Uh Oh! Signs of Danger Ahead

Uh Oh! Signs of Danger Ahead

It Was the Best of Times ….

On Friday the 26th, we locked in a big win.

Nine days earlier, on Wednesday the 17th, as a protective shield, we purchased a large position in SQQQ, a triple short.  

We sold that position on Friday, earning an 11% profit on a 40% size (we invested 40% of each account in SQQQ).

Our AG model, aggressive growth, for the month of August, is beating the S&P 500 by an outstanding +300 basis points. The S&P is down 1.59%.  That is an RFS win of +4.59% (one basis point is 0.01 %).

It Was the Worst of Times ….

I have no idea what the Fed and the White House are doing.

All I can tell you is investors and institutions don’t like it.  I believe more pain lies ahead, and the current bear market could rival the period from October 2007 to March 2009―a nightmarish bear market of -57% on the S&P 500. I am far from alone in having that opinion, and lots of bad news out there supports that view.

Much of the bad news I’ve covered in recent emails. Unfortunately, there’s more.

 Water Water Nowhere and Not a Drop ….

Bloomberg reported on a world-wide fresh water shortage with over 20 pics of rivers and lakes bone dry. The pics are staggering!  (You can get an intro subscription to Bloomberg for $1.99/month here.)  In one case, the Rhine and the Danube, where they try to connect to the Main going over Switzerland, the rivers no longer connect. Water levels are so low that all boats, barges, and cruise ships cannot pass.  I have been there, and have seen it.  It briefly happened in July, 2015.  This is much worse. This is crippling transportation of oil, food, grains, etc., and causing the cancellation of thousands of cruise ship reservations.

The “leisure” sector stock market index, which includes all the publicly traded cruise lines, is -31% YTD.  Europe is in an economic free fall.  Bloomberg also went on to say that thousands will suffer from hunger this winter, mostly eastern Europe, and millions in the UK are facing heating energy price increases of over 300%.[1]

Here in the U.S., we are having the same problem with the Colorado and Rio Grande rivers, creating massive shortages of fresh water delivery to Los Angeles  and all of southern California and east to Arizona and beyond.

Impact on People

The saddest news of all is that domestic violence, drug abuse, and suicides are all on the rise in the U.S.  Along with abortions, this portends a huge, long-term demographic problem for the U.S.―fewer babies, fewer employees, fewer tax payers, fewer consumers.

Lastly, Bloomberg included numerous reports of higher delinquency levels of mortgages and auto/truck loans. They sit at their highest marks since the March 2009 Great Recession. 

All of this comes from Bloomberg, so you might want to consider a subscription for $1.99/month (here).

Maybe someone can explain the game plan of the Fed and the White House. 

I cannot.

I do know that everything can get a lot worse before it gets better.

Prepare to see another position in SQQQ soon.

If you have any questions, comments, or suggestions, please call us at 301-294-7500. We are always happy to answer any questions you have.

Uh Oh! Signs of Danger Ahead

EVs―The Next Big Thing

EVs―The Next Big Thing

An Interesting Email

We recently received an interesting email from a reader of our RFS website. Katie Griffin is a Senior Communications Specialist at EcoWatch.org, a group devoted to disseminating information on the environment to help reduce carbon emissions and their deleterious effects on the atmosphere. Turns out that Ms. Griffin read our article about Lithium,[i] which we sent to clients and friends in August of 2021.

In her email, Ms. Griffin wrote:

I wanted to reach out because I saw that you have some great information about electric cars on your page. It’s projected that there will be 18 million electric vehicles on U.S. roads by 2030. As EV’s grow in popularity, it’s important that people are aware of the different types, their impact on the environment and the pros and cons of purchasing one. 

EcoWatch.org, which has a Twitter following of 238,000, recognized the growing popularity of electrical vehicles and as a result created a guide called “Electric Vehicles 101: Everything You Need to Know.” It’s a must-read for anyone wanting to buy, or just interested in, an EV. You may find the guide here

Yes, Everything

The EcoWatch guide kid you not: It does indeed have everything you need to know about EVs.

