The Halftime Report was published this week. Let’s never speak of the first half of 2022 again, but let me know if you’d like a copy.
A rose by any other name
The Russell indices rebalanced back in late June, and two funny things happened along the way.
First, GameStop was removed from the Russell 1000 Growth Index and placed in the Russell 1000 Value Index. This is funny because (1) GameStop was “upgraded” to growth last year and is already getting the boot, and (2) going from growth to value is viewed as being downgraded by pretty much every investor on the planet – including value investors. If growth is Wrigley Field, then value is somewhere in Kansas.
Getting back to GameStop, think about this for a minute. How can a stock roundtrip like that in 12 months? If this was baseball, no big deal. Some hotshot pitcher in AAA gets the look, gets worked over by Sammy Sosa’s evil twin on day one, and then gets sent back to Topeka. Fine, whatever.
But this isn’t baseball. It’s a business that directs hundreds of billions in assets every year. How can a stock be viewed as a value play, become a growth stock thanks to an epic short squeeze ignited by a dude who dipped chicken tenders in champagne to celebrate, and then get demoted back to a value stock post-squeeze?
Second, and this is truly spectacular, three other growth stocks – Facebook, PayPal, and Netflix – are also being added to the Russell 1000 Value Index (although these will also remain in the Russell 1000 Growth but at smaller weights). Why, might you ask?
It’s because “value” is defined by Russell as mostly having an attractive price-to-book (P/B) valuation. Since these stocks have been hammered, they’re trading at lower P/B multiples than a year ago.
Here’s my question… What tech analyst is running into their portfolio manager’s office right now screaming, “I’ve been doing some analysis on Facebook’s stock price relative to its property, plant, and equipment values on its balance sheet, and this is a screaming buy!”
Nobody, and I mean nobody, cares about P/B multiples on tech companies. Maybe back in the Intel era decades ago, but pretty much only financials and maybe some industrials or other asset-heavy companies get valued on their tangible assets these days. Tech is all about intangible assets like software code and dopamine fasting programmers with PhDs.
I’ve warned about misusing benchmarks in the past, and this is just another example of why. At the end of the day, the S&P 500 and most other popular indexes are little more than a bunch of people sitting in a room and picking stocks for marketing tools that generate billions in licensing fees.
Is this really something advisory clients should be benchmarking their financial future against?
Every rose has its thorn
Speaking of dopamine, when I learned that Def Leopard, Motley Crue, Poison, and Joan Jett were coming to town in late July, I couldn’t have been more excited. That is until I tried to buy tickets. The cheapest seat I could find is $280. Decent seats are like $700, and where I’d prefer to sit is $3,000 PER SEAT.
I’ve argued for some time that inflation is probably higher than the government reports. If this isn’t clear evidence to further support what I must assume everyone who doesn’t work for the government already knows, then I don’t know what else to say.
But I wonder if this week’s inflation report will kickstart the heart of the Fed. They’re slated to raise rates by 75 bps in their next meeting, but the probability of a one-point increase rose to around 79% on Wednesday, up from around 12% before the report. The Bank of Canada hiked by a full percent this week, so…
To be abundantly clear, the futures market’s track record is a fallen angel at best, but it’s still interesting to see what’s being priced in. I’d wager anything is on the FOMC’s table right now.
One year ago, the 1-yr Treasury yield was 0.04%. It reached 3.21% on Wednesday, which is a 15-year high. The 2yr – 10yr Treasury yield spread is also negative again (aka “yield curve inversion”). J-Pow needs to give us something to believe in and fast.
At this point, I support any measure that will pour some sugar on inflation. Perhaps a recession is just what this country needs to get back to “normal.” Otherwise, it’ll be the same ol’ situation the next time the Crue comes through town.
The tallest midget
I’ve lost count of the times I’ve written and/or spoken publicly about why the U.S. dollar will not lose its reserve currency status in our lifetimes. But for some reason, this one just won’t go away.
I think it’s because anytime something bad happens in the world, the fearmongers jump all over it and say that this will be the straw that breaks the camel’s back. Somehow all of those dollars are about to get replaced with renminbi overnight.
But here’s the thing with currencies – they’re relative. When something bad is happening globally, it usually hits other countries harder than the U.S. Sure, inflation is killing the value of our dollars, but guess what’s happening in Europe right now? If you said “parity,” pat yourself on the back because, as of this week, €1 can now buy $1.
Said another way, the dollar is surging right now. In fact, demand is so high that some countries can’t get the dollars they need for global trade. Sri Lanka’s government just fell because they ran out of dollars (oh, and banning chemical fertilizers a year ago, creating widespread destruction of their entire economy).
No double we have problems here, like massively inflated concert tickets, but the dollar is on fire because:
- Our economy rebounded faster than anywhere else. We’re also energy and food independent, and the importance of this cannot be overstated.
- Geopolitical issues have increased the demand for safety (it doesn’t get safer than the USD).
- Germany’s 1-yr yields 0.27%, and Japan is still negative at -0.105%. Ha!
That shiny pet rock
Haven’t ripped on gold in a while, but if you’re wondering how well it’s done as an inflation hedge, it’s down 7% this year. Also that digital gold (bitcoin) is down around 56%. That’s why this is the meme of the week.
Enjoy the weekend…
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