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Weekly Points – December 22nd, 2023 – 5 Things to Know in Investing This Week – The Panic Issue

GDP was revised down, but is still at a high level due largely to massive Congressional overspending. FedEx provides a warning about future demand which is then confirmed by November’s PCE data. The Philly Fed shows a massive decline in new orders. Even retail powerhouse, Nike ($NKE) had a bad quarter and gave disappointing forward guidance. The consumer is spending, but there was a lot of data this week indicating expectations of future economic weakness.

This week, we’ll address the following topics:

  • 3Q GDP revised down. Should we panic?
  • FedEx ($FDX) lowers guidance. Should we panic?
  • Philly Fed announces a huge decline in new orders. Should we panic?
  • Can we trade Janet Yellen for the Manila SaveMore manager?
  • The PCE actually fell even though shelter (housing) prices continue to rise. Do not
    panic over this.

Ready for a new week of panic-inducing headlines? Let’s dive in:

1) 3Q GDP Revised Down:

3Q GDP was revised down from 5.2% to 4.9%. While that’s a substantial revision, 4.9% GDP growth is still a big number. Many are taking that as a positive indicator of economic health, and there’s no question the labor market has been strong and consumer spending has been
high. I’m a bit skeptical of the reported number due to massive Congressional overspending. Throwing an extra $2 trillion into the economy and adding that to the debt isn’t necessarily a sign of a strong economy. I also remind you that printing money and adding to debt isn’t
productive growth; but rather, future demand pulled forward. Those bills will have to be paid at some point; probably through future inflation.

3Q GDP Revision

3Q revised down but still strong.

DKI Takeaway: After the announcement, the market was up big in Thursday’s trading. Some of that was related to positive results at chipmaker, Micron Technology ($MU), and some was related to the expectation that slowing growth would get us closer to a Federal Reserve
rate cut. Despite the big market reaction, I don’t think the revision, however large, is significant.

2) FedEx Lowers Guidance:

The reason so many Wall Street analysts and investors look at results from the big shipping companies like FedEx ($FDX) is because package delivery revenue is a good proxy for national demand for goods. This week, FedEx announced quarterly revenue in line with expectations, but with a big earnings miss. Of greater concern, the company reduced revenue guidance for the fiscal year ending in May, 2024. $FDX now expects a slight decline in revenue vs last year.

$FDX

The market was not pleased with the miss.

DKI Takeaway: DKI has been talking about inconsistent economic data since the 4th quarter of 2022. While holiday sales have been strong, the FedEx guidance is concerning. Part of this can be explained by a shift in consumer preference for services over goods. However,
while DKI isn’t panicking over the economy at the moment, shipping demand is something worth watching over the next few quarters.

3) Philly Fed Announces Decline in New Orders:

The Philadelphia Federal Reserve announced a huge decline in manufacturing activity in its region. From the report: “The diffusion index for current general activity declined from -5.9 in November to -10.5 in December. This is the index’s 17th negative reading in the past 19
months.” In addition, the new orders index fell from 1.3 to negative 25.6 in December.

Philly Fed Index - December '23

Source: Bloomberg, from ZeroHedge.com.

DKI Takeaway: Despite the low unemployment and high consumer spending, we’ve been seeing a trend of lower orders and reduced economic activity for many months. In addition, the yield curve has been inverted for a long time. (That means short-term Treasury rates
are above long-term ones.) For those of you predicting a coming recession, these would be two significant exhibits. I wouldn’t panic over this – yet, but this one concerns me a lot more than the prior two “Things”.

4) DKI Proposal to End Inflation!:

Deep Knowledge Investing has had fun sharing and creating a variety of inflation indexes. The standard ones are the CPI and Core CPI (excluding food and energy). When someone started writing about “Super-Core” (excluding food, energy, and housing), I joked that we
were following the “DKI Ultra-Core” index which is the estimated price of an apple that has been in Jerome Powell’s refrigerator for two months. We now bring you the Manila Chicken Price Watch Index:

Weekly Points – December 22nd, 2023 - 5 Things to Know in Investing This Week - The Panic Issue

The Manila SaveMore manager has defeated inflation!

DKI Takeaway: US Treasury Secretary, Janet Yellen, was publicly moaning about her regret in not creating more inflation here in the US. Partnering with an overspending Congress and a Federal Reserve that kept rates at or around zero for too long, we’ve all been experiencing
her intended inflation for the past two years. At the same time, chicken prices in Manila have been stable for weeks. DKI suggests we trade Janet Yellen to the Philippines for the Manila SaveMore manager who would almost certainly do less damage at the US Treasury
than Yellen. Would you support this?

5) PCE Up Less than Expected – Falls vs Last Month:

The personal consumption expenditures price index (PCE) is the Federal Reserve’s preferred inflation measure. The November PCE was up 2.6% vs last year and DOWN .1% from last month. The Core PCE, which excludes food and energy, was up 3.2% vs last year and up .1%
for the month. That 3.2% increase was slightly lower than the expected 3.3%. The one negative in the report is housing prices continue to rise despite expectations that they’d start to moderate.

PCE - December '23

There’s no question this chart shows significant improvement.

DKI Takeaway: For the first time in years, we are seeing a tiny bit of deflation (lower prices) instead of disinflation (a reduction in the rate of price increases). The recent economic trend has been high current consumer spending combined with lower manufacturing and
reduced retail orders. While consumers are spending for a Merry Christmas, the people further up the supply chain are seeing a more Grinchy outlook. After two years of correctly saying “higher for longer”, last week, DKI acknowledged the Fed “pivot” had arrived. Last
month’s PCE data is further confirmation we have reached the terminal rate meaning the Fed is highly unlikely to raise rates again this cycle.

 

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
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