The Bottom Line
Posted on Sunday, April 17th, 2022
We are back. We hope you missed us. As you know we take a break at the end of the quarter to furnish our highly anticipated quarterly letter. It is a longer version of our weekly note as it attempts to flush out in greater detail the ideas that we transpose in our weekly note. We hope that you enjoyed reading it but if you missed it, you can find it here.
In recent weeks, in preparation for hosting our Easter celebration and in planning Kevin’s graduation celebration, Diane has been wont to inform me about the growing inflation in the grocery store. Now, we have been fervent and loyal customers of our local grocery store for over 15 years. We love the service, convenience and full stock of all of our favorite products. The convenience of one stop shopping certainly helped when we had young ones around the house. In recent weeks Diane has grown frustrated as she was not able to find her favorite items and found herself in various stores around town. She found that perhaps inflation at our local grocery store was a bit more inflated than other places and she was a bit perturbed. Diane is now determined to help the Reilly family bottom line by finding better deals around town. The outsized impact of inflation is enabling her to plainly see the fruits of her labor. It has also brought home the impact inflation is having on individuals and businesses all around us. Businesses and individuals will adjust accordingly and that changes our investing.
All the talk around town is about inflation but, more specifically, inflation in home prices. We have had neighbors pull up stakes and leave quite suddenly over the last two years. The sudden ramp up in home prices gave them sensing of déjà vu. I had more of a sense more of recency bias. Just because the last housing crisis happened a decade ago doesn’t mean it is about to happen again. History doesn’t repeat – it rhymes. In a recent chart from JP Morgan we could clearly see a peak in household leverage in the late 2000’s well above the mean in a near vertical climb meaning households were overleveraged. We are nowhere near that peak leverage and we have in fact reverted well below the mean leverage of US households. What does that mean? Households can afford to leverage up further. While home buyers seem to be chasing price here a bit -recent price gains should hold up a lot better than in 2008-09. After all houses are just a bunch of commodities cobbled together and what would you want more in an inflationary environment than a bunch of commodities?
Things are getting a bit rough out there. We see numbers out of the trucking sector that suggest a slowdown is imminent. JP Morgan released its earnings this week and they provided a sizable reserve for losses. This was the first loan loss reserve since March 2020. Its loan loss reserve was almost $1B. Seems like someone is preparing for a downturn.
April has historically been one of the best months of the year. We are now down 3% on the month. The November through May time period is typically the best 6-month period of the year. Since November the S&P 500 is down 4%. While looking at the market’s seasonality is engaging bar talk, we tend to look at seasonality when it does not work. If we expect the market to go higher in a time period and it does not – then we start to look both ways before we cross the street. The AAII bull-bear sentiment spread is at multiyear lows. Every sentiment indicator that I look at is super bearish. Investors expect the market to decline as the Fed fights inflation with higher rates. Everyone sees a recession on the horizon. Well, if all of this bad stuff is happening why don’t we just sell everything?
If everyone expects something to happen then something else probably will. We need to prepare for either outcome. Let’s see if market will do what it tends to do when this reading is at very low levels. The pain trade right now is higher and many will be forced to chase should it go. We will be looking to take off more risk if that is the case. There is a natural seller out there and it’s the Fed. Every time the market moves substantially higher it helps them by giving them cover to raise rates and restrict policy. There is a cap on this market.
Longer term – We still see us still stuck in the 4000-5000 range on the S&P 500 for months to come. We closed around 4400. Maybe a more refined range is in order. We move it a smidge lower. It looks to closer to 3800-4800.
“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.