Today’s CPI number shows cooling inflation… the latest market development Louis is eyeing with concern… Louis takes the Inflation Reduction Act to task… meme stocks are back
Inflation is officially down.This morning, we learned that the headline Consumer Price Index number for July rose 8.5% year-over-year. This is down from 9.1% last month, and also below the forecast of 8.7%.If we strip out food and energy prices, so called “core” inflation, it’s also down. That number came in at 5.9%, compared with its estimate of 6.1%.Sure, these numbers remain high, but the shift in direction is good news. We’re moving in the right direction.On the “not quite good news” front, we learned that the food index rose 10.9% year-over-year. That’s the fastest pace since May of 1979. Meanwhile, shelter costs continued rising, up 5.7% year-over-year.Also, real wages (meaning adjusted for inflation) rose 0.5% on the month. On one hand, this is positive news. It’s a real increase in buying power for American workers.On the other hand, wage inflation isn’t what the Fed wants to see. It’s a contributor to upward pricing pressure in the economy.Bottom-line – we’re not going to go so far as saying that inflation has officially peaked. Back in the 1970s, officials proclaimed we’d conquered inflation a handful of times, only for it to spike higher in future months and quarters.But we’re encouraged.It would be one thing for the numbers to have simply come in lower than last month. But the fact that they also came in lower than estimates is great news.We don’t know what’s coming, but let’s take the win for now.Related to this, we now face a new question: “Will today’s CPI print mean the Fed slows down rate hikes at its next meeting?”There’s no Fed meeting this month. The next one comes in late September.However, the 2022 Economic Policy Symposium in Jackson Hole will be held on August 25-27. We’ll be listening for hints from Federal Reserve Chairman Jerome Powell.
Meanwhile, legendary investor Louis Navellier is growing cautious about one aspect of the market looking forward
For newer Digest readers, Louis is one of the most respected, veteran quantitative traders in the entire investment community.For decades, he has used computers and algorithms to help generate superior market results. And today, Louis is looking at some numbers that are giving him pause.To understand what’s happening, let’s jump into Louis’ Accelerated Profits podcast from earlier this week:
In the wake of Friday’s payroll report, we saw a big rise in Treasury yields. So, that means the Fed is back on target to increase rates by 75-basis-points on September 21st.I personally think that will be the last rate increase because they do not want to increase rates going into November.But the problem, as I’ve mentioned many times – I’m watching the analyst community – and the analysts are now trimming estimates.So, no matter how relieved everybody was that we’ve had a bigger earnings announcement season with a lot of companies beating, the analyst community is now becoming more cautious.You’re swimming upstream if you fight the analyst community.So, if they start to trim estimates in certain stocks, I start to sell.
As we’ve pointed out here in the Digest, history has shown that analysts are often overly bullish on their longer-term earnings forecasts
Those overestimates range from 10% to 25%.If this dynamic is beginning to play out again, stocks will come under pressure as prices recalibrate to dampened estimates, despite the market euphoria as I write on Wednesday.It’s worth noting that Louis isn’t the only analyst concerned here.Citi’s chief global equity strategist, Robert Buckland, is worried that analysts have been too bullish.From yesterday on Investing.com:
Analysts have a tendency to be late with recognizing the bear market, notes Buckland.“Instead of turning cautious, they turn even more bullish. Even though they are starting to revise down earnings forecasts, falling share prices and cheapening valuations keep them positive. They do eventually turn more cautious as earnings forecasts fall further, but it is a slow process. It feels like we might be at that point right now,” the strategist added.
Here’s Louis’ bottom-line:
We’ve had a good earnings announcement season but the analysts are cutting estimates, so I am a net-seller here.I have pockets of cash building in some of my accounts.I’m not trying to freak anybody out or scare you. I just want you to know what’s going on…We’re going to get more cautious and careful here. This is a notable shift from Louis. We’ll keep you updated as his market views evolve.
This is a notable shift from Louis. We’ll keep you updated as his market views evolve.
