September 29, 2021

As the 3rd Quarter of 2021 comes to a close today, we have a ton to unpack this week. First, it’s an end of an era as Dollar Tree now has to raise prices meaning, the items on their shelves are no longer a dollar. If this doesn’t show you how bad inflation is getting, just wait until next year. My fear is that the resignations of the Boston and Dallas Federal Reserve Presidents are deeper than their portfolio holdings, and most likely means that the Federal Reserve is way behind the inflation curve.

Speaking of way behind the curve or way out to sea, how can we have 66 cargo ships waiting off the coast of California to get a slot in a port to offload? You mean to tell me that these ships set sail, and nobody knew they were on their way? Well, the unions don’t work on Sundays, which, as a religious man, I completely understand. If the port had a slot open to unload the cargo, then they probably don’t have enough dock workers or drivers for trucks to move the cargo, regardless. This supply chain issue is just plain ludicrous. I know of a number of logistics companies, even one I worked for during my college years which begins with “U” and ends with “S”- I can promise you that they would be able to find a solution.

Speaking of ludicrous, how can Congress have a proposed $3.5 trillion stimulus package and it cost $0? According to the Wall Street Journal, this package is going to cost over $5 trillion. That’s fuzzy math to me, and I think we should immediately vote all of them out of office- and I mean both sides of the aisle. The gall of these politicians, speaking to the American public as if we are morons. Just like we have for the White House, we need term limits for all politicians. Also, do we really need “Tree Equity” at this time? I’m all for progress, but this package is off the charts.

Today, Congress has passed the bipartisan band-aid to keep the government running through December- that is only two months. What I still don’t understand is how can we have over 2 million continuous jobless claims while having almost 11 million job openings. What scares me most about this irresponsible Congress (and the ones that came before it) is that we are mortgaging our children and grandchildren’s future all in the name of fuzzy math. Things must change. See ya soon

Three Market Drivers

Here at Chairvolotti Financial, we focus on three market drivers that lead to notable movements in the stock market: market economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 points economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed.

Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I.

Our sentiment indicator tracks how everyday investors currently feel towards the US economy and the stock market. Between Chairvolotti Financial’s own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, Chairvolotti Financial tracks the two most dangerous emotions for investors: fear and greed.

Here is a breakdown of where each market driver currently sits:

Initial Jobless Claims this week came in at 362,000, higher than the consensus estimate. This level is the highest le vel since early August and may be related to the pandemic unemployment benefits expiring on Labor Day.

The three major market indices have all crossed below their 50-day moving averages, indicating potential further downside following the September slide.

The AAII Investor Sentiment Survey found over 40% of investors feel bearish about the next six months for the stock market. the 40% level is the highest level since October 1,2020.

Market indices

Year-to-date returns

 

Large  Cap indices

S&P 500:                                     16.06%

Dow Jones Industrial Average:    12.36%

Nasdaq-100:                                14.47%

Mid and Small Cap indices

S&P 400 (Mid Cap):                     16.27%

S&P 600: (Small Cap):                   21.08%

Russell 2000:                               12.68%

 

International indices

MSCI EAFE Developed Index:         6.24%

MSCI Emerging Markets:               -3.10%

MSCI ACWI ex-US:                          3.89%

Economic sector indices

Basic Materials:                           10.74%

Communication Services:            21.29%

Consumer Discretionary:             11.39%

Consumer Staples:                         4.56%

Energy:                                       40.37%

Financials:                                  29.46%

Healthcare:                                 13.54%

Industrials:                                 12.69%

Real Estate:                                 24.00%

Technology:                                15.30%

Utilities:                                       2.57%

GOING PUBLIC: YEAR OF THE IPO

Source: Stock Analysis

At this point, 2021 may forever be known as the “Year of the IPO.” With 767 IPOs so far this year, 2021 already has 60% more IPOs than the second-highest IPO year since the turn of the century. In light of this IPO craze, eyewear retailer Warby Parker officially went public yesterday on the New York Stock Exchange. However, Warby Parker decided on a less traditional means of going public, declining an initial public offering (IPO) and the headlining craze of special purpose acquisition companies (SPACs) that we discussed in a previous newsletter in favor of a process known as direct listing. While the differences between the three processes may seem unimportant, there are unique benefits to each method of going public.

For an IPO, a company hires someone known as an underwriter to assist not only with the creation of new shares, but also with the setting of the IPO price and distribution of these new shares to investors. Companies and the underwriter present to investors to increase and gauge interest in their company’s stock, which in turn helps the company to set a realistic price for their IPO. In short, while companies pay an underwriter, the underwriter’s assistance in meeting regulatory requirements and drumming up interest in their IPO can be invaluable in certain instances. Notable recent examples of IPOs include AirBnB and DoorDash.