  • History: Did you know that in 1900 one-third of all vehicles on the road were electrical vehicles?
  • Types of Electrical Vehicles: HEVs, PHEVs, BEVs, … the alphabet’s heyday.
  • Are EVs Better for the Environment: yes, says the Guide. Some interesting facts here.
  • How Long Does It Take to Charge an EV’s Battery: In the Guide, you’ll find not only “how long” but “where”; you’ll discover ‘Plugshare, a free website and phone app that bills itself as ‘the most accurate and complete public charging map worldwide, with stations from every major network in North America and Europe.’”
  • Cost of Charging an EV: About half the cost of a combustion-engine car, says the Guide (assuming gas at $3.00 per gallon―so these days less than half).
  • Uncle Sam Wants You (to buy an EV): The Guide covers the federal tax credits you can enjoy when you buy an EV …but …

Inflation Reduction Act (IRA) Changed All That

The recently enacted Inflation Reduction Act made significant changes to the federal tax credits available to EV buyers. According to CBS News:

President Biden’s signing of the Inflation Reduction Act is changing the landscape for Americans interested in buying an electric vehicle. The law replaces a previous tax break for EVs with a new set of credits, although that depends on where a car is assembled.

The manufacturing requirements are effective as of August 16, 2022, the day the bill became law. Other restrictions, including strict limits on where batteries can be mined and assembled, kick in starting in 2023 and ramp up in future years.[ii]

The IRA requires assembly of EVs in North America before federal tax credits are available. It also restricts battery mining and assembly to certain locations. To make certain your prospective EV qualifies, you can check it against this list provided by the Department of Energy.

CBS News provides the following list of eligible cars:[iii]

2022 models that likely qualify for a tax credit under the Inflation Reduction Act

  • BMW 330e and X5
  • Chrysler Pacifica PHEV
  • Ford F Series
  • Ford Escape PHEV and Mustang MACH E 
  • Ford Transit Van
  • Jeep Grand Cherokee PHEV and Jeep Wrangler PHEV
  • Lincoln Aviator PHEV and Corsair Plug-in
  • Lucid Air
  • Nissan Leaf
  • Rivian EDV, R1S and R1T
  • Volvo S60

2023 models that likely qualify:

  • BMW 330e 
  • Mercedes EQS SUV
  • Nissan Leaf

You might notice that the list omits the most popular EVs sold in America; Chevrolet Bolt EV and EUV; GMC Hummer Pickup and SUV; and Tesla Model 3, Model S, Model X and Model Y vehicles. Even though these cars are assembled in America, their manufacturers have exceeded a sales cap under a previous law. This cap will be lifted in 2023, so if you’re shopping for an EV, you should include the popular models on your shopping list.

We’re On It

Only in the past four years have investors had the opportunity to invest in ETFs “specifically dedicated to driverless cars, electrical vehicles. and other innovations in the automobile industry.”[iv] For our Aggressive Growth Model, we selected DRIV.[v] The managers of this ETF―Global X―describe their overall philosophy in creating more than 60 ETFs:

A lineup that spans disruptive tech, equity income, hard-to-access emerging markets, and more. Or simply put, we strive to offer investors something beyond ordinary.[vi]

About the DRIV ETF, the managers have this to say:

EVs produce zero direct emissions, meaning broader adoption could result in reduced greenhouse gas emissions and improved urban air quality. Further advances in autonomous driving could also enhance roadway safety.

No One Knows

Who knows how far and how fast EVs will advance in the marketplace. With groups like EcoWatch (and, no doubt, hundreds more) supporting the transformational change to electrical vehicles and with the federal government eager to pay American citizens to buy them, it seems rational to conclude that investments like DRIV will do well in this decade.

But who knows where the overall stock market is heading. We’ve positioned our Aggressive Growth Model in a decidedly short position with the large 3x short position in SQQQ we bought on August 17, 2022. Counterbalancing this position are TQQQ and UPRO 3x long positions. When the market reveals its hand, we’ll sell either the short position (if the market is heading up) or the long position (if the market is heading down) and just ride in the direction our analysis takes us.

Call Us

As always, please call us at 301-294-7500. We are happy to answer any questions you have.

And please forward this email to family, friends, and colleagues―they, too, might be in the market for an electrical vehicle and would appreciate having access to EcoWatch’s EV Guide.

