Checking in with Chris$$$$$

Happy New Year!

The Federal Reserve continues to move interest rates higher with a targeted terminal rate at 5 – 5.25% sometime in March. They are very data dependent and the employment numbers for the month of December came out on January 6th. The FED is looking for real unemployment to go up to the 4.5% range and real wages to cease their significant increases. Technology firms throughout the country have announced layoffs of very highly skilled and compensated workers. Inflation remains stubbornly high with food and labor contributing to the high reported inflation. Thursday’s Consumer Price Index revealed that inflation is coming down as it declined from 7.2% in November to 6.5% in December. Egg’s last week were stated to be selling at a countrywide average of $3.42 per dozen!

The markets continue to welcome the receding inflation numbers, all the while the Fed is convinced now that the inflation is built into the system and will be around at least through the year 2023. What is working? Rents are declining, house prices are declining precipitously, used car prices have declined 15% so far since the highs back in May 2022. The FED’s projections seem to be more fantasy than reality. Last year the FED stated that inflation was transitory and would end shortly in the 2022 year. This year they are convinced that inflation will almost never again fall, and that interest rates will need to remain higher for longer. The world is slowing down and they just can’t seem to see it.

China The world’s second largest economy continues to struggle with outbreaks of the COVID viruses. They will not use vaccines from Pfizer, Moderna, or even therapeutics that have been developed in the United States. They are convinced that we are going to somehow put something in these to harm their population. They shut down most of their manufacturing base earlier last month to stem the spread. Then just two weeks ago, they reversed course when the population was revolting against the government for locking the people in their homes, apartments and factories. Container ships from China are almost non-existent as so many of their factories have been closed or reduced dramatically. The port of Los Angeles no longer has a wait time for unloading, and the ports of Savannah and New Jersey are processing ships in normal 4–5 day intervals. China was convinced it would be the world’s largest economy by the year 2030. Near-shoring and reshoring continue to move manufacturing back to the United States, Canada, or Mexico. Apple is moving all of its iPhone production out of China and into Vietnam, Indonesia, Malaysia, Mexico and the United States.

Technology As the New Year begins, Technology remains a concern for everyone.

The Consumer Electronics Show was held in early January in Las Vegas. Intel has already announced a super-chip capable of many times faster computing speed than its current version. Ohio is a huge beneficiary of Intel and the many transplants that are coming with it to the Central Ohio region. Licking County Ohio is being turned into Silicon Valley East, as many companies are locating there as feeder companies to Intel. Fab plants are being built in New York, Arizona, Texas, and Colorado.

Where does it all come from? As the movement to electric cars begins to take hold in earnest, the demand for additional raw materials is almost insatiable. California has opened it’s first mine in many years for rare earth minerals. Companies like Albemarle, MP materials, and Lithium Americas Corp. continue to search the globe for these much-needed materials. China again has been buying up most of the world’s rare earth minerals and holds almost an 85% supply. Countries in Africa continue to produce huge quantities of cobalt, essential in the production of battery cell technology.

Energy The need for energy in the coming years will grow exponentially. We will need an amazing amount of electricity to support the coming wave of electric commercial vehicles, personal vehicles, and transportation of every kind. California has outlawed the use of gasoline engines in lawnmowers and most anything else that has used an engine in the past. Natural gas remains one of the few commodities that is available in mass quantities at a very reasonable cost. The price this week hit a year low of $4/gallon compared to $10 back in the summer. Look for the Germans to continue to revitalize their nuclear power plants, as they had over 10 years of useful life left in them when they were shut down in 2021 and 2022. With the help of the French, they are turning them almost all back on. France is also interesting as a socialist country who adopted nuclear power and is today arguably the world’s leading source of this technology along with GE here in the US. Future sources of clean energy I believe will be blue and green hydrogen. This is a little deep, but blue hydrogen is producing energy by use of natural gas splitting the hydrogen and water atoms producing energy. Green hydrogen is using wind, solar or other renewable energy to produce hydrogen. This process is very expensive and not commercially viable yet but is now being widely used in warehouses and manufacturing plants that need a lot of tow motors to move things. The tow motor pulls up just like a gas pump, fills up with hydrogen, and pumps off its byproduct….Water! Pretty amazing. Look for Europe to have alternatives by this time next year to utilizing Russia’s energy supplies. Today Russia is selling oil to countries such as India and China at prices far below the current West Texas Intermediate $79.86 a barrel. Experts believe they are selling this for closer to $45 a barrel. Energy transmission companies continue to provide some the highest dividend streams in the market.

