Munson on Jobs Report: Two effects on portfolios

The first adventure was driving to work at 4am after a major snow storm, then we got to the real fireworks on TV: breaking down the two effects of the disappointing jobs report.

ADP printed -300k jobs while the estimates were closer to +200K - that's half a million less jobs. Okay, blame Omicron, but shouldn't the estimates taken that into account? I don't know, and like to see the revised numbers next month. And yes, December numbers were revised down a bit.

First off, I would speculate this will settle down those voices talking up a 50bps rate hike in March - you really think the Fed is going to move that fast? What about after these jobs numbers??? We will see. Second, some would suggest the weak numbers mean a return to long duration assets that do well when rates are going down and growth is hard to find. I say that's wishful thinking on top of Facebook losing 20% of it's value last night.

My point today was to remind investors that just because cyclicals have done well recently as rates have risen - it can keep doing well if inflation persists and the Fed hikes for a while. And just because a pricy tech firm corrects 20%, it can get a lot worse - just check out a chart of CSCO from 2000-2002 and you will get my drift.

Post-Correction, pre-Fed hike: Munson talks bitcoin, gold, rates

Now that we are past the initial correction and high volatility, we get this reflex rally and people want to know what's next between now and the Fed's March meeting. I don't know any more than you do.

What we do know is that the Fed is pretty clear they are raising rates, but I suggest 50 bps is wishful thinking, and the day the jobs report confirmed that.

One of the questions that gets asked is what does well when rates rise? Over the last 50 years gold has put up some decent numbers starting at the first hike then going out 24 months. Time will tell if this pattern continues.

Also, I put the kibosh on the notion BItcoin as an inflation hedge - seems to me it's just another risk asset that sometimes front runs the market by 4-6 weeks. I wouldn't put much thought into patterns on an asset class this new.

Maria asks Lee Munson about bank stocks

A big chunk of of the value/cyclical arena are bank stocks. As on of the few sectors still seen as "cheap," what would cause them to continue to rise - their performance has been on fire, reminding investors that there is upside to things like valuations, earnings growth, and reality. I know math is hard, but do you really want to pay 10-15x sales for software companies when rates are rising?

If you don't know what I'm talking about you are too young to remember 21 years ago which was the last time tech valuations were this high going into rate hikes. It's even worse today - something I didn't think I would see in my lifetime.

Banks stocks have a few things going for them in the face of inflation and higher rates. They make money off the net interest margins - which go up when the yield curve steepens - a fancy way of saying long term rates are higher than short term rates. Remember 2019 when that wasn't the case? Then you have the potential of more borrowing as retail consumers all the way up to small and mid size firms start to borrow. Right now, people have tons of cash on hand and many didn't have to pay rent for months. Many firms got PPP loans and are flush with cash. That is going to start to melt away as prices rise higher than wages or profits - causing lots of people to get reacquainted with their bankers.

Don't over think it. Review history. Do the math. Have the courage of your conviction. Never be afraid to admit things have changed. But also realize the market will take it's sweet time to unfold and weird things will always happen that will shake your confidence. That's why markets are risky. You can never have the arrogance of certainty.

Lee Munson Discusses GE's Legacy of Shareholder Destruction

I could unpack this for hours. While initially I was set to discuss the all time highs on Bitcoin and the implications to markets, at the last minute the topic was shifted to the breaking news of GE's breakup into three easy pieces. Of course I jumped at the opportunity to let it bleed.

GE has destroyed shareholder capital - including the thousands of loyal GE employees of whom many own significant amount of GE shares in their retirement plans - over the last 21 years. Don't tell me Jeff Immelt was alone in wrecking the firm. Jack Welsh made GE at one point the most valuable company in the world - yet it was build on financial engineering and not the industrial roots of GE. And it wasn't sustainable. While Immelt clearly didn't get the job done, the reliance on financial earnings for over half the earnings didn't translate to a cash printing machine that anyone could run.

So in that sense, no legacy was created, no legacy was undone. The larger concept here is that corporations are made of people. Like people they have a life span - around 25 years. Just ask Jeff Bezos. One day Amazon will look like Sears, even if that day is many years into the future. While you get rich by concentrating wealth, you preserve it by diversification.