Pinching Pennies, Pensions, and 401k’s

Pinching Pennies, Pensions, and 401k’s

Tough Times

When times get rough, the natural human urge becomes one of extreme frugality. Certainly those who survived the Great Depression developed various habits prompting others to view them as “penny pinchers.”

Well, today, those sitting atop the financial infrastructure―companies, governments, and other organizations that sponsor ginormous pension funds and 401k plans―have begun to feel the pinch―perhaps not the pinch of pennies but certainly the pinch of nerves.

40% Are “Nervous”?

Pension and 401k plans are underperforming. When massive amounts of money are set aside to fund the retirement of employees, the sponsors of those plans set their sights on a certain rate of return. The planners know how many years the average pension recipients have before they slip off the raft and can thus figure out how much the average plan participant needs to live a decent life. A certain rate of return―together with Social Security and personal investments―will produce that level of income.

But what happens when the rate of return fails to materialize? The S&P 500 Index was created in 1957. For 64 years―until Dec. 31, 2021―the S&P returned an average of 10.67%.[1] But so far this year, the S&P is down -2.82% in price. When .77% in dividends are added in, the net return this year is negative -12.05%.[2]

To find out how plan sponsors were coping, Cogent Syndicated, a division of Escalent, “conducted an online survey of a representative cross section of 1,267 401(k) plan sponsors from February 11 to March 8, 2022. Survey participants were required to have shared or sole responsibility for plan design, administration or selection and evaluation of plan providers, or for evaluating and/or selecting investment managers/investment options for 401(k) plans.”[3]

40%? Yes, Almost

The war in Ukraine and market volatility have frightened nearly 40% of those surveyed. According to the survey, “nearly four in ten (37%) plan sponsors expect domestic marketplace conditions to worsen, up from 20% in 2021.”[4] 

Nearly 60% Fear Underperformance

The fear factor increases when plan sponsors were asked about the ability of their 401k’s or pensions to meet performance targets. “Concern about underperformance of plan investment options continues to grow with 57% of plan sponsors concerned in 2022, increasing by 6% since 2021.”[5]

What to Do?

Perhaps the 401k or pension just cannot meet initial targets. After all, the plan cannot create returns out of thin air. It becomes perfectly plain that plan recipients will have to reduce their expectations and take affirmative steps to make ends meet. Recipients just might have to learn those money-saving steps that served our forbears so well in the 1930s. Even pinching pennies comes to mind.

An Escalent executive describes the problem and some steps plan sponsors might take:

“Creating a retirement plan that is attractive to employees is even more difficult in the current volatile economic and talent environment,” said Sonia Davis, senior product director at Escalent. “In order to combat participant fears, our research supports that plan sponsors need to encourage employees to keep a long game strategy, avoid drastic withdrawals that will hinder future retirement readiness and think beyond saving by seeking help with their decumulation phase.”[6]

Though we’re not precisely certain, we imagine that “thinking beyond saving by seeking help with the decumulation phase” means “retired participants can’t spend money that’s not there so they must learn how not to spend or how to spend less than they planned or hoped for in their golden years.”

Educating Recipients

Many participants in 401k’s and pension plans have never experienced a downturn like the one currently hitting investors. One observer stresses the importance of education:

“Employee education that emphasizes the importance of long-term investment strategy and dollar cost averaging is more crucial as many new employees in the workforce have never experienced a prolonged market downturn,” said Rikin Patel of Kingswood U.S. Enterprise.[7]

Younger plan participants can view downturns as terrific buying opportunities and with dollar cost averaging can obtain lower average costs of certain investments. But older participants surely view a severe downturn as a direct threat to their security, and, as a result, must adopt more defensive strategies to preserve capital.

Please Call Us

If you have any questions, comments, or suggestions, please call us at 301-294-7500. We are always happy to answer any questions you have. 

Uh Oh! Signs of Danger Ahead

Special Message

Look!

Have You Noticed?

Listen to any politician or any news commentator these days, and they always begin a discussion or answer a question like this:

Look, when I served in the Senate ….

Look, as I wrote in my last column ….

Look, if the Republicans won’t ….

Look, if the Democrats won’t ….

Just listen to the evening news tonight, and you’ll see what I mean. They all say “Look!”

Drives me a bit nuts.

But Maybe …

But maybe we should “look.” Look around us. Look at some statistics. Look at some developing trends. And when we do look, what do we see?

Economic Destruction

It’s not a pretty sight. Inflation drives millions to seek second jobs. Rapidly increasing mortgage rates are destroying the housing market. Applications for refinancing (to pay for higher prices of everything) have plummeted. Big retail outlets must rid themselves of bloated inventories, at a huge cost to their bottom lines. Truncated summer vacations might lower household expenditures for gasoline, but they also help shrink economic activity and add to recession fears. And if that’s not enough, a six-van tour service in Hawaii now needs only one of those vans―pain in paradise. It’s not a pretty sight.

How Bad Is It?

Seeking Second Jobs

Look at employment trends. If you’ve gone to any restaurant or driven up to a McDonald’s, surely you’ve seen the plethora of Help Wanted signs. And if you’ve gone into some of those restaurants, you often see lines waiting for a table but a bunch of empty tables inside. The owners can’t get enough wait staff or cooks to serve a capacity crowd.

Where did everybody go? Many sat out Covid and cashed Covid checks supplemented with unemployment insurance. They liked living at home or in their parents’ basements and just didn’t return to the workforce.

That’s about to change. In the words of Columbia Business School professor Mark Cohen:

At the end of the day, there are only so many credit cards you can load up and things you can avoid spending on before you come to the reality that maybe you have to pick up a second job. It’s about how much do you bring in every month, how much do you spend—if you’re in a deficit position, you have to find another job or an additional job.[i]

The inflation that used to be “transitory” has now transmogrified into an inflation that is “rampant.” Just two years ago, inflation hovered around 2.0%. Now in June 2022, it’s jumped above 9%. Not a pretty sight:[ii]

These elevated inflation rates are driving millions of Americans to seek a second job. Many of these second jobs are “full-time jobs,” which the Bureau of Labor Statistics (BLS) defines as a job requiring at least 35 hours per week. Thousands of our fellow citizens are forced to work two full-time jobs, or 70 hours each week:

426,000 Americans worked that much in June, compared to 308,000 in February 2020, according to the St. Louis Federal Reserve Bank’s analysis of BLS data.[i]

The numbers grow exponentially when we look at the number of Americans seeking second part-time jobs.

A new survey from Bankrate.com shows that, because of inflation, 41% of Americans say they need to pick up a second job in order to make ends meet. That’s up from 31% in 2019.[ii]

What? Forty-one percent of Americans. How many tens of millions of people is that? Not a pretty sight.

Housing Market

Look at what’s happening in the housing market―often a barometer of the economy at large. What was a boom for home-sellers has become an exercise in price-slashing:

The pandemic housing boom is careening to a halt as the fastest-rising mortgage rates in at least half a century upend affordability for homebuyers, catching many sellers wrong-footed with prices that are too high. It’s an astonishing turnaround. Just a few months ago, house hunters felt pushed to make offers within days, waive inspections and bid way above asking. Now they can sleep on it and maybe even shop for a better deal.[iii] 

The post-pandemic high home prices of just a few months ago are now driving buyers away. So sellers must dramatically reduce their prices:

The turn in the US housing market has been sharp and swift. Just ask Karlyn and Jack Stenhjem, would-be downsizers who dropped the asking price for their home near Seattle by almost $100,000 since May.

[Their] house, with private access to lakes and trails, is now available for $899,000, a price that makes Karlyn Stenhjem “cringe.”[iv]

ReFi Market―Up 4%?

Look at the refinance market. When inflation eats into disposable income, people seek other sources of cash. Many were tapping into their home equity by refinancing their mortgages at progressively lower rates. Not now. Those mortgage rates are going through the roof (so to speak). But a week or so ago, we saw refinance demand increase by 4%. But guess what ….:

Refinance demand rose 4% for the week but was 76% lower than the same week one year ago.[v]

No, down 76%. So another source of extra cash bites the dust:

Total mortgage application volume was 52.7% lower last week than the same week one year ago, according to the Mortgage Bankers Association’s seasonally adjusted index. Sharply rising interest rates are decimating refinance volume, and those rates, along with sky-high home prices and a shortage of houses for sale, are hitting demand from potential buyers.[vi] 

Unloading Retail Inventories

Look at what the biggies are doing. Target, WalMart, and other retail giants had it all figured out: When the pandemic ended, there would be huge pent-up demand. The shut-in consumers would spread their wings and open their purses and wallets. The payday would be huge

Oops. The heavy hand of inflation said no to those plans. Consumers certainly felt the new-found freedom of escaping the harsh Covid lockdowns, but inflation prevented them from buying high-end retail items and expensive clothing. Instead, they spent their money on gasoline, food, and other necessities.

