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Back to '99

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The Days Ahead: Fed meeting and presser.

Slower retail sales, slow growth in job openings and better claims. Something for the bulls and bears. Oh, and Apple announced new stuff which left the stock price unchanged. Nestle bought Blue Bottle coffee, a local company for us. The price values the company at $700m against a total of only $115m in raised capital over five years. Google, Jared Leto and Bono were all investors. It’s a sign that big companies are desperate for new and innovative ideas and will get growth where they can find it. Full disclosure, I own NSRGY. But back to work.

1. Well that took long enough.

We passed a rather dismal milestone last week. The Census Bureau announced that median household income returned to the same level it was in 1999. That's right. It took 17 years to make it back to where we were. Here's the chart:

Median household income is $59,039 and up from $58,665 in 1999, a laughable compound growth rate of 0.03%. That's the median so it would have been pulled up a bit by inequality at the top end. The 95th percentile out earned the median by 3.8x against 2.7x 50 years ago. Other fun facts show that male head of households earned 40% more than female head of households. And the poverty rate fell to 12.7% or 41m Americans.

What the household income doesn't tell us is how the earners got there. So, yes, $59,000 is a new high but did it take more earners working longer hours to get there? Our guess is yes, given the green line of real hourly earnings growth has pretty much stalled out for the last 10 years. And, while we’re at it, if prices go down 5% and your earnings stay the same, the above Census Bureau methodology, says “Congratulations, your real income just rose 5%.” It did. But did it? We talked about this a few weeks ago here. And while, we’re still at it, they don't adjust for size of household. Same income with three people at home isn’t the same as with four. Now, we admit, that cuts both ways and our guess is that the average household size has dropped.

Why are we going on about this? Because consumers are stretched and real incomes are barely moving, despite known labor shortages. It's tough to see the economy moving to a 3% growth rate with household income at these levels. It’s just possible that a tax cut may help but as most of the talk is about corporate, not personal tax rates, it seems unlikely.

2. Low inflation again.

The CPI came out and, while up on the monthly rate, is still only 1.9%, and for the core (so less energy and food) up 1.7%. So, no worries there. Here’s the chart:

Gasoline costs skyrocketed, up 10%. That was mostly due to Havey but as you can see, it’s a wildly volatile price point, which is why the Fed ignores it for monetary policy. Still, it’s 7% of the CPI weighting so people will feel it. Housing costs (OER) were also up 3.3% and they're the biggest slice of the CPI by far at 24%.

Finally, wireless costs fell by 13% YOY mainly because of Verizon’s unlimited plan. This brings us into the world of “hedonic adjustments.” Here’s the full explanation but we don't think the BLS goes far enough. So, which of these is a price increase?

1. Your wireless bill is $75 a month. You get 1GB of data. It goes to $100.
2. Your wireless bill is $75 a month. You get unlimited data. It goes to $100.

Your pocket says both but the BLS says only the first because you get so much more quality in the second. They'll go further and say it’s a price decrease, which is exactly what’s going on in that lower graph. But for us, the fact that households end up paying more for a basic good means they have less for other things. And if the adjustment is plain wrong, then inflation is over or understated. There are plenty of conspiracy theories that inflation is deliberately understated and here's one of the calmer ones.

We won't go that far except to say that inflation is on a low and steady path. We don't expect big increases and the Fed may stay its hand even beyond December if we continue to see inflation below 1.5%.

3. Cash Overflow.

An interesting article came up with Microsoft last week. Microsoft has a balance sheet of $240bn of which $133bn is in U.S. Treasuries. Some of that is non-repatriated earnings that build-up because bringing them back to the U.S. triggers a tax liability. But man, that’s a lot and makes them a bigger Treasury holder than all but 12 countries. Apple, Cisco and Google (all right, Alphabet) have another $280bn.

We looked at the market numbers and here they are:

That's the market cap of the S&P 500, around $23 trillion, and the cash percent. It climbed rapidly after the crash and seems to have plateaued at 8% of market cap. It’s around 25% of the S&P 500 equity (the bit that's left over in the balance sheet once all liabilities are paid).

So what? Well i) if the corporation tax cuts comes, that potentially frees a lot of money for shareholders or capex ii) it’s some buffer against a downturn or rising rates (although about 10 tech companies account for 25% of the cash) and iii) it provides a lot of support for Treasuries.

Bottom Line:

We expect stocks to stay well bid… again. Talk of tax cuts help and the dollar will help earnings. The Fed will probably sound dovish which will keep Treasuries in their 2.15% to 2.25% very tight range.


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Tech lobbying (they're good)

Day in the life of a backpack corgi

Electric vehicles “unaffordable and unachievable


--Christian Thwaites, Brouwer & Janachowski, LLC

(again, I hold NSRGY)

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All charts from Factset unless otherwise noted.