election years are not as strong as pre-election years and we did not expect a repeat of the gains enjoyed in 2023, when the January Trifecta went 3 for 3. There is a sitting president running for re-election which has historically been bullish for the market, the JB could still be positive, and Dow's December Closing Low has not been breached.
The History of the January Barometer
Devised by Yale Hirsch in 1972, the January Barometer (JB) has registered 12 major errors since 1950 for an 83.8% accuracy ratio. This indicator adheres to propensity that as the S&P 500 goes in January, so goes the year. Of the twelve major errors Vietnam affected 1966 and 1968. 1982 saw the start of a major bull market in August. Two January rate cuts and 9/11 affected 2001. In January 2003, the market was held down by the anticipation of military action in Iraq. The second worst bear market since 1900 ended in March of 2009 and Federal Reserve intervention influenced 2010 and 2014. In 2016, DJIA slipped into an official Ned Davis bear market in January. 2018 was the tenth major error overall as a hawkish Fed, a trade war and slowing global growth concerns resulted in the worst fourth quarter performance by S&P 500 since 2008. Covid-19 impacted 2020 & 2021. Of the 12 major errors, nine have occurred since 2001. Including the eight flat years yields a .726 batting average.
January is host to many important events, indicators, and recurring market patterns. U.S. Presidents are inaugurated and have historically presented State of the Union Addresses in January. New Congresses convene. Financial analysts release annual forecasts. We return to work and school collectively after holiday celebrations. On January's second trading day, the results of the official Santa Claus Rally are known and on the fifth trading day the First Five Days "Early Warning" system sounds off, but it is the whole-month gain or loss of the S&P 500 that triggers our January Barometer.
And yet for some reason, every February or sooner, if January starts off poorly, our January Barometer gets raked over the coals. It never ceases to amaze us how our intelligent and insightful colleagues, that we have the utmost professional respect for and many of whom we consider friends, completely and utterly miss the point and relentlessly argue the shortcomings of our January Barometer. Again, this year we are not waiting until this happens. Instead, here is why the January Barometer is still highly relevant and why it should not be quickly dismissed.
1933 "Lame Duck" Amendment-Why JB Works
Many detractors refuse to accept the fact the January Barometer exists for one reason and for one reason only: the Twentieth "Lame Duck" Amendment to the Constitution. Passage of the Twentieth Amendment in 1933 created the January Barometer. Since then, it has essentially been "As January goes, so goes the year." January's direction has correctly forecasted the major trend for the market in many of the subsequent years.
Prior to 1934, newly elected Senators and Representatives did not take office until December of the following year, 13 months later (except when new Presidents were inaugurated). Defeated Congressmen stayed in Congress for all of the following session. They were known as "lame ducks."
Since 1934, Congress convenes in the first week of January and includes those members newly elected the previous November. Inauguration Day was also moved up from March 4 to January 20.
January's prognostic power is attributed to the host of important events transpiring during the month: new Congresses convene; the President typically gives the State of the Union message, presents an annual budget and sets national goals and priorities.
These events clearly affect our economy and Wall Street and much of the world. Add to that January's increased cash inflows, portfolio adjustments and market strategizing and it becomes apparent how prophetic January can be. Switch all of these events to any other month and chances are the January Barometer would become a memory.
JB vs. All
Over the years there has been much debate regarding the efficacy of our January Barometer. Skeptics never relent and we don't rest on our laurels. Disbelievers in the January Barometer continue to point to the fact that we include January's S&P 500 change in the full-year results and that detracts from the January Barometer's predicative power for the rest of the year. Others attempt to discredit the January Barometer by going further back in time: to 1925 or 1897 or some other random year.
After the Lame Duck Amendment was ratified in 1934 it took a few years for the Democrat's heavy congressional margins to even out and for the impact of this tectonic governing shift to take effect. In 1935, 1936 and 1937, the Democrats already had the most lopsided Congressional margins in history, so when these Congresses convened it was anticlimactic. Hence our January Barometer starts in 1938.
In light of all this debate and skepticism we have compared the January Barometer results along with the full year results, the following eleven months results, and the subsequent twelve months results to all other "Monthly Barometers" using the Dow Jones Industrials, the S&P 500 and the NASDAQ Composite.
Here's what we found going back to 1938. There were only 13 major errors. In addition to the 12 major errors detailed above: in 1946 the market dropped sharply after the Employment Act was passed by Congress, overriding Truman's veto, and Congress authorized $12 billion for the Marshall Plan.
