Ka-Ching $ - Your Money April 14th, 2023
Posted by Steve Bokor
Not too hot, not too cold, just right. That would describe the economic stats that kept Wall Street on the sidelines last week. However, after much relief, two key inflation numbers showed inflation continues to drift lower. That helped stocks because it sets the stage for May 3rds rate decision. The best guess is for another ¼ point hike at which point, we believe there will be sufficient support to adopt a wait and see attitude. At least we hope that will be the case. We note Tiff Macklem deferred again this month, allowing Canadians to catch their economic breath.
Fortunately, next week, the most important stats will be in the housing sector and unless there are outsized misses, they will play a less important role in stock market activity.
In the meantime, Wall Street has turned its attention to corporate earnings. Today the big three reported better than expected numbers but all three provided guarded guidance and increased their loan loss provisions in anticipation of slowing growth.
JP Morgan also stated they saw “meaningful account opening” during last month’s banking crisis. If the Fed continues to raise interest rates beyond May, we believe “meaningful” will change to “Avalanche” as Main Street American Banks see a run on their deposit base to the safe haven uber banks. And even if it does not happen, we still feel, the loan books of midsized banks will be squeezed as lending conditions tighten up.
We note that Black Rock, the world’s largest asset manager saw a net decline in holdings. We don’t know for sure, but we imagine investors have pulled assets out of both bond and stock ETF’s and rolled into US Treasuries and Banker’s Notes, to ride rising short term rates. Charles Schwab reports on Monday and their numbers may foreshadow a growing trend of switching from on demand deposits to guaranteed money market instruments.
Either that or small customers will sit with what they have and Schwab will likely benefit from interest rate spreads on their balance sheet. The same could be said for Goldman Sachs and Bank of America which reports on Tuesday and Morgan Stanley on Wednesday. Ka-ching.
From there, 490 other companies report next week including some of the biggest bell weathers across most industries. Here is where things could get dicey. Rising interest rates are pinching consumers in the pocketbook, so as the numbers roll in, expect lower First Quarter profits. That in turn could put pressure on stock prices. Remember lower profits means stocks will be trading at a higher Price Earnings multiple and when you factor in a risk-free rate (90 day US Treasury Bills now yield 4.9%) that is a high hurdle for pension managers to justify their equity weights.
Turning to Canada, kudos again to Tiff Macklem for taking a wait and see approach to interest rates. Empirical studies show the full effects of interest rate changes take several quarters to unfold. Think about it. No one really notices the first couple of interest rate hikes when interest rates are down. Who cares about a couple of dollars here and a couple of dollars there that gradually disappear from your bank account and reappear on your credit card statement.
But the cumulative effects of month after month after month shortfalls, add up and all of a sudden spending habits change leading to a slowing economy. Obviously, that is the desired objective by central banker, so we take comfort in our Governor adopting a prudent approach.
In the meantime, we continue to believe Western Canada will lead Canada as the price of oil goes up leading to more exploration, production, pipelines, sales, and tax revenues on the exports. Oh, and as the natural gas pipeline is completed and we export LNG to countries around the world, it will reduce the consumption of coal and wood, both of which are hurting our environment.
Speaking of coal, we note Teck Resources (arguably one of the best managed mining companies in the world) is still in play as Glenore PLC tries to takeover the company. Fortunately, the company is still controlled by the Keevil family and unless the Swiss are prepared to pony up a lot more dough, they wont be stealing one B.C. crown jewels. Did I mention that Teck Corp produces mostly Metallurgical coal not thermal coal (the former is used to make steel, something the world economies constantly need) plus some of the best run copper mines. You know the material needed for all those electric vehicles governments want you to drive.
Well, that is it for now. Enjoy the sun while it lasts. It’s the weekend which means rain.
Happy trading and Stay safe.
Steve Bokor and the Ocean Wealth Team
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