Are you excited about relief for your wallet courtesy of the Inflation Reduction Act? Don’t be, says Louis
In yesterday’s Digest, we profiled the Inflation Reduction Act, which passed the Senate on Sunday and is likely to pass the House this Friday.We looked at specific sectors and stocks that are likely to be winners and losers from this bill.In Louis’ podcast, he chimed in here, noting one big “loser” which you’ll find rather interesting…You.Back to Louis:
There seems to be some celebration on this Inflation Reduction Act. That is grossly misplaced.What the Inflation Reduction Act does is it increases the taxes on coal, crude oil, and natural gas production. So, that’s going to increase utility bills.And you have to understand that utility companies have to maintain a certain operating margin. So, when their costs go up, they’re going to pass that on to you in electric rates.So, that’s a big one.
But that’s not the only way the Inflation Reduction Act is going to hit your wallet.Louis explains the Act will also regulate carbon. The Supreme Court basically deregulated carbon dioxide in a ruling against the EPA. But Congress is now sidestepping that with carbon-dioxide regulation.The tie-in to your wallet comes through the connection to the fertilizer industry. To illustrate, Louis points toward farming in the Netherlands and Canada, where the government is pushing fertilizer companies to move to organic fertilizer rather than chemical fertilizer. The idea is that organic fertilizer produces less carbon dioxide.Unfortunately, organic fertilizer isn’t as efficient, so agricultural production drops.This is why farmers have been protesting in the Netherlands and why Canadian farmers are gearing up to fight Canadian Prime Minister Justin Trudeau.Back to Louis:
The net result of this could be mass starvation because you’re going to cut crop yields.
Hopefully, it won’t come to that. But with less agricultural output, yet the same demand, Econ 101 tells us that prices will be moving higher.Here’s Louis’ final take on the bill:
So, let’s just go back and look at this Inflation Reduction Act.Your utility bills are going to go up because of higher taxes on coal and natural gas. And your food bills are going to go up because they’re going to mess with the fertilizer industry.
Not the best news when we’re already dealing with high prices across the board.
Finally, don’t look now, but meme-stock craziness is back
On Monday, Bed Bath & Beyond stock exploded 40% on record volume. That came after a 30% spike last Friday.Yesterday, it was up 13% premarket before reversing during the day, losing 14%.Meanwhile, GameStop has been surging and was halted on Monday for too much volatility. Plus, in recent days, we’ve seen big rallies from AMC Entertainment, Express, Ovderstock.com, Vroom, Waitr Holdings, and Wayfair.What is happening?From The Wall Street Journal:
The most recent bout of excitement surrounding meme stocks was largely kickstarted last week, after AMC said it plans to issue a dividend to all common shareholders in the form of preferred shares. The exciting thing about that, to many individual investors?AMC applied to list the preferred equity units on the New York Stock Exchange under the symbol “APE,” a nickname for particularly enthusiastic online traders.
We could write this off as a small group of Reddit-traders looking to make a quick buck, but let’s try to view this through a different lens
Is it possible that this craziness is the easiest-to-see evidence of bullish excess that’s been creeping back into the market? If so, what might that mean about whether the bear market is over and we’re beyond the low-point?From CNBC:
There is also little sign of capitulation from investors, which tends to be a sign that the market has bottomed out and will start to rally again.Stocks have seen $180 billion in equity inflows year to date, while $340 billion has been plowed into exchange-traded funds, according to Bank of America.So far in the second half of 2022, BofA clients have been net buyers – not sellers – of U.S. equities.This is important because U.S. household investors are one of the biggest parts of the equity market, representing $38 trillion in assets, or about 52%.Previously, the last three market lows occurred one to two quarters after this cohort starts to sell.
I’ll add that the S&P’s RSI number is approaching “overbought” conditions. (RSI is an indicator that shows whether an index or stock is overbought or oversold.)As you can see below, the market rally since June has pushed the RSI reading to nearly 70, which is the line-in-the-sand representing overbought conditions.
Last week in the Digest, we looked at whether the recent bullishness might, in fact, be a bear-market rally.Well, on one hand, the resurgence of Reddit traders piling into meme stocks and U.S. households piling into the broad market suggests we might not have seen the ultimate low.Add to that the analysts who are finally beginning to lower their earnings estimates, resulting in market legend Louis Navellier growing cautious, and it’s got our attention.On the other hand, today’s lower CPI print could jumpstart a relief-rally that shifts sentiment, resulting in a broader sea-change in the market.Lots of forces pushing and pulling on today’s market. We’ll keep you up to speed with our expert analysts’ latest thoughts here in the Digests.Have a good evening,Jeff Remsburg
