September Bombs

ATTENTION: VERY IMPORTANT

It seems like the entire economy is being held together by two things: questionable jobs data and the unshakeable optimism in chip stocks. Somehow, these threads are keeping the market afloat, while index prices scream "extreme greed"—just begging for traders to get a cold dose of humility soon. Meanwhile, no one seems to bat an eye at the geopolitical minefield. Israel potentially flinging nukes into Iran? No biggie. Let’s just keep buying the dip, right? It’s like everyone's playing poker in a burning house, pretending not to smell the smoke.

Pee Pee Issues (Weak Pricing Power)

Currently, many companies are facing significant challenges with pricing power, meaning they are struggling to raise prices without losing customers due to inflationary pressures and slowing demand. Despite these challenges, market valuations remain extremely high, with many stocks trading at lofty multiples. For instance, Tesla, a market leader in the electric vehicle space, has a Price/Earnings to Growth (PEG) ratio of 3.6, which suggests that its stock price is significantly elevated relative to its expected earnings growth. Such high valuations, coupled with limited ability to increase prices, create a precarious environment for future earnings performance and potential market corrections.

As of October 2024, some of the companies with the highest PEG ratios, indicating high valuations relative to their growth potential, include:

• Adobe (ADBE) with a PEG ratio of 8.6, showing significant overvaluation for its expected growth.

• Tesla (TSLA) is also highly valued, with a PEG ratio of 3.6 (some sources say as bad as 59 haha), far above the market average.

• Broadcom (AVGO) has a high PEG ratio as well, reflecting market enthusiasm that may not align with realistic growth projections

  
  

To improve profit margins, companies often turn to cost-cutting strategies, particularly when revenue growth slows. One of the most common approaches is laying off employees to reduce labor costs, which can have an immediate impact on the bottom line. Another method companies pursue is negotiating for cheaper supplies or raw materials, enabling them to lower production costs without raising prices. However, in the current economic environment, supply chain constraints and inflation have made it difficult for many companies to secure materials at lower prices, limiting their options. As a result, many businesses are left with few alternatives other than layoffs or restructuring in an effort to maintain profitability.

Recently, Boeing announced significant layoffs as part of its effort to streamline operations and improve profitability amid ongoing challenges in the aerospace industry. The company is reducing its workforce by cutting jobs in various departments, which follows a broader trend in the industry of cost-cutting measures due to weaker demand and supply chain disruptions. Boeing, like many other companies, is facing rising production costs and pressures on margins, with fewer options to offset these through price increases or cheaper supplies. The layoffs are part of Boeing’s strategy to stabilize its financial position while continuing to navigate a challenging economic landscape.

Ah, the circle of corporate life. First, you’ve got the small, scrappy companies—the ones clinging to life like a houseplant you forgot to water for a month. They’re the first to topple when the market gets shaky. One minute they’re touting “innovative solutions,” and the next, they’re selling off office chairs on Craigslist. But don’t worry, the bigger companies always swoop in with their own version of a magic trick: mass layoffs. You see, they’re "optimizing for efficiency"—which is corporate speak for trimming the fat after watching the little guys get pulverized. And when the market's rough enough, even the big players have to join the unemployment parade, sending thousands to LinkedIn with a “life update” that no one saw coming.

Layoff Data

1. Tech Layoffs: In 2023, major tech companies announced significant layoffs, with Amazon cutting approximately 16,000 roles, Alphabet (Google's parent company) reducing its workforce by about 12,000, and Microsoft and Meta each laying off around 10,000 employees​. The trend seems to continue into 2024, with predictions indicating that over 130,000 layoffs may occur in the tech sector alone​.

2. Wider Employment Trends: A survey indicated that 96% of organizations implemented some form of downsizing in the past year, and 92% are anticipating further headcount reductions in 2024​. This reflects a broader uncertainty in the labor market, particularly in industries heavily impacted by economic changes and shifts in business strategies.

   
   

Pricing Power Trends

1. Weak Pricing Power: Many companies are facing a lack of pricing power due to high valuations and market saturation. For instance, most tech has inflated PEG, indicating that its stock is highly valued relative to its expected growth​. High PEG ratios across various companies suggest that investors are wary of future returns, impacting how much companies can charge for their products or services.

