Dorsey and Yellen offer conflicting views of inflation … what’s for sure is that earnings will be more important than ever … how a quant-approach zeroes in on earnings power
Last Friday, Jack Dorsey, the CEO of Twitter and Square, sent out a frightening tweet in keeping with Halloween this weekend:
Tweet from Jack Dorsey predicting hyperinflation
Source: Twitter - @Jack
If you’re having trouble viewing the tweet, it reads “Hyperinflation is going to change everything. It’s happening.”
After receiving some questions/pushback online, Dorsey took it a step further, tweeting “It will happen in the US soon, and so the world.”
Meanwhile, on Sunday, U.S. Treasury Secretary, Janet Yellen, said the United States was not losing control of inflation:
I don’t think we’re about to lose control of inflation. It’s something that’s obviously a concern and worrying them, but we haven’t lost control.
***These are opposite sides of the same highly-exaggerated coin
On the hyperinflation side, yes, it appears we’re in for a period of high and persistent inflation. And the inflation rate could eventually settle at a higher baseline level than we want.
But the idea of hyperinflation ignores how the eventual end of our supply chain issues will be a major deflationary force. And what about the deflationary effects of technological advancement?
On the other end of the spectrum, “the Fed has got it under control” from Yellen is laughable on its face.
Does anyone remember the Fed’s attempts to increase inflation during the 2010s? They failed miserably, year-after-year, as inflation remained stubbornly low. Was the Fed in control then?
And now, does anyone remember the various Fed presidents’ comments from about a year ago, pointing toward how much inflation they’d be willing to tolerate?
Let me remind you.
There was Dallas Fed President Robert Kaplan saying he would be comfortable with inflation running a “little bit” above the 2% inflation target if the economy were to return to near full employment.
“And for me, a little bit means a little bit,” or about 2.25%, Kaplan said during an interview with Bloomberg TV. “I still think price stability is the overriding goal and this framework doesn’t change that.”
St. Louis Fed President James Bullard was open to slightly higher inflation.
From Bullard:
Inflation has run below target, certainly by half a percent, for quite a while, so it seems like you could run above for a half a percent for quite a while.
That would have meant a 2.5% inflation rate.
Then there was Philadelphia Fed President Patrick Harker, also pointing toward an acceptable overshoot of a 2.5% inflation rate, but suggesting that the speed at which we got there was the real issue.
Here was his take:
It’s not so much the number. … It’s really about the velocity.
Harker suggested that inflation “creeping up to 2.5%” is quite different than inflation “shooting past 2.5%.”
Umm…so, how about an inflation rate that doesn’t “creep” up to just 2.25% or 2.5%, but has now exploded to 5.4%?
By the way, news this morning is that former Federal Reserve Chairman, Alan Greenspan, sees sustained inflation well above the Fed’s 2% goal.
But Yellen assures us the Fed has everything under control. Phew, that’s a relief.
***We don’t need to know where inflation will ultimately land to know that it’s going to act as a huge sifting machine for the stock market
As our CEO, Brian Hunt, once wrote, “It’s not so much a stock market as it is a market of stocks.”
While it’s easy to think of “the market” as one big monolith that rises or falls in unison, the reality is that it’s made up of thousands of companies with widely-varying fortunes. And rising inflation will compound the differences in how these companies perform.
On one hand, you’ll have the businesses that adapt to an inflationary climate and continue operating well. Their products and services are so in-demand that consumers will pay for them, even at higher prices.
On the other hand, buyers will look at some products and services and say “nope, too expensive. Not buying it now.”
If this sounds familiar, it’s the concept of “price elasticity of demand” you read about back in Econ 101. And it’s going to have a major impact on corporate earnings.
Take Unilever. It owns a vast portfolio of famous brands including Dove, Lipton, and Ben & Jerry’s.
Last week, we learned that Unilever raised prices 4.1% in the third quarter to offset soaring production costs. Are you comfortable paying 4.1% more for your Ben & Jerry’s Chocolate Fudge Brownie? Probably.
But what if it rises to 6%? Or 7%? Or 9%? And what if it’s not just ice cream?
When the entire cost side of your budget is approaching a double-digit increase while your income hasn’t risen a dime, at some point you’ll be forced to pick and choose your purchases.
And what gets the axe? Your Chocolate Fudge Brownie indulgence? Or, say, your baby’s diapers?
I could wager a guess.
This “to buy or not to buy?” decision will mean one thing – it’s every stock for itself.
***If that sounds familiar, it’s because Louis Navellier recently suggested this is the type of market we’re moving into
For newer Digest readers, Louis is a legendary quantitative investor. “Quant” simply means he uses numbers and algorithmic-rules to guide his investment decisions. Forbes actually named him the “King of Quants.”
In essence, Louis uses powerful computers to scan the market for the quantitative fingerprints of high-performing stocks. And these fingerprints usually all point toward one underlying trait…
Earnings strength.
In the short-term, all sorts of factors can drive market prices – a CEO stepping down, a big new customer, perhaps even a rumor.
But in the long-term, what drives a stock price is the company’s earnings. Plain and simple. And today, given the various concerns weighing on the market, Wall Street is refocusing on earnings.
This “every stock for itself” environment means Wall Street is rewarding companies that are maintaining strong earnings, while punishing those with poor earnings.
We’ve already seen this. Last week, we noted how JPMorgan posted decent numbers, but the stock sold off because most of the $2.3 billion profit increase from last year to this year wasn’t driven by growth in JPM’s business segments; it was driven by an accounting maneuver.
Given this, as inflation continues dragging on our economy and shaping the investment markets, it’s more important than ever to make sure your portfolio is filled with stocks that can endure – even thrive – in such conditions.
***Last week, Louis held a special event that explains how he identifies stocks with significant earnings strength
In his Project Mastermind event, Louis detailed his quant-based market approach that targets quantifiably strong stocks.
It’s a system he’s refined over four decades of investing, based on one core takeaway: better investing comes through a computerized market analysis that focuses on fundamental strength.
Over the weekend, Louis provided an example of a company uncovered by his Project Mastermind system:
Daqo New Energy Corporation (DQ) is one of the lowest-cost producers of high-purity silicon in the world. So, it’s not too surprising that the company’s polysilicon and solar wafers are in top demand with the solar photovoltaic (PV) industry, which utilize Daqo’s products to develop solar power solutions.
After detailing some of Daqo’s huge earnings beats in recent quarters, Louis pointed toward the company’s third-quarter earnings report coming this Thursday…
Analysts expect Daqo to report earnings per share of $3.11, which would represent an incredible 1,051.9% year-over-year increase. Revenue is expected to be $517.5 million, up 312.3% from last year’s third quarter.
Louis will be releasing a new Project Mastermind stock recommendation this Thursday. Here he is with a few more details:
The stock is well-positioned to post stunning earnings results in its coming earnings report. I look for its earnings report to dropkick this stock and drive it higher… so now is the time to get in before it starts firing on all cylinders.
For more on this stock as one of Louis’ Accelerated Profits subscribers, click here.
Bottom-line, let’s be realistic about the future. While hyperinflation is unlikely, the Fed most certainly doesn’t have inflation under control. That means it’s critical that your portfolio can handle inflation that’s here for longer – and higher for longer.
