You Asked, We Answered! Part 2

Hello and welcome back to part two of our special two-part series. My name is Spell Carr. Alongside me I have our president, Phil Clark, and our senior portfolio manager, Roger Fuller. Gentlemen, thank you for joining me again.

As a reminder, we're putting these two episodes together for you because of recent market volatility. If you missed the last episode, we encourage you to check that out on our YouTube channel. If you like the video, leave a like, subscribe to our channel, we'd appreciate that. And if you have any other questions or have any ideas for series that you'd like to see in the future, we'd love to hear from you. Leave a comment, call us at the office, we're all ears.

We have received a lot of questions about putting money back into the market. Our clients know that we've been raising cash in their portfolios, and some of those clients are wondering when we'll start putting that money back to work for them. Unfortunately, as we've talked about in the last episode, and I think Roger said it really well, we don't have a crystal ball. If we could time the market, we'd all be rich. But what we do have is technical analysis, and we have two gentlemen on our team in Phil and Roger who are quite good at analyzing charts and trends, and they perform analysis daily.

So today we're going to walk through a chart that explains a little bit about what is going on under the hood, behind the scenes, and those are the things that we use to make decisions. So without further ado, I'd like to get started. And Phil, I'm going to start with you. We're going to show a chart on the screen to our viewers, and I'd like for you to walk us through what the chart is, what does it show, and what are some of the things that you look for when you're going through charts.

Spell, thanks for doing this series. These are a lot of fun, we enjoy it. And Spell, I think as you said, our clients have questions. It's so much fun to break away from the desk and do these shows to hopefully answer those questions. So thanks for hosting, and let's dig into these charts.

So one, there's a lot of charts. You've seen our charts, and we have hundreds of charts. We don't necessarily use those every day, right, all of them, but we have some that we look at daily. There are others that we need to look at based on where we are in the economic cycle, reports that might be coming out. We might want to chart those things to see, if nothing else, to build historical data so that we can better understand what the markets do when we go through these unusual times, or fits and starts, whatever you want to say.

The chart we're going to focus on today is a chart that we design, we build, and that chart has three components. And those components are the S&P 500, so everybody's familiar with that, and we use the total return S&P 500, so that includes dividends. That's the whole shooting match, as they say. We've got another metric, which would be inflation, so the CPI is what we're using to create the line on this chart. And then we're using interest rates, and I chose the two-year treasury because I think that's a really good replication of what real interest rates are doing.

So this chart is going to tell us a lot, believe it or not. It might look a little bit confusing, but as we go through it we'll talk about what each of these lines is helping us understand and why it makes sense to have all three of them on a screen simultaneously.

Well, as I just said too, the charts are great tools. Charts and charting is a science, it's not a law. No one chart will predict exactly what the market will do, but a combination of charts and combination of information can help guide us in making decisions. Not always going to be 100 right, because if it was, again, we would never be wrong, right? But it does help tremendously in time, in when put some money back in the market, wouldn't take money out of the market, different industries to look at, different sectors to look at. So I think charting is a great tool to go along with the fundamentals of the stock. My dad always taught me fundamentals tells you what to buy, the technicals or the charting helps you decide when to buy it.

Yeah, there's no question about that. I like to think of charting as more of a windsock. So it helps me with direction of the market, helps us determine the velocity of the market. So can we understand trends, and if we can understand trends, can we understand the velocity of those trends? And if we can understand the velocity of the trend, then we can begin to gauge when might that trend turn around or capitulate, when would it end. And so all of those things, if properly used, can really help you gauge when to get in or out of the market.

Now keep in mind, we don't encourage people getting in and out of the market because the chart gets ugly for a minute, or because all of a sudden it looks great, should you just push all in and go and hopefully catch it with upward momentum. It's not what we're suggesting at all. In fact, most of the time we're not raising a lot of cash just because the charts might have some kind of interim change that might be really short-term, or what we might refer to as a whipsaw in the market.

So understand, if your nature of trading or what you're trying to accomplish is all short-term or day trading, our type of charting is not for that person, right? We have many, many charting tools. It could be good for that person; that's really not who we are. Our things are typically, our charting is used to support our long-term strategies. So we're not trying to time the market perfectly, and I think anyone that does is going to get hurt or they're going to be humbled in a huge way. But lots to learn on this chart, so where do we start? It's a great question.

So now our viewers will see this chart on the screen. Phil, I want to start with you again. You mentioned that we use, there are three things that we're tracking on this chart. So we have the S&P 500, and you mentioned that it's the total return, which includes dividends. We have inflation, and we have interest rates. So when you look at this chart, walk me through your process. Take me through the mind of Phil, if you will. What does this chart mean to you? What are some of the trends that you can pick from this chart, and how do you relate that to what we do here at OmniStar? And Roger, I know that you're also involved in charting here, so feel free to jump in, add things as you will.

There's a lot more to this chart. I thought this would be a good place to start for our viewers without adding too much complexity, but there's a number of things behind this chart that we have to know in order to make an educated guess or decision at what's going to happen in the market. But if I can use the mouse here a little bit, I will take you through what I'm looking at.

So first, I'm more focused on the CPI to start. So I'm looking at inflation, and of course today we had an inflation release, and as we all know by now, inflation ticked up 0.4 0.04 today. So everybody, I think, optimistically was hoping it would come down. We've written about this, we've talked about it on our shows. I don't guess we're as optimistic as everyone in terms of thinking it was going to come down. If you look around the globe and you begin to understand what drives inflation, you'd be hard-pressed to believe that it's going to come down right now. I think it will eventually abate, but we are not there, in my opinion.

But as we look at this red line, the CPI or Consumer Price Index, the one thing that really stood out to me back in 2021 is how it began to rise, and the rise started getting well above this part of the line, which is almost like a trend line. And if we put a 12-month trend line on this, you would notice that this section all of a sudden got above it, and then all of a sudden we had this parabolic move over almost the last two years.

So what people don't recognize is inflation didn't start in 2022. It's been building. We have inflation always, but it started this build back in 2020, right after COVID, and then all of a sudden it was sort of a skyrocketing result. This thing was precipitous in every way. And so that's the first thing I'll look at, Spell, and then from that there's a lot that I can learn.

So that rate of change tells me a lot. One, it tells me something is broken in the system, and that without having the news, without reading anything, which I love. I don't like to be distracted or even manipulated by the news. Once you start reading news, I think you get swayed. You read it and all of a sudden, okay, well, I like what they're saying, I think I'll go with that. And I think a lot of money managers really miss the mark because they're influenced by, I call those exogenous forces. They're outside; they really don't belong in your management of a portfolio.

So what else are we looking at here? So we've got the inflation number. We see that that is still rising, so we know that's not good, because rising inflation does what? It restricts the consumer from purchasing, right? So all of a sudden money doesn't go as far.

That's right.

Well, that's problematic, because if we have fewer goods being bought because consumers don't have a dollar that will stretch as far, we know right away that is going to affect earnings on a publicly traded company.

The second thing, Spell, is this line that looks more like an EKG. That is the S&P 500. And so with the S&P 500, we can already see what I'm talking about with this parabolic move on CPI. You see that even as it was rising, here's what's really interesting, the market was still going up. It took a long time for it to peak in spite of very heavy inflation. And so that presents another concern: why is the market rallying like this in spite of inflation? Well, there's a simple answer, and you go to interest rate for that.

So notice the gold line. The gold line peaked back in 20, roughly just before 2019, and then it fell precipitously as we went into 2020.

Now, why did that happen? Well, we had this sluggishness in the market, and then we met COVID, and that changed things even more. And so notice that the Federal Reserve started pushing interest rates down, and when we had COVID they really had no choice but to keep them low, because they thought we were going to be in a long recession. And I can imagine that that was a reasonable thought, because we shut down an economy. The world's largest economy got closed, along with most other economists, right?

So that would tell you that, well, if economies are closed, that could be problematic, because think about what happened. In spite of a closing economy, notice that inflation really didn't dip very much, did it? Right. And all of a sudden, the more supply and demand got out of coordination, all of a sudden we see this thing start to move.

Now, here's what was really interesting. The Federal Reserve right here said, oh my goodness, the world's closing, coming to an end, we've got to give people money so they can survive. Businesses are closed, so why don't we just bail them out? And money started flying everywhere. We had unemployment benefits that were unusually high. We had what they called these kickers, so you could get an unemployment, for example, here in North Carolina, 300 and say 50 a week max, plus six hundred dollars as a kicker, and you were getting almost a thousand a week that was coming to you without tax. Now, you had to pay some tax on that next year, that in the following year, but that's a lot of money. And a lot of people were making more on unemployment than they made at their job.

That's right.

And so what did that do? That created the first sloshing of money. All of a sudden we had this abundance of money in a closed economy, which is why we saw internet shopping go up by leaps and bounds. People still want to shop, they want to do things, and so they were sitting in their house locked down, not anything to do, and so let's go buy something on the internet, right? The first sign of the pent-up demand.

So that signals the first sign of some issue. And then behind that we said, all right, we're starting to come out of COVID, we're still doling out money as a country, as are others, and look at this, we have interest rates literally sitting down at about zero. Now think about what's going on here. We have a market that's rising with tremendous inflation. Why would that be happening? Well, it'd be happening because we've been given a lot of money on the backs of taxpayers, these bailouts, if you will, to help everyone. And granted, I think it was necessary for some people, but I think we way overdid it. There was trillions of dollars being thrown around.

