Market Frustrations – by Justin Vaughn

(Justin Vaughn, Editor, Options Trading Report)

An uneasy market Monday and Tuesday didn’t get better after the release of the Consumer Price Index numbers on Wednesday. The Dow Jones Industrial Average even skidded a bit with the tech-heavy Nasdaq Composite and S&P 500 edging up 1% and 0.45% respectively. Increases in consumer goods were the weakest in over two years. The CPI was up 0.4% in April, a good sign that the economy is finally showing results that the rate hikes are taking hold. Some economists and economic advisors and market analysts feel these numbers might give the Fed reasons to cease upcoming rate hikes, with some in the ‘Powell Camp’ favoring continued hikes. “The bottom line is that inflation is moving in the right direction, and quickly at that,” said the team at Bespoke Investment Group, as ‘they’ wrote in a directive. Joseph Williams, a former Federal Reserve officer, was more pointed, saying that inflation remains “too high.” As inflation slowly backs off, much attention of investors and traders is directed to the ‘debt ceiling’s’ coming crisis. House speaker Kevin McCarthy and President Biden are ‘slugging’ it out testing each one’s endurance. As push-comes-to-shove and the day of ‘reckoning’ arrives, concessions from both sides will embrace an agreement. As the week moved on, Thursday’s market was a downer, as it has been nearly all week. Today, Thursday, with Disney’s reporting poor numbers and with continued Regional Bank problems, the indexes were handcuffed.. The banking index, KBW Regional Banking Index, lost for the fourth straight day, and since the first of the year down a concerning 32%. The Labor Market is showing more signs of softening as ‘claims’ have increased to a one and a half year high, adding to the general overall weakening of the economy. Many on the street feel the direction of the market will influence Mr. Powell to reassess upcoming interest rate hikes.. Time will bear out the Fed’s direction.

Commercial properties are facing untold vacancies, massive devaluations, turning investors away from the troubled sector. Real Estate Investment Trusts (REIT’s) are struggling to maintain investors, having shown signs of declining investment interest. Shopping malls, health care facilities, commercial office buildings, movie theater properties, and manufacturing facilities are flooding the real estate market with vacancies. Commercial property values have dropped 25% since the start of 2022, and the trend is snowballing down. As mentioned above, shopping malls are the hardest hit, with values down 44% since 2016, dropping the most in the past three years. “You literally have trillions of dollars of investments that are suddenly just massively impaired,” said Dan Zwirn, chief executive of Arena Investors, a New York-based asset manager and real estate investor. The severity of the decline in property values in today’s time frame is much more telling when compared to the 2008 debacle. (2008-2012) Then values of commercial property recovered consistently over the next four to five years, in a much less complicated fiscal environment. This time is more complex; having a covid pandemic to deal with for three years, and resulting ‘total’ change in the way business is transacted, has forever impacted the basic economics of the country, with real estate taking the hardest ‘hit.’ The tech industry alone has had to retrench thousands of employees from offices to in-home work places. 35% to 45% of former office workers are still at home, and fully desire to be there, signaling a ‘new’ method of working. Mr. Zwirn, (above mentioned), comments: “People thought of office buildings as forever because of course it’s going to be leased forever, people were not planning on this secular change.” As the ‘after pandemic’ adjusting continues, the vacancy trend keeps falling, with properties skidding to new lows, a sad outlook for the U.S. economy.

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RUMBLINGS ON THE STREET

Amy Abby Robinson, Charles W. Robinson lll, Robinson Value Management, Barron’s “The economy and markets are addicted to the Fed’s elixir, always needing more. To avoid bad outcomes, the Fed accommodates (what else can a committee do?) but the direction doesn’t feel good.”

Bernard Arnault, CEO LVMH, (LVMH Moet Hennessy Louis Vuitton SE) WSJ “When you create desire, profits are a consequence.” (World’s richest man, $500 Billion net worth)

Abbott Cooper, who runs activist bank investment firm Driver Management, Barron’s “The risks in some of these bank stocks can’t really be quantified. It takes a really strong stomach to wade into these waters,” he added, “whatever we’re going through now is going to abate at some point, it can’t be soon enough,” he said.

Jerome Powell, Federal Reserve Chairman, Barron’s “We shouldn’t even be talking about a world in which the U.S. doesn’t pay its bills. It shouldn’t be a thing.”

Matthew Fine, Portfolio Manager, Third Avenue Management, Barron’s “There is no metal or natural resource more critical to renewable energy than copper. It is critical to the basic functioning of modern society but also incredibly scarce. We’ve done a terrible job of finding more copper resources.”