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THE U.S. ECONOMY IS "FINALLY CRACKING"

by Tyler Durden
Monday, Jun 10, 2024 - 06:55 PM

Submitted by QTR's Fringe Finance

Friend of Fringe Finance Mark B. Spiegel of Stanphyl Capital released his most
recent investor letter on May 31, 2024, with updates on macro and his fund’s
positions.

Mark is a recurring guest on my podcast and definitely one of Wall Street’s
iconoclasts. I read every letter he publishes and thought it would be a great
idea to share them with my readers.

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Morgan Stanley's Shalett Expects Stocks to Grind Higher
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Morgan Stanley's Shalett Expects Stocks to Grind Higher

Like many of my friends/guests, he’s the type of voice that gets little coverage
in the mainstream media, which, in my opinion, makes him someone worth listening
to twice as closely.

In his most recent letter he offers new takes on his favorite long, his favorite
short and his outlook on the market.

MARK ON MACRO

We remain very net short. This month’s small gain was due to a decline in the
price of Tesla (which we’re short) combined with an increase in the price of our
long position in Volkswagen (after accounting for it having gone ex-dividend),
offset by an increase in the S&P 500 (which we’re short via various ETFs). I
discuss VW and Tesla later in this letter, so let’s talk about the S&P, which
is very expensive.

The U.S. economy seems to finally be cracking. This month a slew of retailers
(off the top of my head: Target, Lowe’s, Macy’s, Kohl’s, Best Buy and Foot
Locker) reported negative year-over-year sales comps, and
that’s before adjusting for the inflation that makes them 3% to 4% more negative
in “real” terms. Others (Dollar General and Burlington) reported same-store
sales comps in the +2% range, but that too was negative when adjusted for
inflation, while Walmart and Nordstrom comps managed to roughly keep pace with
inflation, but were unable to exceed it. (To its credit, Costco
comps did handily beat inflation—I wish I’d bought that damn stock 15 years
ago!)

Corroborating the poor retail sales data, final Q1 GDP growth (released May
30th) came in at just 1.3%, primarily because of the weakening consumer,
while pending home sales plunged. At some imminent point in time, this stock
market will switch from "bad news is good news" to "bad news is bad news" as it
suddenly realizes that there's a HARD economic landing coming and sticky
inflation (3.6% core CPI and 2.8% core PCE ) driven by massive federal budget
deficits prevents the Fed from cutting enough to compensate for it. That's what
we remain positioned for.

In the far-right column below from Standard & Poor’s are the 12 most recent
quarterly operating earnings for the S&P 500 (with Q1 2024 estimated with 88.9%
of companies having reported) and, in the middle column, the price of the S&P
500 as of that date. (The S&P 500 is now at 5277.)

As you can see, nominal earnings have barely grown in the last three years, and
although Q1 2024 earnings were up 4.7% year-over-year, that’s only around 1.2%
CPI-adjusted. Additionally, those latest earnings are lower “nominally”
and much lower “inflation-adjusted” than they were way back in Q4 2021 (when
stock prices were much lower). In fact, adjusting for inflation, Q1 2024
earnings came in lower than every quarter of 2021! Annualizing those Q1 2024
earnings to $220.12 ($55.03 x 4) and putting a long-term market average 16x
multiple on them would bring the S&P 500 all the way down to just 3522 vs. May’s
close of 5277. Even an 18x multiple would bring the S&P down to just 3962 vs.
the current 5277. And then what happens to those earnings when we get a
recession?

The consensus is now for either “no landing” or a “soft landing,” yet before
even the worst recessions the consensus is nearly always for a “soft landing”;
for example, here’s just one headline of many from August 2007:

In fact, for reasons I clearly lay out below, I still strongly believe that the
U.S. economy is headed for a hard landing. Why do I believe so strongly that we
face a “hard landing”? For the same reasons I’ve been stating since the Fed
started raising rates in 2022:

> There’s no way an “everything bubble” built on over a decade of 0% interest
> rates and trillions of dollars of worldwide “quantitative easing”
> can not implode when confronted with 5% U.S. rates and
> quantitative tightening plus tighter money from the ECB (even with a tiny
> expected June cut), BOJ and other central banks.
>
> And contrary to the belief of equity bulls with short memories, when an asset
> bubble unwinds, lower inflation and lower interest rates won’t immediately
> ride to the rescue. When the 2000 bubble burst and the Nasdaq was down 83%
> through its 2002 low and the S&P 500 was down 50%, the rates of CPI inflation
> were 3.4% in 2000, 2.8% in 2001 and 1.6% in 2002, and the Fed
> was cutting rates almost the entire time.

Yes, a nasty recession was delayed due to a combination of interest rate lag
effects, leftover “Covid cash” (which has finally run out), and consumers
loading up on credit card debt, but a hard landing will soon arrive as household
debt delinquencies are now surging while personal savings have collapsed,
and shipping freight data is already recessionary. Yet despite myriad lurking
dangers—both economic and geopolitical—the stock market is completely
disconnected from a scenario involving any landing. Here are a few exhibits that
perfectly capture this decoupling…

MARK ON HIS FUND’S POSITIONS

For commentary on the positions Mark currently holds in his fund, click here to
read the rest of his letter.

QTR’s Disclaimer: Please read my full legal disclaimer on my About page
here. This post represents my opinions only. In addition, please understand I am
an idiot and often get things wrong and lose money. I may own or transact in any
names mentioned in this piece at any time without warning. Contributor posts and
aggregated posts have been hand selected by me, have not been fact checked and
are the opinions of their authors. They are either submitted to QTR by their
author, reprinted under a Creative Commons license with my best effort to uphold
what the license asks, or with the permission of the author. This is not a
recommendation to buy or sell any stocks or securities, just my opinions. I
often lose money on positions I trade/invest in. I may add any name mentioned in
this article and sell any name mentioned in this piece at any time, without
further warning. None of this is a solicitation to buy or sell securities. These
positions can change immediately as soon as I publish this, with or without
notice. You are on your own. Do not make decisions based on my blog. I exist on
the fringe. The publisher does not guarantee the accuracy or completeness of the
information provided in this page. These are not the opinions of any of my
employers, partners, or associates. I did my best to be honest about my
disclosures but can’t guarantee I am right; I write these posts after a couple
beers sometimes. I edit after my posts are published because I’m impatient and
lazy, so if you see a typo, check back in a half hour. Also, I just straight up
get shit wrong a lot. I mention it twice because it’s that important.

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