What to know today

  • It’s Jobs Friday.
  • Elon issues a warning.
  • The US is a fiscal mess.
markets

A Rate Cut Is Coming

That’s what the data say.

Initial claims for unemployment insurance continue to slowly climb. Continuing claims are also trending gradually higher.

It’s possible these slow and gradual effects we’re seeing are simply seasonal noise.

It’s also possible the consequences of the Federal Reserve’s higher-for-longer stance will show up in greater and grimmer detail in coming weeks, that labor-market deterioration accelerates in the dog days of summer. This is Jobs Friday, so we have imminent and on point incoming data to evaluate 

The consensus expects the Bureau of Labor Statistics to report that nonfarm payrolls expanded by 190,000 in June, down from 272,000 in May.

The unemployment rate is forecast to be steady at a two-year high of 4 percent.

The important number in this particular set of data from the BLS will be hourly earnings. That’s the fuel for spending in our consumer economy.

The consensus expects to see hourly earnings growth slow to 0.3 percent on a month-over-month basis from 0.4 percent in May.

Year-over-year wage growth will come in at 3.9 percent. And that would put it below 4 percent for the first time since 2021.

The US unemployment rate has risen from 3.4 percent to 4.0 percent since February 2023.

Minutes from the June Federal Open Market Committee meeting, released on Wednesday after the US stock market closed, suggest voting members had not the confidence yet to cut rates.:

“Some participants,” the minutes read, “emphasized the Committee’s data-dependent approach, with monetary policy decisions being conditional on the evolution of the economy rather than being on a preset path.”

The target range for the federal funds rate has been 5.25 percent to 5.50 percent since July 2023. The current official forecast indicates a single 25-basis-point cut in 2024, down from three in March.

FOMC members noted that progress on inflation had been slower than expected in December.

They’ll convene again on July 30. Only a series of mass layoffs between now and then will ensure a rate cut at that two-day meeting. It’s just not likely to happen. 

But there’s plenty of time for more incoming data to accumulate between now and September 18.

The case for a rate cut is building slowly and gradually. But it is building.

deep dive

Elon Has a Lot of Entertainment Value

His EV business has some issues.

On April 22, the day before its first-quarter earnings report, Tesla $TSLA traded at an intraday low of $138.80.

And we weren’t very friendly to Elon Musk in our April 23 issue.

He didn’t catch wind of it, though, as he surely would’ve roasted us like he did Bill Gates and other skeptics this week…

Elon Musk issued a warning to investors who are short Tesla $TSLA stock, including Microsoft $MSFT co-founder and philanthropist Bill Gates.

Full disclosure, I hold no direct TSLA exposure, long or short, which is why I can enjoy the week’s events with bemused remove.

Whatever Elon is, he entertains. And he creates value.

There are now legitimate questions about whether and to what degree that value has become a function of the entertainment factor.

But TSLA longs probably don’t care about that this week.

Extending a run off that April 22 intraday low, TSLA closed up 6.54 percent on Wednesday. It was up 10.20 percent on Tuesday and 6.05 percent on Monday.

It’s now up 77.51 percent from that bottom.

And that’s been a major challenge for those holding TSLA short positions, a list that by many accounts includes Microsoft $MSFT co-founder and noted philanthropist Bill Gates.

Tesla $TSLA is up 77.51 percent after trading at an intraday low of $138.80 on April 22, 2024, the day before it reported first-quarter earnings.

Elon, who’s up about $15 billion himself, has managed expectations and his loyal base of retail shareholders for maximum effect.

This bounce is happening despite the fact that his EV company is about to report a second consecutive quarter of year-over-year delivery declines for the first time ever.

Tesla is scheduled to release full financial and operating results after the market closes on July 23.

deep dive |
July 5, 2024

Elon Has a Lot of Entertainment Value

THE STOCKPICK INTERVIEW

Know What You Own

And know why you own it.

One of the consequences of the Federal Reserve’s rate-hiking cycle is to push up in a major way the cost to service the federal government’s debt.

This has happened at a time when the federal government has relocated its fiscal authority.

In response to historic disruptions caused by the COVID-19 pandemic, politicians in both major US parties, including leadership at the very top, committed to historic levels of federal spending.

Largesse like that, sensible particularly to Democrats who must, looking back, question their austere response to the Global Financial Crisis/Great Recession in 2009-10, now seems the way to go following downturns.

But it’s also going to create a set of consequences beyond the immediate employment, wage, and consumption support.

That’s a conclusion shared by Avenue Investment Management chief investment officer Bryden Teich in a July 2 StockPick Interview.

US spending and total debt as a percentage of GDP have soared in the aftermath of the COVID-19 pandemic.

That’s also a long-term issue.

In the short term, we’re still in a phase where the US fiscal response has put it in a better position compared to the rest of the world.

The impact of that response is beginning to fade, however, with the economy slowing and getting to the point where the Federal Reserve will begin its cutting cycle.

“We think the markets are at a pretty risky moment right now,” Teich notes, given where we are this late in the business cycle.

A significant run from the lows of last October has put the market “at an expensive level, valuation-wise in aggregate.” Teich also notes “euphoric behavior” in parts of the market.

Teich warns that once we get closer to the beginning of a rate-cutting cycle and once you actually get into a rate-cutting cycle “you are very close to a much more challenging environment for equities.”

As we’ve discussed and as Teich underscores, a rate-cutting cycle happens because the economy is weakening.

The implication is earnings will weaken as well. That’s not how the market is pricing things right now, Teich observes.

He also has a strategy for any potential re-pricing/sell-off ahead: “How we think about investing is we look for companies that we are comfortable and confident with their ability to earn profits when times are good in the economy and when times are bad.

Teich is focused on resilient companies “that have characteristics that allow for a consistent profitability, regardless of what the economy is doing.”

“We're cautious,” he adds. “We think investors should be very cautious at this moment.

“But that doesn't mean that there aren't great things out there to own. You just have to really know what you own and know why you own it.”

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