Weekly Reflection for January 27, 2023

The Week - An Update in Charts

Equities rose this week on news about GDP growth, declining inflation and improving home sales. Investors mostly brushed off disappointing earnings news from Intel, Microsoft and even Chevron, which missed its 4th quarter earnings target. Most of the focus now is on next week’s first 2023 interest rate hike from the Federal Reserve and the meeting of the Organization of the Petroleum Exporting Countries (OPEC+) where production levels may be left unchanged even though China's reopening means greater demand.

Holding U.S. equities over the longer term has proven to be a much better hedge against inflation when compared to bonds, gold and home prices. Per research from Goldman Sachs, commodities fail to outperform due to their cyclicality and risk/return profile in long-term portfolios.

While the markets cheered the 4th quarter GDP results, the devil is in the details. The data supported the recession watchers who pointed out that the consumer, the backbone of our U.S. economy, is losing momentum. Retail therapy is out; spending on just the necessities is in.

A technician forgot to turn off a computer system and threw the open of the New York Stock Exchange into a frenzy on Tuesday morning. Stock prices went haywire without the normal opening settlement process that occurs between orders sent outside of normal market hours.

Just take McDonalds (MCD) and Walmart (WMT) which each likely sent hearts racing. Circuit breakers that were designed to stop massive swings were triggered and the NYSE has cancelled thousands of trades. No estimate of the monetary damage has yet been provided.

While the big companies are chopping employees, the little ones are snapping them up as fast as possible. It is terrific for workers but is a big thorn in the side of the Federal Reserve. As The Wall St Journal put it best, "In the sometimes confounding logic of Wall Street, good news for the economy—such as a hiring surge by small businesses—can be bad news for markets." Strength in employment means continued interest rate hikes.

$30 Trillion in Debt and You

Yes, the debt ceiling fight in Congress might negatively affect your financesand it is okay to be upset about it. Before getting too much in the weeds, remember that the debt is how much the U.S. has borrowed. The debt is determined by the annual budget deficit,

the annual amount that the government spends over its revenue. In 2001 there was a budget surplus but in each of the following 21 years, there has been a deficit. Add up decades of deficits and you get a lot of debt. The last two decades of war, tax cuts, increased entitlement spending and fiscal crises have taken a toll. The issue of our government spending and borrowing has become bitterly partisan.

The current debt total is over $31 trillion. And if Congress does not allow the government to borrow more soon, there will be significant consequences. Already the U.S. Treasury is being forced to make decisions on what to fund and not fund, as we discussed last week. As we get closer to June with no resolution, expect worker furloughs, delays in Social Security and Medicare payments and national parks closed to summer vacationers.

Not raising the debt ceiling puts individuals at risk and puts an already fragile economy at risk. By refusing to vote to raise the debt, which pays for spending measures that Congress has already passed, is a second way for a legislator who did not vote for, or agree with, an earlier budget provision to get another word in.

2011 was the most recent time that the fight got ugly and the same repercussions could play out again this year. between July 22nd and August 8th of 2011 the S&P 500 dropped nearly 17% ; it did not recover to previous levels until 2012.

The panicked selling of stocks led to a rush to buy U.S. Treasuries, somewhat

ironically. Even though the credit rating of the U.S. was in jeopardy, the price of bonds rose. When bond prices rise, yields fall. The rate on a 10-year U.S. Treasury fell from 3.2% to 1.78% in just two months. Other fallouts included job losses and a hangover that took time to recover.

The U.S. has never defaulted on its debt to date, even though our credit was downgraded following 2011’s mess. Last week's noise over the issue has died down but the continued uncertainty, and the longer we muddle in it, the more likely stock volatility and economic malaise will be the reward.

Largest Corporate Con?

David has challenged Goliath to a fight and the rumble is making big waves in the Indian stock market. David is Hindenburg Research, a quirky little research firm with a handful of employees, roughly 5, and only a few more investors or clients, about 10. The firm is named after that Hindenburg and founders say the original Hindenburg’s “man-made, totally avoidable disaster” is what they aim to expose on Wall Street. They seek publicly-traded companies with suspected serious man-made problems and expose these issues to other investors, all while making millions themselves by shorting the stock.

Goliath this time is Indian billionaire Gautam Adani, who per Forbes is one of the world’s richest men with a paper net worth of roughly $120 billion. It is worth noting, as the chart shows, that his net worth soared from $20 billion to $120 billion in a mere three years due to the stock price of Adani Group, where he is chairman and 75% owner. Adani is a conglomerate of businesses such as ports, airports, power generation and transmission, real estate and other ventures. The nature of Adani's businesses requires strong alliances with the governments of the countries in which they operate - India, Indonesia, Israel and Australia to name a few.

Mr. Adani’s net worth has dropped well over 20% following Hindenburg’s report titled “Adani Group: How the World’s Third-Richest Man is Pulling the Largest Con in Corporate History.” Ignore the “Third-Richest" mention; focus on the “Largest Con” accusation. Hindenburg says that Adani has engaged in “brazen accounting fraud, stock manipulation and money laundering” for decades.

Here is what just some of what Hindenburg alleges. The con involves 38 shell companies controlled by Mr Adani’s family members and close associates. The shells have no assets, no business in their stated locations of the Caribbean, Cyprus and the UAE. Flimsy websites allege that the businesses engage in "consumption abroad" and "commercial presence," whatever that may be. Hindenburg says that "fraud" is more akin to what is occurring. Already four government agencies have investigated $17 billion of suspected money laundering, theft of taxpayer funds, and corruption.

The Adani Group stock has fallen each of the last three trading days, triggering trading stops in the markets so it may have fallen even farther without those stops. Hindenburg sees a total of 85% downside based on their review of the fundamentals of the conglomerate. Additionally, many non-Adani companies in India have been rocked by the report. Bank stocks have considerable exposure as do utilities, commodities and telecommunications.