US Debt
The talk began Thursday morning about a rating downgrade for US debt. The bad news continues to make headlines and drive broader markets and value stocks lower. We took a look at the US debt versus GDP which is similar to looking at debt versus income and over the last three years the ratio has been declining. In the second quarter of 2020 the ratio was 134.8. The most recent data reported was for the fourth quarter of 2022 and the ratio has improved by over 10% to 120.2. I have said this many times before, what we should be focusing on is increasing the GDP by growing the economy. This would then reduce the burden of the debt.
Savings Rate
Even though consumers have said they are worried about a potential recession, that has not stopped them from spending. In the month of April, spending rose 0.8% compared to March. This easily topped the estimate of a 0.4% gain. There was a $151.7 B increase in expenditures with $86.9 B of it coming from services and the remaining $64.8 B coming from an increase in spending on goods. Some have highlighted a concern over a depressed saving rate which fell to 4.1% in April from 4.5% in March. This was the first decline in the savings rate since last year. This rate has been depressed since the beginning of 2022, but I believe much of this is due to the over saving that occurred during Covid. There were some months in 2020 and 2021 that the savings rate was over 20% and in April 2020 it was 33.8%. If we look at the average savings rate from March 2020 - April 2023 it would be 10.1%. For comparison, if we look at the average savings rate from January 2017 - February 2020 it was 7.9%. I believe that Covid created a lot of excess savings in the economy that people can afford to spend more of their income each month due to the savings that were built during the pandemic. As we go out over the next couple years, I would expect to see excess savings continue to fall as the savings rate normalizes and continues to climb higher.
S&P 500
The five biggest companies in the S&P 500 account for nearly 25% of the entire index with a combined market cap of about $8.7 trillion. Those five companies are about 3.2 times the Russell 2000 which has a value of $2.7 trillion. This differential is now larger than the difference between the five biggest stocks and the Rusell 2000 during the dot-com boom. The five companies we're talking about are Apple, Microsoft, Alphabet, Amazon, and Nvidia. Something just doesn’t seem right investing in these companies at these levels.
Bitcoin
You may have heard that recently there was a Bitcoin convention in Miami Beach. The excitement seems to be leaving Bitcoin based on the change in attendance. Last year, they had 26,000 attendees and this year it dropped to about 13,000 attendees. It was also noted at the entrance there was a sign that read “No bears allowed”. What does that tell you about the future of Bitcoin.
Anheuser Busch
I saw an interesting headline in Barron’s magazine this past weekend that said, “This Bud’s for you Bargain Hunters”. I thought this headline was very misleading because Anheuser Busch (BUD) trades around $59 per share and I still would not consider it a bargain. This is a little over 10% off the 52-week high of $67.09. The forward PE on the stock based on 2024 earnings is 15.9x and investors receive a 1.4% dividend yield. When compared to other beverage companies like Coca-Cola, which trades at 22.4x 2024 earnings and PepsiCo, which trades at 24.2x 2024 earnings, yes Anheuser-Busch looks pretty good. But when compared to its main competitor Molson Coors (TAP) it does not look so good. Molson Coors trades at 14x 2024 earnings and has a dividend yield of around 2.6%. It will also be interesting to see how the earnings look when they come out with the second quarter report. Based on what I have seen I expect them to have a good size drop. Maybe the author of the column enjoys his Budweiser beer?
Cars
If you have noticed there seems to be more cars on the road, you would be correct. For the first quarter of this year Americans drove their cars 752 billion miles. For comparison, the record of 753 billion miles was back in 2019.
Global Inflation
We may have our inflation problems here in the US, which have been improving, but imagine a situation like this. The central bank of Argentina just set their interest rate at 97%. This was done to avoid devaluation because as of April inflation had an annual rate of 107%. This is why it is so important to keep inflation from getting out of hand.
Freight Rates
At Wilsey Asset Management we have continued to watch items that could help reduce inflation. One of those has been the cost of shipping. The average daily freight rates from Asia to the US West Coast are now around $1,500 per 40-foot container which is a huge drop from $14,000 a year ago and well below the peak in late 2021 of nearly $20,000 per 40-foot container. I remember it seems not too long-ago container ships were sitting off the coast of Long Beach because the ports were too crowded. In the first quarter of 2023 approximately 1.74 million import containers were unloaded which was a 32% decline from 12 months earlier. This could be impacted by fuel and labor costs being higher than before. The ship operators have already begun to cancel some vessels, and this could cause shortages of certain items in the months to come, which is not what we want.
Apple
Apple has entered into a new lower margin financial business and earning 30% off the app store sales it receives from games, music and video revenue may be peaking. You can now do a deposit through your Apple wallet of $250,000 that earns 4.15% in a money market. This is mostly done through Goldman Sachs with Apple putting its name on it. They also have started doing buy now, pay later options also known as BNPL and are competing with companies like PayPal and Affirm. Splitting the revenue and returns with Goldman Sachs tells me the returns on this are likely very low. At the current time any revenues and profits will be a drop in the bucket compared to the $96 billion in income Apple is expecting this year, but it shows me two things. First, this will be a small distraction for Apple and second it could turn out to be a money loser.
Annual Inflation
I was a little disappointed with the Personal Consumption Expenditures (PCE) index which showed annual inflation of 4.4% on a total basis and 4.7% on a core basis. This is the Fed's preferred gauge of inflation and shows a gain compared to the prior month when PCE showed a gain of 4.2% and core PCE showed a gain of 4.6%. This is still substantially higher than the Fed's 2% target. Even with the slight acceleration in the month, I still believe the Fed should hold off in June on another rate hike as other indicators have shown signs of inflation easing further. We know that month to month data can be volatile, and an over aggressive hiking cycle could push us into a deeper recession. I believe it would be prudent to give it some time to see how the rate hikes have impacted the economy as they do have a lagged effect.