2. Economic Pressures: The combination of rising costs and reduced consumer spending is putting pressure on companies to maintain their margins without passing costs onto consumers, which further erodes their pricing power.

   
   

I could keep throwing data at you like a game of financial dodgeball, but let’s spare ourselves the workout and move on to the real meat of the matter—facts that won't make you reconsider your life choices. After all, who doesn't love a good fact that involves a spreadsheet in words?

JOBS JOBS JOBS (and some struggling Americans)

Jerome Powell has already given us a heads-up about the labor market cooling off, delivering the news with all the enthusiasm of someone announcing a surprise tax audit. His hawkish approach suggests we should all be preparing for a market showdown, perhaps in our Sunday best, as we brace for a potential economic drama. Who knew keeping a close eye on the economy could be as thrilling as watching paint dry? So, let's dive into the red flags and see just how colorful this ride can get!

With about 6% of Americans juggling two jobs—hitting a decade high—it seems we’ve reached peak productivity or maybe just peak desperation. On top of that, credit card debt has surged over 40%, with delinquencies climbing above 3.5%, also a decade high. If this is what thriving looks like for the working class, I can’t wait to see the “How to Survive on Less” masterclass! Clearly, we’re all living the American dream—one extra shift and a mountain of debt at a time. Is this inflating company share prices..? haha

The latest labor reports are the stuff economists’ nightmares are made of. Sure, we saw a double beat on the predicted 158,000 non-farm jobs for September—sounds impressive until you realize the devil’s in the details. A suspicious 786,000 seasonal government jobs (not even counting teachers) seemingly appeared out of thin air. And then, poof, 200,000 self-employed payrolls vanished as if they were some over-optimistic Etsy shops that suddenly folded. The real head-scratcher? How the Fed manages to keep this fantastical narrative alive while election season lurks. It’s almost like the data fairy sprinkled just enough magic dust to keep those pre-election bull flags waving in the wind. But honestly, is the economy thriving or are we just dancing in a fog of conveniently timed labor statistics? One thing’s for sure: if this was all part of the Fed’s job, they’ve mastered the art of market illusion. Maybe Jerome Powell moonlights as an illusionist in Vegas.

So, HIP HIP HURRAY, the jobs data!—those “solid” numbers that don't get revised for five months, only to be sliced in half like day-old pizza no one wanted. With predictions of just 110,000 new jobs in October, we're tiptoeing dangerously close to sub-100,000 territory—the recession red zone. And let’s be real: recessions don’t tap you on the shoulder and give you time to brace. They come out of nowhere, smack you across the face, and then leave you staring at your dwindling portfolio, wondering what just happened.

When we lose jobs, it’s not just a hiccup—it’s a full-blown chokehold on the financial future. And trust me, getting those jobs back is like trying to find a needle in a recession-sized haystack. If the market tanks and jobs dry up, guess what else shrinks? Your long-term holdings. Yes, the very safety net meant for your family’s future starts looking a bit frayed, and suddenly, cushiony nest eggs don’t seem quite so certain. Food for thought right?

AI BULL RALLY: THE STOCK EXCHANGE’S SAVIOR….DOES IT LAST FOREVER

AI, long hyped as the tech market’s golden child, is facing some serious headwinds. The U.S. sources 90% of its AI-related materials from Taiwan, a country that’s seen its export growth plummet from over 16% to under 5%. U.S. imports from Taiwan are also down more than 23%, squeezing the supply chain and making AI development more challenging. This isn’t just a hiccup—this is a significant slowdown that will hit AI companies hard, especially as demand for specialized chips outpaces supply.

The reality is, America doesn’t need 10,000 different AI chatbots doing the same thing, but that’s exactly what the market is currently pushing. Even Amazon, which was an early adopter of AI and machine learning, has scaled back its H100 chip orders by a substantial amount. The race toward AI supremacy has inflated stock prices beyond reason, making it clear that the future of AI is still distant, and nowhere near the levels companies have priced in. NVDA 10 point drop today. Is that just an Oopsie daisy?

