AM Brew, Jun 22nd 2022

For the rest of this week and all of next week, these posts will be haphazard, as not only are we moving, but moving to one place, then switching countries the next day. Sorry for any inconvenience.

LEN reported Q2 yesterday and the numbers were incredibly good. We don't quite understand how a growth company can report quarterly earnings (excluding non-recurring items) of $4.69 and be trading in the mid-60s. LEN also stated that Q3 gross margins would exceed 28%, which is a lot higher than anything it achieved in the 10 quarters ending Feb 2022. Both the pricing and demand environment is good for homebuilders - these are growth companies priced as cyclicals. LEN, PHM are interesting at these valuations. Very interesting.

It seems like yesterday's risk on is now in reverse: stock futures are trading down in the -1.75% to -2% range as of 9:30 am London time. Is crypto now leading the market? Its starting to look that way. Think about that, crypto leading global stock markets - scary? Yes. It does seem that, given the current economic news, that the S&P500 wants to trade in a range around 3700. Our conviction is not high on this observation.

The Japanese Yen topped Y136 per $ for the first time in a quarter century. Whatever the past 12 years taught us, post financial crisis, is unlikely to be very helpful going forward. We were taught that rates are zero, the world is globalized with excess capacity, inflation is in check with excess capacity and technology keeping a lid on prices, and we were conditioned to buy dips as the stock market was the only game in town.

Keep an eye on oil prices. Oil has been weak the past few trading days, anticipating a recession. That is the best gift for the economic world - as oil goes, so do the markets, with inverse correlation. If oil can stay weak, the Fed can declare victory and the markets can stop dropping. If oil's weakness only lasts a few weeks, then Houston, we have a problem.

Cobalt prices have slid over 10% due to lack of Chinese demand. These Chinese lockdowns do have impact:

We are bullish on ALB, but maybe Lithium is next....

Another negative item on the inflation front is the recent victories by local Amazon and now Apple unions. This may be good for the country, but its not good for inflation or corporate margins - thus its not good for stocks. Even Starbucks, which has treated labor famously, is having union issues. Expect unions to continue to gain traction, which will almost certainly make companies less efficient and less profitable. As long as quality can stay strong, this is not a problem, but we have never seen any evidence that unions are positively correlated with quality. The top heavy wealth equation is not good, so the advent of unions is good in that respect, but as investors, we must vote with our pocketbooks. Be wary investing in companies that are unionizing. The union's purpose is to provide power against companies and transfer margins towards labor.

Bloomberg had a really cool table showing how cheap global stock markets are:

The numbers look a bit aggressive to us - we don't think the USA has 80% of the stocks cheaper than pre-pandemic ( we think of pre-pandemic as that February 2020 mini bubble if you remember that ). That said, markets are looking a lot cheaper, especially foreign markets.

Quality has gotten a lot cheaper, look at the median quintile spreads - it shows that the expensive stocks are not much more than the cheap - now is a good time to buy Chanel, not Coach:

Even though we are suspect of the first chart, great report by Bloomberg. Bloomberg is a great service and worth every cent for subscribers - we are fans.

Bloomberg is also reporting that small cap is cheap. If you get into small, micro or nano cap stocks, we suggest using a 10% stop loss. Some of these things can go down 80% or more, especially the ones without earnings:

In a bit of a surprise, Key Bank is reporting that La-Z-Boy's sales remain strong. The stock is up 9% pre-market. We thought that furniture was weaker.