What to watch for in 2023?

People and businesses will continue spending, although they will be doing it differently. Off-price or closeout brands will come to the forefront even more as large retailers try and move the glut of inventory they double, and triple ordered during 2021 out of their stores and warehouses. Car parts stores like O’Reilly Automotive and AutoZone will continue to see outsized sales from the need for people to keep their vehicles longer. The average loan payment of $731 during the month of December was an all-time high. Look for used car prices and for that matter, new car prices to begin to decline even faster in 2023 as supply chain issues finally work their way through the system and more used inventory will be available from slowing sales. Deferring the purchase of a used car until later in 2023 should be a benefit if you are not trading in a car, if you are, it may be about the same. Industrials will continue to perform well with the recent bills that were passed by Congress funding years of construction projects.

Dividend paying stocks, and for the first time in 12 years, bonds are looking like more attractive investments at these levels. As interest rates rise, the dividends from stocks look to offset the higher interest rate environment, with these companies usually having more reliable balance sheets and profitability. The 10-year treasury bond is yielding approximately 3.5% with corporate bonds at 5.5%.

A surprise for 2023 will be that Emerging Markets will come back as the rising interest rate environment subsides and the dollar falls against other currencies. China, and specifically Southeast Asia will benefit from both events occurring. Europe is in for one of the worst recessions it has faced since World War II. Inflation running at over 10%, along with rapidly rising interest rates will continue to hamper its ability to again grow. The overhang of their energy needs will also drive-up costs and inflation.

Animal house More pet owners will purchase pet health insurance, enabling them to pay for high-cost services, boosting industry revenue. Which has grown at a CAGR (compound annual growth rate) of 3.6% to $62.2 billion over the past five years, with no signs of stopping. Today retail companies are trying to adopt almost everything they have for people, for their pets…Clif Pet recently started selling plant based jerky treats. Many pet owners are increasingly willing to pay for pet treatments that were once reserved for humans. Including biannual wellness exams for aging pets to lower the risk of heart, kidney and liver diseases and decreased mobility to meet demand. Marriott international recently did a survey and 85% of their respondents said they have pets, so under a partnership with Petco, Marriott will highlight home rental properties especially well equipped for their pets.

Chris’s Top 12 predictions for 2023

1. Healthcare may very well be the best performing sector of the economy as people look at their health more strenuously and cost inflation continues.

Drug stocks such as Eli Lilly should continue to benefit from astounding new drugs for the treatment of diabetes and weight loss.

2. Energy worldwide will be a source of political and economic confrontation.

Countries will continue to look for any or many sources of energy to grow their economies and as such, their GDP for their citizens.

3. The Fed will Pivot on interest rates in the second half of the year as the economy slows considerably. Look for the Fed funds rate to top out at approximately 5% before beginning to fall in late 2023 or early 2024. This will be the shock around the world as the U.S. market has performed much better than most other international markets this past year.

4. Inflation will surprisingly go down much more rapidly than currently forecast. Housing will decline in value upwards of 20%, used car prices will decline similarly. Commodities except for energy and agricultural products will continue to decline.

5. Defense spending will increase, and defense companies will be a beneficiary of the world restocking their stockpiles of weapons. This should continue until there is a resolution of the War in the Ukraine, which I don’t see happening until the end of 2023.

