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Weekly Points – April 5th, 2024 – 5 Things to Know in Investing This Week – The Shockwave Takeover Issue (Includes video version)

The Shockwave offer that DKI predicted in December happened this week with Johnson &  Johnson agreeing to pay $335 per share in cash. DKI subscribers celebrated! The PMI came in  hot. Don’t want to read the details? The conclusion is “higher for longer”. More insane calls by “experts” crying for lower interest rates in order to help homebuyers ignore the fact that  it was low rates that led to this particular housing bubble and the government “help” they  want will end up in the sellers’ pockets, not the buyers’ bank accounts. The Congressional  Budget Office projects US debt to GDP will be 166% 30 years from now. I’m prepared to make  a sizeable bet with anyone reading this that we hit that mark well before 2054. DKI Advisor  and real estate expert, Howard Freedland, contributes a guest “Thing” explaining the impact  of the new settlement on realtor commissions. 

Plus, we have one big non-Thing. We’re not covering the new employment report out Friday  because the numbers are lies. We keep getting great reports which are then revised  downwards during the following months. Plus, all the new jobs are some combination of  government creations and more part-time work. Finally, there are reports that employment has been overstated by almost a million jobs. Reporting on that is an act of political advocacy,  not financial analysis. 

This week, we’ll address the following topics: 

  • Shockwave Medical $SWAV gets the takeover offer. Definitive agreement announced. – The purchasing managers index (PMI) came in hot. Regular readers can prepare for a  familiar conclusion. 
  • Economically illiterate people say silly things with great confidence. We’ll help you  identify the nonsense. 
  • The CBO releases projections that would be scary if correct. The good news is the  projections are lies. The bad news is the CBO is being too optimistic. 
  • Want to know the impact of the change in realtor commissions on the real estate market.  DKI Board Member and real estate expert, Howard Freedland, contributes a guest  “Thing”. 

Ready for a new week of shocking information? Let’s dive in: 

1) Shockwave Medical $SWAV Being Acquired by Johnson & Johnson $JNJ:

Last week, DKI reported that Shockwave Medical was in takeover talks with Johnson &  Johnson. On Friday morning, the parties announced a definitive agreement. $JNJ is buying  $SWAV for $335 in cash. Another round of applause for cardiologist and DKI Board MemberDr. Paul Thompson and interventional cardiologist, Dr. Dan Fram, who were instrumental in  suggesting the idea and explaining the medical implications of Shockwave’s devices.

$SWAV B

More than 70% in under 4 months. That worked out well. 

DKI Takeaway: DKI recommended Shockwave Medical $SWAV to subscribers in December at  $190. Our positive thesis was based on an expected takeover for more than $300 per share.  Boston Scientific $BSX approached Shockwave last year. They could return to bid again, but  given that the $JNJ talks have been public for more than a week and that there’s now a  breakup fee, it’s possible but unlikely they re-enter the situation. DKI subscribers made more  than 70% in under four months. This is the second DKI portfolio company to be acquired  following Houghton Mifflin which was bought for more than 4x DKI’s initial purchase price. If  that’s of interest to you, you’re welcome to subscribe. Otherwise, we’ll be happy to keep  informing you after the fact. 

2) Purchasing Managers Index Comes in Hot: 

The ISM Purchasing Managers Index (PMI) came in high. The index was 50.3 for March. This  was above February’s 47.8 and above expectations for 48.3. On the positive side, the  economy is expanding. On the negative side, this makes it harder for the Fed to lower rates.  On the very negative side, the primary reason we have a “good” economy is due to debt-fueled governmental overspending. That’s not sustainable and is leading to debt increases  that are greater than GDP growth.

ISM Manufacturing PMI

Manufacturing and prices of goods have been strengthening lately.

ISM Services PMI

The Fed has struggled to get services inflation under control. Services have been relatively  weaker lately. 

DKI Takeaway: The market was concerned that greater economic activity combined with  sticky (not transitory) inflation would keep the Fed from lowering interest rates later this year.  Then Fed Chairman, Powell, calmed the market by saying he still thought the Fed would lower rates in 2024. On Thursday, Minneapolis Fed President, Neel Kashkari, came out and said he  wasn’t sure the Fed should lower at all this year. This is the chattiest group of Fed Governors  I’ve ever seen. None of them can resist an open microphone and they often contradict each  other within days. Still, the conclusion from this week’s data is “higher for longer”.

