Shed some positions & bought Mid Caps 220517

I took advantage of today’s rally to sell a few positions and reinvested the money (along with cash reserves) into a Mid Cap index ETF (SCHM, MDY, etc).

I’m still fully invested in the Market, and the move to Mid Caps is just a parking place until the money is allocated to specific stocks.  I think the Small Caps (which have been beaten up badly) still offer the best upside potential and I’m holding that position.  Mid Caps offer a “sweet spot” between the more volatile Small, and the Large Caps which will likely be more impacted by geopolitical events & currency fluctuations.

Today the following positions were closed out:

COHR

HST

KMI

SHEL

More selling…and buying to come.

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Has Copper (inflation) Peaked?

I view the current Market selloff as a Psychological Correction, rather than a Fundamental Correction.  The Market has crashed because investors are fearful of a recession, but economic conditions are relatively favorable and stock valuations are reasonable. 

The fear of recession is based on the premise that the FED will raise interest rates to calm inflation and at the same time kill the economy.  That’s not a forgone conclusion, just like it wasn’t when the same paranoia gripped the Market in 2018-2019.  [ Oct 2018 Podcast: https://www.wealthsteading.com/276 ]

Copper is an excellent barometer for the general economy and it looks like it might have peaked in March.  If inflation was rampant, copper would be moving higher, not lower.

If inflation is moderating, then the FED won’t have to raise rates to draconian levels.  The economy and Stock Market will function just fine.

My cynical crystal ball predicts a major economic resurgence sometime before the mid-term elections.

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Panicked?  Here’s what I’m telling my clients

The market has tumbled over the past couple weeks.  Here’s what I’m telling my clients:

As of mid-April, the stock market was gaining ground, especially Small/Mid Caps.  But on the 19th, FED chairman Jay Powell stated the obvious, that FED fund rates would need to accelerate.  Since then, the stock market has been in a severe decline, but I think it’s unwarranted.  FED rates are already drastically behind market rates…a move in FED rates won’t necessarily drive Bond & Mortgage rates higher, the FED is just catching up to what the market has already priced in.

Additionally, the USA economy has mostly recovered from the COVID hangover, but Semiconductor Chips are still in short supply.  Global economic headwinds that are emanating from the Ukraine invasion are impacting three sectors: Agriculture, Energy & Defense.  Despite the negative headlines, I cynically believe the USA is strategically poised to economically take advantage of this global crisis.  The USA dominates the global economy in Agriculture, Energy, Defense & Chips, these sectors are among our largest exports.  The Ukraine crisis could be extremely profitable for the USA economy.

It’s lonely being an optimist in a down market, but there are a few others.  It was recently announced that Warren Buffett’s stock purchases during the first quarter were his largest since 2008.  Perhaps things aren’t as bleak as they’re being reported.

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INANE Market reaction to Interest Rates

As the world adjusts to the Ukrainian Invasion, the stock market was recovering and the Small-Mid Cap stocks were showing strong relative strength.  Until yesterday, when FED Chairman Jay Powell stated the obvious about raising the FED Funds Rate- “it is appropriate to be moving a little more quickly.”

In typical kneejerk reaction, the Markets closed out the week down significantly, NASDAQ ~3.85% & S&P 500 ~2.68%. 

My typical cynical response is:  So what?  The economy is no longer in an “emergency” situation and therefore, “normal” rates are justified.  The FED is just raising rates to catch up to where the Market already is.

As displayed in the below chart, the FED Funds Rate is significantly below the current 10 Year Treasury & 30 Year Mortgage.  Furthermore, the 10 & 30 are not at extreme levels, they’re at about a 20 year mid-range.  Something I would characterize as “healthy” not “scary”. 

Therefore, I remain cynically optimistic.

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PETRODOLLAR has limited economic impact

Markets remain volatile, but the S&P 500 is up well above the Ukraine Invasion low and it has recouped all the losses since the week before the invasion.

There’s always something to fear and right now a lot of people are concerned about the “petrodollar”.  As I’ve discussed years ago in the blog and just recently in a podcast, the petrodollar isn’t a “thing”, it’s simply a term to describe a category of Oil purchases.

I won’t belabor the point as to why the economic impact (if any) would be limited if oil is traded in a currency other than the US Dollar, because the facts won’t change anyone’s mind.  A country’s currency derives its strength from the country’s productivity (products & services).  The USA is extremely productive, the below chart highlights just one of the country’s many outputs- OIL.  Note how in recent years, the production of domestic oil far out paces imports.  This is essentially why the mythical petrodollar is irrelevant. 

The really good news is that the technology which enabled the USA to be the world’s LARGEST oil producer is also the technology that’s energizing the country’s entire economy.  Long term the future is very bright for the United States, North America, and most of the Western Hemisphere.

But don’t be too optimistic, always invest with caution.

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