The retailers faced a gigantic dilemma: What to do with bloated inventories? Put them on-sale? Offer a BOGO (Buy One Get One Free)? Store the goods for better times ahead? Offload them to bargain sellers like TJ Maxx?

Reuters wrote an interesting article about this quagmire: Sell, Stow or Dump? Retailers Wrestle with Mountain of Unsold Stock:

In the United States, clothing sales fell 89% in April from the same month in 2019, while in Britain clothing sales sank by 50% compared with an already-squeezed March.[vii]

So the anticipated post-Covid demand just isn’t there. If the big retailers opt to off-load expensive brands, savvy consumers should stand ready to cop some fabulous deals. Look at the plans of one California socialite:

“We’re going to see the most insane sales,” said Melissa McAvoy, founder of events company Luxury Experience & Co, who lives in the celebrity-studded Los Angeles suburb of Calabasas.

The 43-year-old said she planned to snap up merchandise at a discount, to then resell it at a higher price online at a site such as California-based Poshmark, which also makes money by taking a commission on sales.

“I’m going to get a tonne of stuff and either wear it once or put it on Poshmark,” she said.[viii]

Truncated Vacations

Look, or in this case, listen to identical conversations―typically between a Mom or Dad and their teenaged children―echoing throughout households across the country:

Mom or Dad: “But we are going to the beach this summer …. Just not quite as long.”

Teenaged Son or Daughter: “Quite? Last year we went for three weeks. And this year just one? That’s not fair.”

In millions of household budgets, money ordinarily set aside for vacations has jumped over into the column named “Gasoline” or “Weekly Food Budget.” Stats bear this out:

Majorities say they are likely to take fewer leisure trips (57%) and shorter trips (54%) due to current gas prices, while 44% are likely to postpone trips, and 33% are likely to cancel with no plans to reschedule. 82% say gas prices will have at least some impact on their travel destinations.[ix]

Needless to say, fewer people on the road affects the local economies of countless communities.

One short story from paradise makes the point:

Sunsets, surf and sand are still draws for visitors to Hawaii, but new statistics show their numbers are lower than usual for this time of year. That’s a big concern for those in the tourism industry, such as Carey Johnson, who runs Custom Island Tours. “We have four tour vans, I have six drivers,” she said. “So we can possibly be doing four tours a day, but right now we’re averaging less than one tour a day.”[x]

Look! Look Around You

You don’t have to look far to realize that this country―indeed, the entire globe―faces some dire economic circumstances. After the first quarter’s 1.6 percent decline in GDP and the second quarter’s 0.9 percent decline,[xi] the country officially entered a recession, according to traditional economic theory (two consecutive quarters of negative economic growth).

The White House begs to differ:

What is a recession? While some maintain that two consecutive quarters of falling real GDP constitute a recession, that is neither the official definition nor the way economists evaluate the state of the business cycle. Instead, both official determinations of recessions and economists’ assessment of economic activity are based on a holistic look at the data—including the labor market, consumer and business spending, industrial production, and incomes. Based on these data, it is unlikely that the decline in GDP in the first quarter of this year—even if followed by another GDP decline in the second quarter—indicates a recession.[xii]

Look, whether a recession begins with two consecutive quarters of negative growth or some other definition prevails, our citizens know that today’s economy isn’t doing the heavy lifting needed to sustain the livelihoods of  332,403,650 Americans alive on January 1 of this year.[xiii]

Will we come out of this mess? Yes, Americans always do. When? No one knows. But we can all look around us and see that things probably won’t get better before they get a whole lot worse.

But better they will get.

One day.

Call US

As always, please call us at 301-294-7500. We are happy to answer any questions you have.

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