As a reminder, SPACs are publicly-traded firms that have no operations and no assets other than a pile of cash with the sole intent to merge with or acquire another business as a means to take it public. Companies that choose this route tend to do so due to it being a cheaper and faster alternative to an IPO. Investors essentially write blank checks to SPACs, while the SPAC can take up to two years to target and buy another firm. While investors have the chance to get in early on a potentially hot stock, SPACs are also risky. Recent examples of companies that have announced plans to go public through SPACs include 23andMe and SoFi.

Finally, if a company wants to avoid having to pay an underwriter or is worried about diluting their stock by creating new shares like through an IPO, direct listing is a viable alternative. Through a direct listing, existing shares are made available to investors, with current investors and employees having the ability to sell their shares to the public. However, despite its low-cost convenience and avoidance of share dilution, there are drawbacks to a direct listing as well. Without an underwriter, companies receive less promotion behind the scenes to major investors and institutions that could become safe, long-term investors in the stock. Without these stable institutional investors and a true ability to gauge interest behind the scenes, direct listings tend to have greater price volatility, as their initial pricing tends to be less informed than an IPO’s pricing. Other than Warby Parker, other recent direct listings include Coinbase and Spotify.

In short, while a direct listing may be cheaper and better for employees and private investors, there are drawbacks regarding how informed the initial pricing will be, along with potentially elevated price volatility. How long will it take for the market to decide on a true value for Warby Parker’s IPO? How long will we see this IPO craze continue? Only time will tell, but it is telling that many private companies are looking to take advantage of the equity market momentum this year by going public.

THE DEBT CEILING: WHY IT MATTERS

With the debt ceiling once again being used as a political football by both parties, there have been concerns about whether Congress will be able to raise the debt ceiling prior to the October 18 deadline. What is the debt ceiling, and why does it matter? Today we’ll explore what it actually is, as well as what kind of potential fallout can occur from hitting the debt ceiling.

To put it simply, the debt ceiling is a limit on the amount of federal debt that the government can accrue. The federal debt can be broken down into two categories: debt owned by the public, and debt that the government owes to itself after borrowing from government programs like Social Security and Medicare. The reason the debt ceiling is so important is that, once it is hit, the government quickly runs out of available cash. Without cash-on-hand, the government will default on anything from Social Security payments and salaries for federal civilian employees to veterans’ benefits and salaries for military members. In short, a sizable amount of U.S. citizens will have their livelihood impacted in a significant way if the government is unable to meet these obligations.

Like many things in our government, the debt ceiling only recently became a political decision. Prior to the turn of the century, the debt ceiling was a bipartisan and apolitical decision. In fact, the debt ceiling and its raising have been a natural part of our nation’s governmental procedures for over 100 years. However, both political parties have since used the debt ceiling in recent history as a bargaining chip when they have been out of power. In 2006, Congressional Democrats refused to support a debt ceiling increase as a means of protesting the Bush tax cuts and the Iraq war; in the end, the ceiling was approved. In 2011 and 2013, Congressional Republicans also refused to support a debt ceiling increase, and instead used it as a bargaining chip to force Congressional Democrats to concede on certain spending cuts; once again, the debt ceiling eventually passed.

Today, Congressional Republicans are once again refusing to support a rising of the debt ceiling, in part due to wanting Congressional Democrats’ budget and spending bill to be treated as a separate vote from the debt ceiling vote. While Congress will almost assuredly continue this debate into the October 18 deadline, they have historically found compromise once the true pressure of defaulting on their obligations begins to set in; neither party wants to be responsible for federal civilian employees or military members not receiving their salaries. However, Congress has other methods of avoiding the crisis of default. During previous contentious debt ceiling debates, Congress has passed bills that have acted as a patch for government funding so that the government can continue to meet their obligations.

While the debt ceiling is most likely to be raised in time, the thinktank Committee for a Responsible Federal Budget (CRFB) believes that there is still room for plenty of debate around whether the government should continue to kick the proverbial “debt can” down the road or instead begin addressing our deficit. The CRFB suggests that, in future debt ceiling adjustments, Congress should also use the opportunity to take stock of the nation’s fiscal state and explore ways to reduce spending or increase revenue. While the debt ceiling is integral to how our government functions today and hitting it would have severe consequences, history shows us that Congress will most likely raise the debt ceiling as soon as the pressure of the impending deadline sets in.

Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor