I’ve been thinking a lot about how out of whack and illogical the economy and markets have been behaving. It’s like adding 2+2 and coming up with 5 — nothing makes sense.
First, I’ll set the stage for what I simply call “my thesis” for why we are where we are today. And, unfortunately, it’s not far from where we were when the Fed started its crusade in March 2022 to hike interest rates and thwart record-high inflation.
The Fed pretty much took a textbook approach to ease the problem. Any educational material I’ve read says that raising interest rates will make it more expensive to borrow money, reduce consumer demand and, in turn, stabilize rising prices.
Yet, after 10 hikes that ushered in mortgage rates around 7% and credit card rates at 20%+, all data points to strong consumer spending, a stable job market, a strong dollar and stubbornly high inflation that’s crippling middle America right where it hurts most.
In fact, at Wednesday’s Fed meeting, Federal Reserve Chair Jerome Powell even referred to the economy as “strong” after the GDP grew by an annual rate of 4.9% from July to September.
A hot economy means that inflation that’s come down from 9.1% to 3.7% — but is still rising month-to-month — might stop coming down and plateau somewhere above the Fed's 2% target.
And if that happens, the central bank might have to push interest rates even higher. It’s a vicious circle that, quite frankly, can be dizzying.
But I’m thinking that if hiking rates hasn’t accomplished the Fed’s goal yet, the approach may never work. They’re supposed to bring down inflation and eventually make it painful for consumers and Corporate America in order to slow the economy.
Many say that’s not happening yet because it takes time for pain from a tighter monetary policy to radiate down to the masses.
In fact, my thesis is that high interest rates are actually making the economy stronger in certain ways. No, I’m not losing my mind. At least not over this issue.
Think about it ... consumer spending on discretionary things — luxury trips, luxury clothes, luxury entertainment, luxury cars — is very strong currently. Home prices are even rising in many areas as rates make them more unaffordable than ever … and that logic just doesn’t add up.
We can blame or attribute (depending how you look at it) spending on those things on the rich getting richer and retaining their luxurious appetites. I’m hard-pressed to believe that it’s all that federal COVID-19 money fueling the economy. Nobody got rich, but some did get richer.
The net worth of the richest one-tenth of households skyrocketed by $28 trillion — or about one-third — from Q1 of 2020 to the Q2 of 2023, according to the Fed.
The poorer one-half of Americans gained a bigger percentage increase, but in total dollars much less, from about $2 trillion to $3.6 trillion. (Those figures aren’t adjusted for inflation.)
Still, the 99% that represent the lower- and middle-classes are struggling just to make ends meet.
I think we’ve gone beyond the point where raising rates is helping our cause. In fact, after a certain point, you reach another point where doing so defeats the purpose all together.
The result: The unintended consequence of helping the economy instead of hurting it.
Higher yields, stable economy, corporate growth and a strong dollar all attract foreign investments, and all that money contributes to the GDP.
So, I’m of the opinion that foreign investments might very well be propping up, or at least helping to prop up the economy. In fact, Foreign Direct Investment increased by $104.2 billion in June, registering a growth equal to 1.5% of the country's nominal GDP that month.
FDI involves the direct investment by companies or governments into foreign firms or projects. This accounts for nearly $2 trillion in cash flows around the world, with the U.S. and China leading in the FDI inflow statistics. There are many examples of companies pouring cash into the United States.
Foreign investments in specific corporations could help explain the rather rosy earnings picture and healthy dividends paid to shareholders for Q3 from many of our richest corporations.
I’m not saying for a fact that this is what’s behind our strong economy, but it’s certainly capable of providing a boost.
Of course, my thesis wouldn’t be complete without a potential solution. The answer could very well be that now’s the time to lower interest rates and direct attention away from U.S. investments. The economy is still strong, and we’ve also seen signs of a landing with weaker jobs numbers released this week and declining inflation.
I’m all for doing whatever it takes to unravel the mess we’ve got on our hands, reduce uncertainty and reestablish everyone’s sanity.
