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5 Things to Know in Investing This Week – October 20th, 2023

The Bond Vigilantes Issue

Fed Chairman, Powell, implied the Fed was done raising the fed funds rate for now partly because longer-term yields were rising. Excessive Congressional spending is now driving inflation and higher Treasury yields instead of actions by the Federal Reserve. Politicians in Argentina refuse to learn the lesson of how modern monetary theory doesn’t work and propose both big government and no taxes. That doesn’t mean everything is free; just that you pay for your massive government in inflation. “Higher for longer” now has a new meaning. Want to know more?

This week, we’ll address the following topics:

  • Las Vegas Sands ($LVS) is back. Singapore posting near-record results. Macau close to 2019 levels. Big construction projects. Yay dividends. Yay buybacks. (HT to legendary former Chairman, Sheldon Adelson.)
  • Powell done. Congress and the bond vigilantes are now in control of inflation and the yield curve.
  • Trade war with China taking down Nvidia ($NVDA) stock. Will stock market indexes follow?
  • The consumer continues to surprise economists by spending more and more. Are they receiving more?
  • Argentina politician aims to keep his country at the top of the inflation/default pyramid of bad policy. Argentinian people are starting to understand that they’re still getting the bill for free stuff and charting a new course.

Ready for a new week of bad policy? Let’s dive in:

 

1)  Las Vegas Sands is Back:

Las Vegas Sands ($LVS) reported a spectacular third quarter. The Marina Bay Sands in Singapore posted $491MM in property-level EBITDA which was the second highest I’ve seen in my quarterly model that goes back to 2016. Macau operations went from negative $152MM last year to a solid and improving $631MM despite a typhoon that forced closures for part of September. Due to a shift towards the high margin mass and premium mass business, operating margins are now above pre-pandemic levels.

3Q Operating margin ticking above 40% for the first time in my model.

DKI Takeaway:  Singapore is performing at near-record levels, and is adding a 4th hotel tower and suites. Macau is approaching pre-pandemic levels. Both of these are happening with travel and visitation still below 2019. The shareholder-friendly company has reinstated the dividend and increased the stock buyback authorization to $2.0B. This is your opportunity to buy pre-pandemic financial results at pandemic-crisis prices.

 

2)  Powell Acknowledges the Bond Vigilantes Have Control:

Fed Chairman, Powell, spoke on Thursday and indicated the Fed is unlikely to raise rates in the near future. That caused the market to rise – briefly. Then he explained that the rising yields on the longer-term part of the yield curve were doing the Fed’s work for them. That caused the market to fall. He’s still avoiding placing blame where it belongs.

The Fed has stopped hiking but Treasury yields are rising at an increasing rate.

DKI Takeaway:  The Fed is done hiking for now, but Treasury yields are still climbing. The reason is massive Congressional overspending is being funded by debt. That means more currency creation leading to more inflation. The bond market is recognizing that Powell can’t stop this and Congress won’t reduce spending. “Higher for longer” now applies to inflation. Need help hedging for that risk? Reach out and we can help protect your portfolio.

 

3)  Trade War with China Taking Down Nvidia – Market Implications:

Nvidia ($NVDA) has had a spectacular run this year and with good reason. The company makes chips that are useful for artificial intelligence (AI) applications and has been raising revenue and earnings guidance by massive amounts all year. In order to limit Chinese growth in this crucial area of technology the White House has limited exports of Nvidia’s chips to the country that makes up 20% of revenue.

Unsurprisingly, $NVDA stock was down about 10% this week. Chart from Yahoo Finance.

DKI Takeaway:  Last decade, we had the FANG stocks which morphed into FAANG, then, FAAMG, and now, the magnificent seven. They’re all representations of a market with decreasing breadth. For most of this year, the S&P 500 has risen due to the performance of seven technology stocks while the other 493 stocks in the index have been collectively flat to down. This action by the US government just caused a decrease in one of the biggest contributors to index performance in 2023 year-to-date.

 

4)  Strong Consumer Sales – Again:

Despite constant warnings that the consumer is in trouble, Americans continued to spend in September. Retail sales were up .7% vs August and were above $700MM. Projections had been for .3% growth. What’s going on here?

Aside from a couple of understandable blips, the consumer continually spends more.

 

That’s six straight months of increasing spending.

DKI Takeaway:  DKI has been pointing out inconsistent economic data for the past year. In this case, we think the data itself has two explanations. It’s possible to look at increasing retail sales and conclude the consumer remains in great shape, is employed, has higher wages, and is enjoying spending on lots of fun services and experiences. Astute observers also point out that spending is up 3.8% y/y meaning that after accounting for inflation, people are just spending more to maintain the same quality of living. If you’re skeptical about the accuracy of the CPI (as DKI is), you could conclude the consumer is spending more and receiving less. Normally, we’d add the line “higher for longer”, but as noted above, Powell has acknowledged the bond market is taking control.

 

5)  Argentina Proposes to Pay for All Spending in Inflation:

The election in Argentina has become fascinating. The current favorite to win is a libertarian who wants to cut the size of the government and change the currency. This would be a huge win for the liberty movement gaining ground in South America, currently led by El Salvador. The Peronist candidate has just offered the citizens of Argentina a fascinating offer: no taxes. Not no new taxes; just no taxes. If he’s offering to cut the size of the government to zero, I haven’t seen that.

Argentine citizens have been dealing with this for decades. Inflation changes your society.

DKI Takeaway:  Argentina constantly debases their currency, defaults on their debt, and reboots using the exact same strategies of offering everyone everything. The beautiful country is rich in natural resources, has a long coastline, and a well-educated population. However, they constantly vote for more “free” handouts which are provided by printing currency at a rate that would make the US Treasury blush. Promising more benefits, bigger government, and no taxes sounds like a lot of fun. It also means that people will be taxed either through import tariffs which make foreign goods expensive, or through inflation which makes everything more expensive. Note to the US Congress:  Pay attention. This is how you destroy an economy.

 

 

Information contained in this report is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied and DKI makes no representation as to the completeness, timeliness or accuracy of the information contained therein or with regard to the results to be obtained from its use.  The provision of the information contained in the Services shall not be deemed to obligate DKI to provide updated or similar information in the future except to the extent it may be required to do so. 

The information we provide is publicly available; our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion are precisely that and are subject to change. DKI, affiliates of DKI or its principal or others associated with DKI may have, take or sell positions in securities of companies about which we write. 

Our opinions are not advice that investment in a company’s securities is suitable for any particular investor. Each investor should consult with and rely on his or its own investigation, due diligence and the recommendations of investment professionals whom the investor has engaged for that purpose. 

In no event shall DKI be liable for any costs, liabilities, losses, expenses (including, but not limited to, attorneys’ fees), damages of any kind, including direct, indirect, punitive, incidental, special or consequential damages, or for any trading losses arising from or attributable to the use of this report. 

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