Then there’s TESLA and the whole illusion of AI in robotics. Elon Musk’s so-called “AI-powered” robots? Turns out, they weren’t AI-powered at all. These robots were preprogrammed to dance, serve drinks, and roll through basic tasks. In fact, the much-hyped RoboTaxi wasn’t using Full Self-Driving (FSD) as advertised; the spacecraft literally held the blinker through a traffic intersection. It was more of a stage act than an AI breakthrough, seemingly programmed just to wow audiences at Warner Bros. studios rather than delivering any real-world utility.

In short, the AI race is oversaturated, overhyped, and overpriced. And while the distant future of AI holds promise, let’s not kid ourselves—it’s nowhere near as close as current stock valuations would have you believe. Investors and companies alike need to wake up from the illusion before the bubble bursts.

ELECTION: PRICED IN EAGERNESS (An America’s First)

  Companies are eagerly pricing in post-election bull runs as if the economy is immune to downturns, completely ignoring the warning signs. Stocks have already priced in over 90% of gains, while bonds lag slightly behind at 60ish%. (yields near all-time highs) But here's the kicker: neither market has fully accounted for a looming recession. It’s like everyone’s gearing up for a victory lap, unaware that the track is about to collapse beneath them. The disconnect between market optimism and economic reality is astonishing.

We’ve been here before. In 2008, markets rallied for six weeks despite clear red flags, only to come crashing down. Stocks are now so over-leveraged that we’re practically walking the same tightrope, except this time with even less of a safety net. The overvaluation is unsustainable, and companies seem to be repeating the mistakes of the past, pricing in profits that simply aren’t there. The fact that these trends persist suggests we could be heading toward another sudden market correction.

What’s even more baffling is that we’re not seeing the kind of responsible caution you'd expect. Instead of preparing for a downturn, companies and traders are chasing after short-term gains, ignoring that when the music stops, there won't be enough chairs for everyone. When this over-leveraging comes crashing down, it won’t just be a few corrections here and there—it could be another economic gut punch like 2008, hitting portfolios hard and fast.

The parallels are uncanny, and it’s difficult to watch as stocks remain wildly overvalued while the cracks in the foundation grow deeper. If companies and investors don't start taking a hard look at the warning signs, the post-election bull run they’re counting on could quickly turn into a bear market that leaves many scrambling to recover.

BUT WHERE DO WE GO?

When the Fed chair made a 50 basis point (bps) cut, many expected bond yields to drop, but instead, they spiked 50 bps, leaving Jerome Powell probably punching holes in his walls. This move highlights how unpredictable macro tightening can be. With the economy on shaky ground, even aggressive rate cuts can't always control market forces.

Macro tightening is no joke—its ripple effects often result in recessions, and that’s when bonds explode to the upside. As equities crumble, investors flock to bonds, driving up their prices. This is why Buffett and other financial giants are repositioning—they know what’s coming. The smart money is betting on bonds, not chasing overvalued stocks.

Bonds are quietly becoming the safe haven for those paying attention, as their future looks brighter amidst looming economic uncertainties. Warren Buffett's decision to pull back on stocks like Apple, despite the massive dividends, signals a significant shift. His Berkshire Hathaway now holds more T-bills than the Federal Reserve, a move that should raise eyebrows. When someone like Buffett, who typically embraces equity markets, pivots to bonds, it’s not because he’s bored—it’s because he sees what's coming. And he’s not alone. Titans of tech like Nvidia’s CEO, Mark Zuckerberg, and Jeff Bezos have also sold off shares, signaling they too are bracing for impact.

JP Morgan’s prediction of the S&P 500 closing the year at 4,200—a staggering 25% lower than its current level—shows that these moves aren’t random. If some of the wealthiest, most financially successful people in the world are preparing for a downturn, it begs the question: should we really ignore the signs? As macro tightening and a likely recession loom on the horizon, these investors are choosing bonds over high-risk equities, knowing that bonds tend to surge when recessions hit hard. Following the example of those who’ve mastered financial survival, we should consider doing the same. When markets start shaking, bonds provide safety, and iShares options offer a smart way to position for potential upside. Are we really smarter than the PhD-level hedge fund wizards who predict these shifts?