Using these 13 major errors, the accuracy ratio is 84.9% for the full 86-year period. Including the 9 flat year errors (less than +/- 5%) the ratio is 74.4% - still effective. For the benefit of the skeptics, the accuracy ratio calculated on the performance of the following 11 months is still solid. Including all errors - major and flat years - the ratio is still a decent 67.4%.
Now for the even better news: In the 52 up Januarys there were only 4 major errors for a 92.3% accuracy ratio. These years went on to post 16.2% average full-year gains and 11.6% February-to-December gains.
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Let's compare the January Barometer to all other "Monthly Barometers." For the accompanying table we went back to 1938 for the S&P 500 and DJIA - the year in which the January Barometer came to life - and back to 1971 for NASDAQ when that index took its current form.
The accuracy ratios listed are based on whether or not the given month's move - up or down - was followed by a move in the same direction for the whole period. For example, in the 86 years of data for the S&P 500 for the January Barometer, 64 years moved in the same direction for 74.4% accuracy.
The Calendar Year ratio is based on the month's percent change and the whole year's percent change: i.e., we compare December 2022's percent change to the change for full-year 2022. By contrast the 11-month ratio compares the month's move to the move of the following eleven months. February's change is compared to the change from March to January. The 12-month change compares the month's change to the following twelve months. February's change is compared to the change from March to the next February.
Though the January Barometer is based on the S&P 500 we thought it would clear the air to look at the other two major averages as well. You can see for yourself in the table that no other month comes close to January in forecasting prowess over the longer term.
There are a few interesting anomalies to point out though. On a calendar year basis DJIA in January is slightly better than the S&P. 2011 is a perfect example of how the DJIA just edges out for the year while the S&P does not. For NASDAQ April, September and November stick out as well on a calendar year basis, but these months are well into the year, and the point is to know how the year might pan out following January, not April, September or November. Plus, no other month has a stronger basis for being a barometer. January is loaded with reasons.
Being the first month of the year it is the time when people readjust their portfolios, rethink their outlook for the coming year and try to make a fresh start. There is also an increase in cash that flows into the market in January, making market direction even more important. Then there is all the information Wall Street has to digest: The State of the Union Address in most years, FOMC meetings, 4th quarter GDP data, earnings, and a plethora of other economic data.
Myths Dispelled
In recent years new myths and/or areas of confusion have come to light. One of the biggest errors is the notion that our January Barometer is a stand-alone indicator that could be used to base all your investment decisions for the coming year on. This is simply not true, and we have never claimed that our January Barometer should or could be used in this manner. Our January Barometer is intended to be used in conjunction with all available data deemed relevant to either confirm or call into question your assessment of the market. No single indicator is 100% accurate so no single indicator should ever be considered in a vacuum. Our January Barometer is not an exception to this.
Another myth is that the January Barometer is completely useless. Those that believe this like to point out that simply expecting the market to be higher by the end of the year is just as accurate as the January Barometer. Statistically, they are just about right. In the 86-year history examined in this article, there were 25 full-year declines. So yes, the S&P 500 has posted annual gains 70.9% of the time since 1938. What is missing from this argument is the fact that when January was positive, the full year was positive 86.5% of the time and when January was down the year was up 44.1% of the time. These are not the outcomes that pure statisticians prefer, but once again, our January Barometer was not intended to be used in a vacuum.
Free Lunch Update
From "Jazzy" Jeff Hirsch:
Free Lunch stocks got off to a reasonable solid start with 10 of the 13 positions posting a gain through the market's close on January 2. [We provided a quick update in our member's only webinar on January 3. The update is on slide 20 here.] One stock was unchanged and two were down. Overall, the entire basket had an average gain of 8.9%. Since that update chopping trading has weighed on Free Lunch stocks.
Average performance across the entire basket has slipped to 1.8% (open position average is 6.0%), five positions have been stopped out (four for at a loss) and two of the remaining eight positions were modestly negative as of yesterday's close. NASDAQ listed positions have outperformed NYSE positions and the entire basket was up 1.8% compared to a 1.3% NYSE gain and 1.1% NASDAQ Comp advance as of the close on January 10.
Two standouts are 374Water (SCWO) and Largo (LGO). Prior to getting stopped out, SCWO traded from $1 per share on December 20, to over $2 on December 27. A potential 100%+ gain in four trading sessions. As is often the case, those gains faded nearly as fast as they were produced as SCWO traded as low as $1.06 on January 5. LGO's gain arrived at a slower pace and could be ending as shares declined over 7% today.