3) Economically Illiterate People Say Silly Things: 

Asset gatherers are saying we need lower interest rates to avoid a recession. Congress and  the White House have been talking about lower mortgage rates and giveaways to “help”  homebuyers. Does anyone understand cause and effect? The same massive governmental  stimulus that caused inflation is keeping us out of an official recession. This doesn’t mean the  economy is good. It just means we’re pulling forward future demand in favor of consumption now. Homebuyers aren’t hurt by current mortgage rates. It was years of near-zero interest  rates that led to a housing price bubble. Subsidies for buyers will lead to higher prices, not  lower ones.

3-Month Rates and Yields Certificates of Deposit

Higher interest rates aren’t bad for everyone. Retirees and savers like this. 

DKI Takeaway: The dominant economic narrative is that higher interest rates are crushing  the consumer with an increase in the price of mortgages and credit card debt. However, it was the government keeping rates too low for too long and then debasing the dollar with  excessive debt-fueled spending that caused the inflation problem we’re seeing now in  addition to asset bubbles including higher home prices. For many Americans, higher rates,  which encourage saving and investment, have been a huge benefit. Many people are  benefitting from the opportunity to earn 4% – 5% on their cash balances instead of the .01%  we’ve seen in recent years. 

4) CBO Says We’re Heading for 166% Debt to GDP. DKI Disagrees: 

The Congressional Budget Office (CBO) just released projections that US debt will grow from  100% of GDP to 166% in the next 30 years. Please note that these figures completely ignore  the more than $200 trillion of off-balance sheet debt for programs like Social Security and  Medicare. Currently, our on-balance sheet debt is increasing by $1 trillion every 100 days and  the interest expense needed to service that debt is increasing on a parabolic curve (that  means it’s going up a lot and at an increasing rate). Congress has “responded” with  consistently-higher budget deficits. The only discussion about spending “cuts” really means a  slightly slower rate of spending growth.

CBO Debt to GDP

DKI Analysis is certain these projections are pure weapons-grade bolognium.

DKI Takeaway: The CBO is typically hamstrung by rules that prevent them from considering  the effects of bad policy in its analysis. Still, this chart is complete nonsense. Current US on balance sheet debt is about $35 trillion on a $27 trillion economy meaning that the 100%  starting point in the chart above for 2024 isn’t right. I further believe these projections  assume a lack of recessions which cripple tax receipts, a lack of “one-time events” like the  2008 bailouts and trillions of dollars of Covid “stimmies”, and also assume future  Congressional spending restraint that is never going to happen. The US will hit debt to GDP  of 166% long before 2054, and I’m prepared to put real money up to back that opinion if  anyone wants to take the “over” on 2054. DKI has been writing about Japan’s debt problem  since 2022. The US is heading in that direction. 

5) Real Estate Commission Chaos – What’s it Mean for You?: 

DKI real estate advisor, Howard Freedland, weighs in on the change in realtor  commissions…The National Association of Realtors (NAR) settlement on commission  negotiation is affecting the supply of homes right now, but will have less effect on pricing  than many expect. By making the commission structure more negotiable and competitive,  and increasing buyer representation contracts, it will make the industry more responsible;  something I support. In an environment of already-tight supply, the settlement has caused  uncertainty. Most people don’t know the long-term effect on home prices from negotiated  commissions and buyer agreement. However, this is how commercial real estate has  operated for years and as a result, I don’t expect any change to pricing in the commercial  property market.

US Housing Price Index

Home supply has been tight leading to higher prices. 

DKI Takeaway: The publicity of the NAR settlement is making people question whether they  should wait to sell their home, thinking there will be massive savings after the settlement is  enacted. They’re hoping for further constriction of already-tight supply. The uncertainty will  be resolved and have little long-term effect since most consumers will still need to pay for  services rendered in order for their transaction to go smoothly. The way they pay and the  people they pay may change, but any meaningful change to housing prices as a result of the  new rules is questionable at best.

Here’s the video version:

 

Information contained in this report, and in each of its reports, 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. DKI makes no representation as to the  completeness, timeliness, accuracy or soundness of the information and opinions contained therein or regarding  any results that may be obtained from their use. The information and opinions contained in this report and in  each of our reports and all other DKI Services shall not obligate DKI to provide updated or similar information in  the future, except to the extent it is required by law to do so. 

The information we provide in this and in each of our reports, is publicly available. This report and each of our  reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion in this and in each  of our reports are precisely that. Our opinions are subject to change, which DKI may not convey. DKI, affiliates of  DKI or its principal or others associated with DKI may have, taken or sold, or may in the future take or sell  positions in securities of companies about which we write, without disclosing any such transactions. 

None of the information we provide or the opinions we express, including those in this report, or in any of our  reports, are advice of any kind, including, without limitation, advice that investment in a company’s securities is  prudent or suitable for any investor. In making any investment decision, 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. 

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