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Where are we going with stock prices? Prophets and profits. Something we can do about guns.

After four magnificent days in the market (especially in tech stocks), I’ve been mulling what to write today. What next?

Our little town of Chatham NY is booming. The coffee shops are full. The streets are a traffic jam of happy folk aggressively ignoring the skyrocketing price of petrol at our four gas stations. The coffee shop WiFis are bubbling with budding novelists and one young lady studying for the bar. At one cafe, I count 31 WiFi networks. The local phone company has gig Internet. It’s magnificent and even works when it rains, unlike DirecTV.

The town’s leading building contractor, Aaron Gaylord, won’t bid fixed price. He used to guarantee a month, then a week, then a day. Now he’s done. He’s labor (which is escalating) and materials (which are skyrocketing — from $530 to $1300 for a square of cedar roofing shingles in less than a year)

Inflation has hit with a vengeance — in materials and interest costs. Everyone is dancing. A big multi-family sale fell through when the buyer figured in higher borrowing  costs. All the present owners (including me) were happy because rents are rising and the property will be worth more with higher rents at the end of the summer.

The town’s leading banker, David McNeill, is ecstatic. Everyone’s low interest loan is coming due. He’s inundated with demand for refinancing. He’s “never been busier.”

The town leading insurance broker, Matt Wood, says consumer spending is buoying the economy and we’re not going into recession — which is technically defined as two quarters or GDP going negative. His insurance brokerage is getting rave reviews on Google and Yelp.

Jack be nimble. Jack be quick. Opportunities abound. My call on Nvidia earlier this week was brilliant, or lucky.

Then today’s Economist lands in my mailbox on the side of our dirt road.

Ain’t “technology” wonderful? Our mailman has never lifted our red flag…

The Economist has a “Leader” called Prophets and profits. They say it better than I do. Their leader is beautiful — On the one hand… On the other…. The reason President Truman wished for a one-handed economist. Here’s their leader:

Why investors are increasingly worried about recession in America
And why the speed of the market correction offers a crumb of comfort

So choppy has America’s stockmarket been this year that only a fool would predict mid-week (or even mid-Friday) whether prices will end the week up or down. This time the answer was up: at the market’s close on May 27th, the s&p 500 index of leading American shares had broken a seven-week losing streak. Thus far, at least, it has avoided (just) the 20% peak-to-trough decline that is the informal definition of a bear market. But there are signs that America’s markets are entering a new, more worrying phase.

From January until early May, falling share prices could be put down to the effect of rising bond yields, as fixed-income markets responded to guidance from the Federal Reserve that interest rates would be going up a lot and fast. Higher interest rates reduce the present value of a stream of future company profits. Shares were marked down accordingly, especially those of technology firms whose profits could be projected furthest into the future. But in recent weeks share prices have kept falling, even as bond yields have dropped back. This combination points to fears of recession. Indeed, the mix of Fed tightening, slowing gdp and rising production costs has the ominous feel of the later stages of a business cycle. The expansion is barely two years old. Yet investors are already worried that corporate profits are under threat.

The world economy has been sideswiped by several big shocks. China’s gdp is likely to contract sharply in the current quarter, because of renewed lockdowns. Europe’s consumers are suffering a squeeze on purchasing power because of sky-high gas prices. America’s economy had seemed resilient. But parts of the economy that are sensitive to rising interest rates are faltering, even though the Fed has barely got going. Figures released on May 24th showed that new home sales fell by almost 17% between March and April. Any sign from corporate reporting that demand is flagging is seized upon. When Snap, the company behind Snapchat, a social-media app, said this week that its sales would be weaker than it had suggested as recently as April, its share price plunged by 43%. The share prices of Walmart and Target fell when the two retailers reported they had been left with piles of unsold stock after misjudging consumer demand.

Slower growth is one element of a textbook profit squeeze. A consequence of the mostly stable cost base of big businesses is that, when sales rise or fall, profits rise and fall by a lot more. This effect boosted profits considerably last year, but as gdp slows it goes into reverse. The other element of a profit squeeze is higher costs. A variety of bottlenecks have pushed up the prices of key inputs, notably energy. Debt-service costs are rising with interest rates. But the main worry is wages. The jobs market in America is tight. Pay rises have become more generous as a consequence. Corporate America finds itself in a double bind in this regard. If it passes on rising wage costs in higher prices, it will keep inflation high and force the Fed to raise interest rates more aggressively. If it absorbs rising costs, that will crush profits.