6. International stocks and bonds will probably have a higher return for the first time in 12 years than those in the US.

7. Artificial Intelligence will sprint to the forefront of business spending as companies can easily see how AI, Robots, etc. can help drive down costs immediately as they struggle to find the workers they need with the skills necessary. Look at the new Ford F150 lighting pickup, they are building these trucks with components requiring less than 15% of the people previously needed along with a considerable number of robots.

8. People love to spoil themselves a little, just a little. High end retailers will continue to benefit from this phenomenon that almost always occurs during a recession. Companies like Ulta Beauty, Lululemon, and LVMH will see people trading up for better things, just as some people will trade down for more commoditized products.

9. Gold- This asset has set out this era of inflation, and very likely will go higher completely since central banks around the world are loading up on the shiny metal. They are buying it like there is no tomorrow. Do they know something they aren’t telling us? I don’t think so, as this is a common practice to buy and sell gold reserves.

10. U.S. agriculture will continue to be a bright spot. The world needs our grain and foodstuffs. The war in the Ukraine along with adverse weather has resulted in a 20% reduction in food worldwide this year. This must get resolved as countries in sub-Saharan Africa depend completely on Ukraine for their food supply.

11. Fertilizer- over 50% of the world’s fertilizer comes from Russia and Belarus. Many countries in the world cannot afford the current cost of fertilizer at any price as it is just too much for their standard of living cost. There is only so much to go around and only two companies that produce most of the world’s supply. This may seem like an obscure topic, but it could turn out to be an economic and political issue.

12. Bond rates will peak in the second quarter of 2023 and begin to move down in anticipation of the Fed pivoting on interest rates later in the year.

This may seem like a very negative list. It is not. It definitely shows the power, and powerful position the United States plays in many of the most important areas of politics and economics. Just look at these industries…

Artificial Intelligence – Dominated by the United States the fastest most capable computing power in the World. These will be the brains controlling almost everything in the future. The semi-conductors had quite a falling out this year, it is only temporary as inventories adjust. They will be back producing multiples of goods and services in the next year.

Consumer Cyclicals – Same

Defense – We are the World’s production facility. First in almost every category.

Agriculture- CF Industries, Mosaic, Deere and Co, CNH Industries, Caterpillar, Nucor Steel, Corteva, Archer Daniels Midland, Bunge, and the list goes on and on of the finest businesses. The number one of these isn’t on the list… The American Farmer. The most productive producer of food in the world, and again it isn’t even close.

Healthcare, pharmaceuticals, biotechnology, genetics, solving the problems of the entire world in the healthcare arena.

Energy- Companies with the lowest cost of production in the world. Exxon Mobil is reported to be able to produce oil at nearly $10 a barrel from old fields and $40 a barrel from very expensive fields. This will give the US a dramatic advantage for many years to come.

The Dollar… the entire world trades on the American Dollar, we are the reserve currency of the world and there is no other one even in its league.

I will leave you with this,

Wilbur and Orville Wright developed flight… they were spurned by a famous French balloon flyer and the press for almost five years who literally laughed at their success, we all know how that turned out.

At the beginning of the last century no human had ever flown… in 1969 we landed men on the moon and returned them safely to earth.

Commercial space flight will occur within the next five years. Today the cost is $200,000 per person. It will decline to $40,000 in the next few years as recoverable reusable rockets are the standard.

By 2050 we will have completely autonomous cars and tractors. Drone technology will be used in almost every type of vehicle. Planes will be fueled by battery cell technology with safeguards for their capabilities of distance.

We will land a person on Mars by 2035 and return them safely to Earth. This isn’t a dream, it will happen. And there is nothing, no virus, no war, no politics to get in the way, it is destiny. Where were you when a person first stepped on Mars? It will be quite an event.

I hope all of you have a fantastic 2023, and I look forward to a very bright future.

Chris