CPI
Headline CPI of 4.9% came in below expectations of 5.0% and registered the slowest growth since April 2021. It also marked the 10th consecutive month of slower growth since the report peaked in June 2022 at 9%. Areas that continued to see a growth in prices were food (+7.7%), motor vehicle insurance (+15.5%), transportation services (+11.0%), admissions which includes concerts, movies and theaters (+6.9%), and electricity (+8.4%). There continues to be more components that are registering declines compared to last year. Energy was a big one as it was down 5.1% as gas and oil prices fell from high prices last year. Gasoline in particular was down 12.2%. Other areas that saw declines included major appliances (-10.4%), used cars and trucks (-6.6%), and even airfares (-0.9%). The Core CPI, which excludes food and energy, did come in higher than the headline number at 5.5% but over 60% of that increase came from shelter costs which grew 8.1% compared to last year. If those shelter costs were removed from the report the Core CPI would have grown at just 3.7%. Overall, I continue to see inflation heading in the right direction as costs continue to decelerate.
PPI
Big news on the Producer Price Index (PPI) as it came in with just a 2.3% increase in April. This was the lowest reading since January 2021, and it was well off the high of 11.3% in June 2022. This is so important because if businesses are not seeing costs increase as much, they should not need to increase prices as much for consumers to offset the costs. I really believe inflation will not be a problem as we exit 2023 and head into 2024.
Regional Banks
The regional banks have really caused a lot of concern in the markets lately. Unfortunately, short sellers have stepped in and are magnifying movements of stock prices beyond belief. But if an investor looks at where some of these regional banks are trading, like Western Alliance at 2.3 times forward earnings or CoAmerica at 3.9 times forward earnings, it would appear that the worst is probably over. For the big banks, they have been beaten up somewhat as well, and are currently trading at 1.2 to 1.3 times tangible book value. If you back out the non-cash impact from potential bond portfolio losses, the price to tangible book value trades closer to one. The normal for big banks is more around two times tangible book value. For an investor looking down the road two or three years I think this is a good time to add some good bank positions to the portfolio after some strong research. I would also caution investors to be prepared for a bumpy ride for the next few months but if you wait and by the time everything looks good, you would’ve missed the opportunity.
Exchange Traded Funds
Exchange Traded Funds (ETFs) came out primarily as a passive investment. Investors would buy them based on what the fund held, and the investments wouldn't really change. Over the years that has changed for ETFs and this year about 30% of investment dollars going into the ETFs are finding their way into actively traded ones. That is more than double the 14% last year.
Water Shortage
We continue to hear about the water shortage in California even as we have had one of the biggest rain seasons and snowpack in decades. You may be scratching your head and ask how can we have a water shortage? It is because California's state legislature refuses to build the infrastructure to retain the water, and they also let the environmentalists control our water supply. This will hurt businesses, farmers, and people in general. To give you some numbers, during the 2021-22 water season we had some of the lowest participation ever but even with that, in December 2021 well over 100-million-acre feet of rain fell during one big storm that hit the state that year. The water unfortunately runs off and goes back in the ocean. To let you know how much 100-million-acre feet of rain would help, we currently have an annual deficit of 2 million-to-4-million-acre feet. There is plenty of water. We don’t have a water problem. We have an infrastructure problem, and this is going to hurt the state economy. I continue to hear California brag about being the fifth largest economy in the world. If we do not fix the water problem, more businesses and people will leave the state and California will no longer be an economic power. Send a letter to Sacramento today to enhance our water infrastructure.
Tech Companies
I continue to worry about the stock market indexes as the weight continues to become more concentrated in the big tech companies. Looking at the S&P 500, Apple now makes up close to 7.5% of the entire index and Microsoft accounts for over 6.6% of it. The top five companies, which also Amazon, Nvidia, and Alphabet, accounts for over 22% of the entire index. The QQQ or the Nasdaq 100 is even worse. Apple and Microsoft together account for over 26% of the index, and those top 5 companies account for over 45% of it. The indexes have done well so far this year thanks to these big tech companies, but we know the party can't last forever and if they turn so will the "broader" market indexes.
Peloton
Peloton (PTON) continues to face problems and the stock is now trading under $7/share. That is a huge fall from the all-time high in 2021 of around $170/share. Today's problem stems from another recall as the company is recalling 2.2 million bikes. This comes as there have been 35 reports of unexpected seat breakages between January 2018 and this month. During that period over two million bikes were sold in the U.S. While the recall seems a little excessive, it is still a cost and a problem for the company. I continue to have a hard time seeing a path to profitability for the company, especially since the company just issued its first ever forecast for a decline in subscribers.
Beyond Meat
I was surprised to see Beyond Meat (BYND) go across the ticker tape the other day. For the week I noticed it traded under $10/share at one point. This is far from the high of close to $250/share back in 2019. It's just another example of how hype can take stocks beyond levels they should not trade at. Even with the decline I would still not buy the stock as the company is still estimated to have a loss of $2.66 per share in 2024. I also don't hear nearly as much about the hype around the product. Does anyone still use Beyond Meat?
Consumer Credit
You may hear how terrifying it is that revolving consumer credit outstanding is at record highs and recently in February it was at $1.2 T. What you don't hear though is how that number relates as a percentage of disposable income. In fact, in the chart below you'll see revolving consumer credit outstanding as a percent of personal income was just 6.2% in February and is actually still below pre-covid levels. It's important to understand that when the price of assets and incomes rise so will costs and debt levels. The absolute level is not nearly as important as the relationship that the numbers have.