Here in the Weiss Intelligence Portfolio, we’re ready for whatever the market throws our way, and we’ll continue to beat to that drum by banking a slight gain today and rotating that cash into a pick that All-Weather Portfolio subscribers were already able to grab a 21% gain on back in August.
Grab Gains & Rotate Cash Into Rankings Riser
We’re selling Banco Bilbao Vizcaya Argentaria SA (BBVA). The company released earnings earlier this week on Oct. 31, and whilst the stock is up this week, our database and I were unimpressed by the results, so we’re going to get out with the minimal gain before we possibly lose it again.
Revenue came in at $7.6 billion, an upside surprise of 8.2%. And EPS came in at 34 cents a share, representing a 3% downside surprise. Not ugly, but not great. We have better options. Sell.
A FIX for Gains
Comfort Systems (FIX) is a Houston-based leading provider of mechanical, electrical, modular and plumbing building systems. It has seen stable growth and profitability, and it’s been rated as a “Buy” in our system since April 2022.
Shares are up around 116% since that upgrade, and far more recently, the stock was upgraded last week to “B+” after reporting its financials for the recent quarter. Let’s look at the chart:
On the technical side, things look even better as shares have recently dipped over the past month, giving us an ideal entry point. Buy.
Action Summary
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1. Sells: Banco Bilbao Vizcaya Argentaria SA (BBVA) 2. Buys: Comfort Systems (FIX) |
Below is a list of what our stock portfolio will look like after today’s trades. And if you are just joining us this week, I recommend you continue to allocate 3% of your total portfolio allocation to each at market prices:
- Super Micro Computer Inc. (SMCI)
- Sterling Infrastructure Inc. (STRL)
- Nvidia Corp. (NVDA)
- Kinsale Capital Group Inc. (KNSL)
- LSI Industries Inc. (LYTS)
- Comfort Systems (FIX)
- Caterpillar Inc. (CAT)
- Frontline plc (FRO)
- PACCAR Inc. (PCAR)
- Hawkins Inc. (HWKN)
- Arista Networks Inc. (ANET)
- Schlumberger Limited (SLB)
- BellRing Brands Inc. (BRBR)
- Broadcom Inc. (AVGO)
- Consolidated Water Co. Ltd. (CWCO)
- Target Hospitality (TH)
- SAIA Inc. (SAIA)
- nVent electric plc (NVT)
- Vista Energy, S. A. B. de C.V. (VIST)
- Arch Capital Group Ltd. (ACGL)
These 20 stocks comprise 60% of our total portfolio allocation. (That’s 20 stocks x a 3% allocation each).
We’re firmly still in Neutral Mode, so no changes to our two exchange-traded funds at a 15% allocation to each.
Again, only if you are just joining the Weiss Intelligence Portfolio, I recommend you allocate 15% of your total portfolio allocation to each at market prices:
To recap our portfolio structure:
- 60% in 20 stocks at all times, with a 3% allocation to each.
- 30% split evenly between two ETFs. These will be dependent on our Timing Model, which is currently Neutral.
- 10% in cash.
Brief Portfolio Updates
We’re up around 12% on Arista Networks (ANET) after the company reported stellar earnings earlier this week on Oct. 30. EPS came in at $1.83 per share and revenue came in at $1.51 billion, representing 16% and 2.3% uprise surprises, respectively.
Last Friday, Kinsale Capital (KNSL) reported weaker-than-expected earnings, and shares were down around 22%. This week, shares have rebounded around 4% and are holding for now. As an investor, you never want to overreact, and it’s still highly ranked in our system despite the weaker earnings. I am closely monitoring it. But for the time being, it still makes sense to hold.
Given the broad market rally this week and continued rally today, our two inverse ETFs are consequently both down, and this is ultimately a good thing in the grand scheme of things.
Remember, we own them to act as stabilizers. It’s like a big yacht driving in rough ocean seas … sure, the boat is stable given its size, but it still has stabilizers to help keep it balanced, and that is the purpose of our inverse ETFs. Until our Timing Model changes, we’re holding them.
I’ll see you again next week.
Cheers!
Gavin Magor