When a magic CEO has a solid 20 year track record of hitting it out of the park, maybe leave with them. You can always go back to the well, as the resurgence in Microsoft post dot.com crash to Cloud dominator has taught me over the last 20 years. But it was a painful drawdown between Gates and Nadella.

Maria asks Munson the theme of Q4

It's the start of Q4, and Maria wants to know what I think the theme will be for earnings season. Simple, supply chains. For great firms, it's a continuation of the sustained demand and ability to pass on costs to customers. For bad firms, it's an excuse for their poor performance. My point is simple, increased demand is not a summertime problem, it's a multi-year unfolding.

I talk inflation, quickly

The interview got cut short, which happens all the time with live TV, but you get the picture. People are concerned about inflation and that perception, that feedback loop can at times be more powerful than the underlying economics.

Maria asks Lee about oil terror premium and heroin trade

What does the price of opium in Afghanistan have to do with global trade? On the surface not much. But dig deeper and discover the dynamics on how Iran gets cash to keep going, how the Taliban gets oil to keep functioning, and how China conspires against them while saying they support these evil empires.

While it's all fascinating, there is not trade here. Oil supply will soon move on from the short term narrative and start to fall in line with the demand from industrial supply - remember that most foundries and factories rely on oil and natural gas for power. Increased industrial demand will provide the base demand even as alternative fuels grow.

Nicole asks Lee for his crib notes

We know what they want - my internal investment notes. What am I looking to buy or add to? What is the most beat up that I love? If I had a gun to my head and was forced to speculate or gamble - what would I look at?

The key thing to remember is that a globally diversified stock and bond portfolio is not something you trade in and out of. You plant the seed, water it, take care of it, and make small adjustments to keep it growing. On top of that, you have to add stinky stuff to the soil from time to time in order to harvest sweet smelling profits. That is my lesson for the day.

Munson On The Correction That Wasn't

I got a call early in the morning, asking me if I wanted to be on. Of course, I checked my calendar and said yes. The open that day (July 8th) was bad. It was looking like the start of something interesting, but that faded fast. Like the last few months, we have seen a few bad days like May 12th and June 18th.

Here is my bottom line: bad days are normal. For me, unless I'm just looking to add some fresh cash (think dollar cost averaging in a long term portfolio over time) - I really need to see a few more days in a row, or a proper 10% correction. And no, it doesn't count if that lasts for 5 minutes, I want to see the close look ugly. Why? Because then you can ask yourself if this is a time to rebalance your portfolio, using volatility as your friend.

If you know what you want to own longer term, use 10% off sales to your advantage. However, that Thursday was another tease, because the market does not make anything easy.

Munson Is Asked: Is Wall Street Rigged?

I was asked to hang out with Steve Clemons and Richard Vague to talk about markets from high level. Specifically, is Wall Street Rigged? Well, yes, it’s rigged, but what can consumers to do prevent getting ripped off? While I literally wrote the book called Rigged Money, Richard has decades of insight and currently the Pennsylvania State Secretary of Banking and Securities.

What I really want to talk about was what we talked about off air. After the interview Richard made the comment to me that, despite my suggestion that investors should think more like institutional investors rather than retail gamblers, institutions get ripped off on a scale inconceivable compared to retail investors. You know - he’s right! In my defense, I suggested that the bulk of individual investors don’t know this, and assume that large pension funds are run by competent managers. I like to point out Calpers or very large pensions that have rid themselves of expensive underperforming hedge funds and focus on low cost index funds and reasonable strategies. Yet, I can only point to a handful that really run pensions well. In short, I was telling people to invest like they think pension funds invest, not how most actually do it. Crazy, right? And what I mean by all of this is to have a structure, a plan, and not wing it. Looking at the fundamentals of investing and not simply buying whatever your neighbor is doing for fear of missing out should be the focus. So, let us continue to lie to ourselves and believe that major pension funds make thoughtful decisions based on hard work, math, and a little bit of luck - because the truth is, an institutional investor is simply a retail investor hiding in a blue wool suit who expects a lobster dinner from a Wall Street wholesaler. . . hardly a setup for success.