Some wide-ranging action yesterday came out of a couple behemoths. First up was Tesla with its investor day and subsequent 7% drop in value. As noted last week, Tesla was up 60%+ so far in 2023, pricing in a lot of good news, but Elon Musk’s widely followed presentation did not offer enough fodder for the bulls. In the EV space, a continued introduction of new products is what increases sales over the long haul. Standing steady or relying on yesteryear’s models when the competition heats up is not going to goose revenues. To be clear, what Musk has done over the years is astonishing. It is one thing to design a sleek vehicle with industry leading software and battery capabilities, but it is another to get the manufacturing side correct. Rivian, Lucid and other start-ups can barely get workable vehicles out the door. Rivian delivered 20,000 cars last year. Lucid produced just 7,100. Tesla is delivering over 1.25 million cars which should double in two years. Even if they hit those targets, the stock trades for 35x earnings. Without another new hot product announcement, it will be difficult to keep growing that quickly. Investors were clamoring for more, helping deflate a little overhype in Tesla stock. At a $600 billion valuation, this does drive some index movement, but Bostic’s somewhat dovish take fueled a minor relief rally.
On the other end of the spectrum, Salesforce.com# reported stellar results, which primarily focused on another market hot point: cost cutting and improving margins. CEO Mark Benioff channeled his inner Elon Musk, noting more work can be done on the employment side. Twitter laid off 75% of its workforce once Musk took over and barely missed a beat. Cost cutting measures are what investors want, even if it is bad for the overall economy. Expect more layoffs coming for Salesforce employees. This is one of the 30 stocks that make up the Dow Jones Industrial Average, having replaced Exxon Mobil back in 2020. Salesforce added 130 points to the Dow, which finished +340. Even with a 12% jump yesterday, Salesforce is down 31% since joining the DJIA. Exxon fared much better since being kicked out of the Dow, nearly tripling in value.
There is not much to add to Jim Meyer’s and my previous letters. Stocks are in a holding pattern for the moment. Fed officials are not yet seeing results from the largest rate increase cycle in decades. Consumers are still spending pent up savings. Jobs are plentiful. GDP is higher than many expected. An inverted yield curve gives caution to soft landing scenarios. Stocks are fairly/fully valued. Interest rates are stubbornly rising again. Risk / reward is neutral at best for the moment. Stock selection is critical. Range-bound action will continue until economic data breaks one way or the other.
With that, I thought I could relay a hodge podge of interesting data points that pinpoint how unusual these times are for bulls and bears alike:
- Some housing stats:
o Three years ago, a 30-year mortgage rate was 3.5% and the average new home price was $384k. Today, mortgages are back above 7% and the average new home costs $475k. End result, down payments are $20k higher and the monthly mortgage cost is up 70%, from $1,400 to $2,400. This does not include any tax, insurance, utility, repair or maintenance cost increase.
o However, prices are getting better. The average price of a new home in the U.S. is already down ~12% from July’s peak, and has dropped for 7 straight months. The last housing bubble preceding the Great Financial Crisis saw prices drop ~25%+ nationally.
o Used homes are holding up much better, only down ~5% nationally with Seattle & San Francisco leading the way with ~12% drops.
o Mortgage demand is at a 28-year low.
o On the positive side, since existing home owners do not want to move and lose their sub 4% mortgages, homebuilders have the market to themselves. Most homebuilding stocks are within spitting distance of new all-time highs.
o Average mortgage rates by decade: 70’s: 8.9%, 80’s: 12.7%, 90’s: 8.1%, 00’s: 6.3%, 10’s: 4.1%, 20’s: 3.9%. Today: over 7%.
- It is one thing for the Fed to be raising interest rates, but “inflation is always and everywhere a monetary phenomenon.” Year-over-year increases in Money Supply, or M2, were over 25% during the pandemic, far outpacing previous records during the 70’s that did not even eclipse 15%. Today, M2 increases are now negative for the first time since the early 90’s and below any metric on record.
- Some scary stats:
o A record 35% of U.S. adults have more credit card debt than savings (not including home values)
o Credit card debt is up 15% over the past year and 7% in just one quarter. When no one needs credit, rates are low. Now that some require it to put food on the table, costs are spiking:
- o Having $1 million in T-Bills last year generated $6k in implied interest. Today, it is up to $51k. Apply that to $31 trillion in national debt and you are talking real money.
o Credit card interest rates are handily above 20% now, new auto loans averaging 8%, used car loans are double digits.
- It has been commonplace to note how bloated inventories are across the retail landscape, yet I am not seeing massive discounts everywhere. While it is true that the “dollar value” of retail inventories are at record highs, if one backs out inflation, we are still below pre-pandemic levels. The supply chain still needs reparation. Inventories are not as bloated as they may seem.
• For the first time since the Y2K bubble popped, a 6-month T-Bill has a yield above that of a 60/40 balanced portfolio. There is more income to be had sitting in a money-market fund than buying a balanced portfolio of stocks and bonds.
• On the international front and a still emerging economy, India consumes 6 times the energy of the UK. However, the population differential is massive and only equates to two light bulbs per person. To consume as much per person in the U.S., India needs 10 times the amount of energy production. Surely there is money to be made there as they try to build out their infrastructure and manufacturing facilities.
• Pandemic SNAP (supplemental nutrition assistance program) benefits ended this week. For those able to do so, help out your local food banks.
• Three months ago, many expected the Fed to stop raising rates in January and odds of rates rising above 5.5% were ZERO. Today, that is turning into the base case. There is a 40% chance of rates being increased in July to 5.75%. End result, do not believe Fed officials’ attempts to forecast.
• The entire U.S. Treasury yield curve, from 1 month to 30 years, is now all above 4%. The last time this happened was the aforementioned 2007 period before the housing bust.
• Office landlords are defaulting on their loans. 17% of U.S. offices are vacant, with another 4% available for sublease. Nearly half of all maturing debt in 2023 carries a variable rate. Refinancing will be very expensive. There is $92B due in 2023 and $58B due next year.
• Bad news priced in? Carvana, the used car retailer and supposed future for auto sales, had a market cap of over $31B in August of 2021. The company has now dropped to a $1B valuation, a 97% correction.
• Average U.S. gas prices are now 28 cents below what they were a year ago. Barring a sudden spike, the year-over-year declines will start to accelerate. This 8% drop will be a nice help in lowering inflation statistics.
• Prior to the Great Financial Crisis, the Fed started raising rates in 2004. It took 2 years of 25bps increments before housing was finally impacted enough for the Fed to cut rates in 2007. We have not even gone 1 year since this Fed rate hike cycle started. It takes time before things start to slow!
Camila Cabello, artist of one of my daughter’s favorite lyrics, “Havana ooh na-na”, turns 26 today. Basketball star and Sixers #1 concern in the playoffs, Jayson Tatum, is now 25. Chef Buddy Valastro is 46. Actresses Julie Bowen and Jessica Biel are turning 53 and 41. Many have likely seen a Flex Seal commercial. Its founder and spokesman Phil Swift is 62.
James Vogt, 610-260-2214