Ho Hum Markets - Your Money May 12th, 2023
Posted by Steve Bokor
The clock is ticking down as politicians dig in their heels on critical socioeconomic sides of the fence. The democrats continue to argue for more spending on social programs that only heap more debt onto an already dangerously high pile of IOU’s that arguably can never be repaid. But with interest rates at dangerously high levels, credit has been sucked out of the monetary system at near unprecedented rates leaving an ever-growing mound of bankruptcies in its wake. Mid cap bank failures are just another symptom of the problem, but in this case, destructive short selling is accelerating the transfer of credit from Main Street to Wall Street. That is not good for the economy in our opinion. We also note the Dow turned negative for the year, and the TSX is only up 5%.
And while mainstream Republicans are on the right track to curb government deficits, their party seems to be governed by alt right extremists willing to set fire to the whole system. Again, our opinion only. In the meantime, the best guestimate is the US Government runs out of money the first week of June and without a deal, the default could cause financial markets to quickly sewer and in a worse case scenario, the rating agencies downgrade the US debt by another notch. You may recall that Moody’s downgraded Greek Debt by three notches back in 2011. Losing AA status could see interest costs rise across the whole spectrum and would likely lead to a widening of high yield spreads, that will in turn reduce the profitability of corporations and add another layer of costs to State and Municipal bond issuance. Cuts will have to be made, likely resulting in reduced services and job losses.
Ok enough bad news, Corporate America continues to generate acceptable profits to support their current stock prices absent a panic to the exits if a default occurs. Remember capital tends to look for the best risk adjusted returns but during times of stress, like the Covid scare of 2020, all bets are off. For this reason, we are either high grading our positions to larger capitalized companies (it is why we have seen the likes of Microsoft, Apple and Alphabet aka Google moving higher) or carrying higher levels of money market and cash. In fact, we see the looming crisis as an opportunity and we are creating a growing list of names that should they fall, then there will be a “Black Friday/Boxing Day” sale in June.
We also continue to scratch our heads over commodity prices. Yes, China growth is coming in slower than anticipated but if any economy can engineer a recovery, its that Asian nation run by a not so benevolent dictator. In the case of oil, we have a massive dislocation from Russia dumping millions of barrels to any buyer that can take delivery no questions asked. Word on the street is India is the number 2 customer, buying boat loads at fire sale prices, refining it, and moving out distilled products at margins we can only dream of. Call me crazy, but when the music finally stops, those foreign oil companies (that pay little to no carbon taxes), will take some of those profits and start buying US and Canadian energy companies, at prices well above the rates our investors will be willing to pay. It is another reason why we believe we have a secular bull market in energy.
Turning to next week, a little over 900 companies will be reporting with retailers at the top of the list (Walmart, Target, Home Depot, Canada Goose) along with some tech names thrown in for good measure (Applied Materials, Take-Two Interactive). Plus, in Canada, close to 200 will report.
Happy trading and Stay Safe.
Steve Bokor and the Ocean Wealth Team
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