Stocks went on a roller coaster ride yesterday after the government released the latest CPI report that showed inflation slightly higher than forecast. The odds of a first rate cut in March declined slightly. Immediately after the release, stocks fell and bond yields rose. But as Pavlovian instincts gave way to rational reason, the report really changed nothing. A March rate cut is still possible if trends continue. The report had no impact on future earnings growth, and bond yields settled back to where they started the day. 10-year Treasury yields have now spent a couple of weeks meandering around the 4% mark, exactly where they are this morning.
Yesterday was also the debut of 11 bitcoin ETFs. These new funds will buy, sell and hold bitcoin in the spot market. Prior funds were inefficient limited to buying bitcoin futures. The likelihood these funds would be approved had sparked a huge rally sending the price of bitcoin up well over 50% since last fall. By law, the SEC was required to approve or disapprove these funds by Wednesday. Thus, there has been a focus on a January 11 introduction for months. Indeed, in initial trading bitcoin rose another 8% yesterday morning before giving those gains back by day’s end. As least for yesterday, the old saw buy the rumor, sell the news seemed apt.
The rationale for owning bitcoin hasn’t changed. Nor is the permanent value of bitcoin changed significantly by the introduction of these funds. For now, these funds can only buy bitcoin. Ethereum funds will have to wait for spring for approval. Funds for other variants of cryptocurrency don’t seem likely soon. Bitcoin is still not a currency despite its second syllable, nor can it be deemed a store of value given its price volatility. Yes, it has nefarious uses we all know about but those hardly justify its price today, yesterday or tomorrow. Blockchain technology, the backbone of all cryptocurrencies is important but doesn’t require bitcoin or any other form of cryptocurrency to work. Governments around the world use the dollar or gold as a store of value. Corporations park excess cash in Treasuries or bank accounts. In sum, bitcoin is primarily an instrument of speculation. There’s nothing wrong with that as long as one understands that bitcoin has no more intrinsic value than any other speculative medium including all the SPACs introduced in 2021. The one thing that has changed is reduced transaction costs. That alone might add a percentage point to the value of bitcoin. Is a bitcoin ETF safer? We’ll see over time. Perhaps the easier comparison is to look at the options of owning gold or a gold ETF. If you own gold directly, you either pay a premium if you own it in the form of a gold coin, or you have to pay to store it and assay it upon sale. The emergence of gold ETFs gave the value a brief pop. But over time, gold has followed its own path which lately has been far different than bitcoin. Like bitcoin, gold has limited commercial use (mostly jewelry and semiconductor wire) but it has served as a store of value for thousands of years. Anyway, if you want to speculate in bitcoin, do so knowing there is neither an intrinsic floor or ceiling to its value.
Today, marks the unofficial start of earnings season. We will start with some major banks plus Delta Airlines and United Healthcare#. Results from just a handful of companies won’t tell us much about the numbers that will cascade before us over the next few weeks. But the reaction to them, the matching of expectations to reality, will grab our attention. What investors will be looking for is commentary relative to the full year. The banks can offer a few hints. Obviously, they don’t know the future course of interest rates any better than we do, but they can give us clues on credit quality. Are defaults rising? They can give us guidance relative to loan demand. Finally, given a flattening yield curve, they can offer some commentary on net interest margins and their abilities to contain costs in what is likely to be a tough environment.
Delta will offer a different picture. In the rear-view mirror, air travel has been robust. Delta had great fourth quarter earnings. But the focus will be on bookings and expense control. Travel and leisure spending was through the roof in 2023. It is unlikely to be nearly as strong in 2024. But that doesn’t mean it will be bad. Information on booking trends and pricing will give investors real time hints as to what may lie ahead. As for the recent Max 9 midair incident, Delta doesn’t own any in its fleet.
United Healthcare’s numbers are out and are clearly disappointing. Earnings per share were below expectations. Even though the company reaffirmed 2024 guidance, the initial reaction was a decline of 5%. That could change in either direction after the conference call later this morning. Business is still strong with revenue growth well into the double- digit range. But, as always, the key is matching expectations to reality. Do estimates come down as a result of the Q4 miss? Or are the problems a one-off that won’t hinder long term valuations? Stay tuned.
Moving on, American led forces attacked Houthi positions in Yemen. That ignited a 4% rally in the price of oil, an immediate and obvious reaction. Is it the first sign of escalation or will the attacks in the Red Sea slow down? I have no answer other than to say any meaningful change in the price of oil matters economically. A one-day reaction doesn’t. So, once again we all have to stay tuned and hope that over the next few months military action in the Middle East deescalates.
Finally, it isn’t too early to begin to think about the FOMC meeting at the end of this month. Yesterday’s CPI numbers support the Fed’s case that a first cut in Fed Funds rates may not happen until late spring or early summer. Inflation is still receding. But getting from 6% to 4% is a lot easier than getting from 3% to 2%. Even assuming future moderation of shelter costs, a 40%+ component of core CPI, there are few signs that the 2% target will be achieved any time soon. That doesn’t mean some rate cuts aren’t in order. But the Fed is still talking 3 this year and markets are still expecting 6 or more. Both can’t be right. I doubt the January meeting will offer any meaningful guidance.
Today, Jeff Bezos turns 60 while Howard Stern turns 70. No reason they shouldn’t party together.
James M. Meyer, CFA 610-260-2220