Is any relief for investors in sight? Some soothsayers feel they are due a bear-market bounce. Their theory is that if a lot of traders have already sold stocks, there will be fewer potential sellers to drive prices down in the future. But a rally based on more balanced position-taking will not do much to change an awkward macroeconomic backdrop for equities.

If consolation can be found in the present conjuncture it lies in the fact that financial markets have done a lot of the Fed’s heavy lifting for it. Since the start of the year, bond yields have risen sharply; mortgage rates have surged; spreads on corporate bonds have widened; the dollar has climbed; and share prices have slumped. In a counter-factual world in which financial markets had shrugged off the Fed’s two interest-rate increases so far, the risks of a hard landing for the economy would, paradoxically, be greater. Inflation pressures would keep building. But as things stand, interest rates may not have to go quite as high as they otherwise might have. Amid all the down days for the stockmarket, this is not a great comfort. But every little helps.

That’s it for today’s Economist. Now to Harry.

Last week I covered all my shorts and bought long NVDA, AAPL, GNRC, BROS and NKE. It was a nice week on a much-reduced (i.e. smaller) portfolio.

Technology in your home — latest thoughts

It’s tempting to think technology will help your home. Here’s some of our experiences with the 15-year old home we’re trying to save:

+ Don’t buy technology that you bury in the wall. We have several broken electric blinds. We’ll have to pry out the wood covering them. We have category 3 Ethernet cable buried in the wall. The new Ethernet is Category 8. It’s much faster.

+ Move your fiber router to the center of your house — closest to where you’ll use it. WiFi speed drops as you move away from your router.

+ Get fiber and a gigabit Internet service.

+ Our manual blinds still work, but don’t look as handsome as the buried ones. But they’re never broken, compared with the electric ones, which have.

+ You’ll never use the speakers in your ceiling. Don’t put them in.

+ Distributing giant TVs around the house makes no sense, now everyone is watching stuff on their iPhones and playing games on their laptops. Personally I prefer watching TV on my laptop in bed. I can see the tennis ball clearer  on my laptop than I can on some distant mega-screen on the other side of the room.

+ Every piece of technology should be protected with a surge arrestor and a battery. WiFi router. Laptop screens. etc. You should have a Generac emergency generator that keeps everything running when it stores  — from your boiler to your refrigerator, etc.

More nonsense with Windows 11

Windows 11 is a ploy by Microsoft to sell more of its computers. Microsoft is pushing the idea that your old laptop won’t run Windows 11, so need a more powerful laptop to run Windows 11. It’s thoroughly dishonest — especially when you recognize that Windows 11 is a far worse operating system than Windows 10.

The big irony is that my computer repair shop in New York is making a handsome business taking Windows 11 machines and reverting them to Windows 10, which its customers prefer. Cost? $95.

The French Tennis Open is on

The tennis is really good. Two youngsters are kicking ass: Iga Świątek in the women and Carlos Alcaraz in the men. They are both phenoms. Haven’t seen anything like them since the early days of Federer and Nadal. They’re playing on The Tennis Channel, which you can stream.

Weekend reading

+ Foreign Affairs magazine

Putin Against History
How His War Has Erased Russia’s Past—And Endangered Its Future

Click here.

+ New Yorker magazine

Letter from the Southwest
After the Uvalde Shooting, Lifelong Residents Consider How to Stop the Next One

Click here.

+ From The Economist

Learning from Uvalde
Why America should make it harder to buy guns
In many states, it is easier to own a gun than a dog. That is absurd

The Economist believes it should be hard to own a gun. Farmers need them for pest control; hunters and other hobbyists may use them for sport. But each gun should be licensed and registered. Each owner should have to pass stringent background checks, and the process should be slow—no one should be able to buy a gun while in a fit of rage. Also, there is no good reason to let civilians own guns that fire rapidly, or magazines that let them kill a room full of people before reloading.

Click here.

Sad commentary on politics

It’s stopped raining. I’m off to play tennis.

See you soon. – Harry Newton