As a reminder, Free Lunch stocks are not intended to be held for long. Should a sizable profit present itself, do not hesitate to lock it in. The exact definition of a sizable profit is yours to decide. We will continue to hold the eight remaining positions with the suggested 15% trailing stop loss based on closing prices. The market has been choppy, but it still appears to be consolidating sizable Q4 gains.
Stock Portfolio Updates
Over the past four weeks through yesterday's close (January 10), S&P 500 climbed 1.6% higher while Russell 2000 gained 1.2%. Over the same period the entire stock portfolio advanced 1.9% excluding dividends, any interest on cash and any trading fees. Small-cap portfolio positions performed the best, up 14.9% on average. Mid-caps were second best, up 1.7%, while Large caps itched 0.3% higher. Of the 20 new trade ideas presented in November, 14 are higher (10 up double digits), 6 are in the red and the average gain of all 20 is 11.0%.
The top performing trade from last November is still Virco Manufacturing (VIRC) up 78.5% at yesterday's close. Mama's Creations (MAMA) is second best from the November basket, up 37.6%. Gains by VIRC and MAMA were the primary driver of the double-digit gain in the Small-cap portfolio over the past four weeks. VIRC and MAMA are on Hold.
Amneal Pharmaceuticals (AMRX) is another standout from the November basket, up 31.5%. Aside from the solid number of new products brought to market last year, AMRX moved from the NYSE exchange to NASDAQ in late December. With the move it was added to the NASDAQ Comp and NASDAQ Biotechnology indexes. AMRX is on Hold.
At the other end of the performance spectrum, Grand Canyon Ed (LOPE), was hit by a lawsuit from the FTC in late-December. The initial selloff turned a modest gain in the portfolio into a loss. The outcome of the suit is not likely to be known anytime soon and when that happens the most likely outcome will just be a fine. LOPE is on Hold.
All existing positions in the portfolio are on hold. Please note that some stop losses have been updated. The New Year is off to a choppy start and January has historically been softer in election years, but thus far there has not been any meaningful change in fundamental data. Employment data is still reasonable firm, inflation's sluggish cooling trend continues, and economic growth is holding up. Fed rate cut expectations are adjusting after getting overly optimistic.
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Disclosure note: Officers of Hirsch Holdings Inc hold positions in AADI, ASPS, ASYS, EGRX, FEAM, HSY, IEP, LGO, NRT, TH, and ZTO in personal accounts.
Charting The Technicals
"The crowd is bargain hunting in what was; the knowing are buying what will be."
- Justin Mamis
Bonus: Some Great Links
The December Inflation Report Will Not Delay Rate Cuts
From my friends at Miller Tabak:
Macro View
Thursday, January 11, 2024
Headlines proclaiming that "inflation edged up" in December are correct. Core-CPI (blue in Figure 1) increased for the third consecutive to 3.7% (m/m, annualized). "Supercore," which also removes shelter and is more predictive of core PCE-inflation, the Fed's preferred measure, also rose for the fourth consecutive month to 2.3%. These headlines, however, miss the bigger point. As we have written many times, too many analysts are underestimating the role of productivity growth in the economy. After exceptional growth in 2023, productivity growth is likely reverting to its trend. This is causing the excellent GDP growth of 3Q2023 and the very low inflation readings of recent months to fade. The underlying inflation data are still, however, solid enough to support our existing prediction of 100 bps of FOMC rate cuts this year, starting in May.
Core (blue), Core, ex-shelter, (red), and Core-Services, ex-shelter, (green)
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The December data bring the six month average for core-CPI to 3.2%, for "supercore" to 1.6%, and for core services, ex-shelter (more on this later) to 4.9%. A useful hypothetical is where would the FOMC set the Federal Funds rate based only on these data, ignoring higher inflation before July 2023? It would be around 350 bps, almost 200 bps below its current 525-550 bps range. This is the basic case for rate cuts. The Fed, of course, has its reasons to wait. First, it is understandable to be cautious given that inflation is higher over a longer window (core-CPI is 3.7% and supercore is 2.2% over the past year). By spring, some of this caution should fade. Second, strong GDP growth and full employment give the Fed the luxury of waiting. By May, however, the Fed will see what is likely to be a weak, around 1%, 1Q2024 GDP growth figure and possibly some weakening of labor markets. This will illustrate the risks of staying too high for too long and induce the Fed to finally start cutting.