And then, so that's called the free money, if you believe that anything's free. And then you have cheap credit. So we had interest rates sitting on the floor, so you could borrow money, you could go get a home for two percent, two and a half, 15 year was two percent. And so we had a perfect storm here. So a market that's still rallying? Well, heck yeah, it's rallying, because you can borrow money at almost zero and you had extra money coming to you from the Fed. So heck, spending spree galore, let's go, we're just going to spend, spend, spend. That drove markets, and I believe it drove markets almost indiscriminately. And so these markets are going up, and they shouldn't have been at this pace, and I think this is because Federal Reserve and our White House just went a little too far.

Now, at some point this is going to break. And so as this continues to climb, the only way to pull down the red line, the inflation, the Federal Reserve says we've got to start raising inflation. Well, look what happens the minute they start raising it. Notice, in perfect harmony, the market begins to sell off. And that is simply because when the cost of money rises... Roger, you can speak to this.

It absolutely has the potential to destroy earnings as it relates to a publicly traded company, really to any company. So as those earnings are hit or affected, it is going to change the value of any asset, not just stocks but every asset, including housing, one of the first ones that we saw begin to feel the effects. But every asset gets repriced as cost of capital goes up, and that's what we're feeling right now amid this really, really stubborn inflation.

The higher interest rates affect all companies. Even the defensive companies, where things people have to own, those companies still have to pay higher fuel costs to get those supplies because of the higher inflation. Now they have to pay higher wages to keep their employees happy, right? So even though some of these defensive companies, if you will, are still have good sales, their cost of business is going up.

That's right.

And so it does affect every company. Now, there are some of the obvious ones where people might not go, as we mentioned last episode, not going out buying an 80 inch television. But the other companies that are producing your toilet paper and food and Kleenex and things that you have to have, their cost of business is going up. So you're right, it does affect every company in some way.

And in this case, this is almost a bit of a catch-22, because everyone says, well, if we raise interest rates enough, we can pull inflation down. Yes and no. If we raise interest rates in hopes of bringing down inflation, the idea there is to slow spending.

That's right.

Right. So if we bring interest rates up quick enough, we slow spending because the dollar doesn't buy as much. So we really restrict the value of the capital, right, the cost of the capital, we take that up. Doing that, in theory, pulls down inflation.

The problem with all of that is that because back here, when we go back to this area, this low point in interest rate where we were coming down to nearly zero, and we were pumping free money into everyone's pockets, and we had PPP loans, and we had other types of government lending that was designed for people being affected. What I'm finding with the businesses that we work with, most of them still have nearly all of their PPP money sitting in their bank accounts. They didn't have to use it. So their businesses were affected, but not to the extent that they needed these huge amounts of PPP.

So what am I saying? What I'm saying is that the reason inflation is not coming down is because spending, the consumer is still spending, in spite of high interest rates. So we're not nearly high enough to make people say, I'm going to stop. They still have discretionary money to spend, and they can still get credit, and it's relatively cheap versus, say, 1980.

that's right. In fact, I was speaking with a client earlier today who works in a upscale restaurant here in town, and they have not seen a drop in business. In fact, their business is booming. So if you think about this for a minute, the Millennials, and even a little older than Millennials, they've never been through, other than Covid, they haven't been through tough times. They don't know what it's like to have to stop spending money.

That's right.

And they don't want to stop spending money, and they're not going to stop spending money until they have no choice but to stop spending money.

Absolutely.

And so even though we have these higher inflation rates and the price of everything's going up, like I said, spending is still there because they don't know how to stop spending.

I'll add one more to that. You brought it up a little while ago, which is overhead cost for these businesses. Labor cost, right? The more that goes up, people don't think about what that does to pricing structure. So the more their cost goes up, they still need to make a certain margin, right? Their shareholders demanded. And so is that is the case, they're going to raise prices. So we're fighting a couple of things here. We're throwing interest rates higher, some prices continue to rise because companies are having to pay people more.

Since we're in the middle of this great resignation, there's not enough people to go around. So people will walk off of a job, they'll ghost you, they don't show up for an interview. That says to a company, we got to pay more, we got to do whatever we have to do to make our people stay so that we can do business. And when they do that, they've got to adjust prices. So that is something that moves price up, right? And on top of that, supply and demand. So lack of supply drives it up, cost of overhead drives it up.

That's right. And so how much will interest rates have to move to get people to finally reach their point, their breaking point, to say, I gotta stop spending? Because to your point, Roger, as long as they can get credit or they have cash in the bank, they're going to spend. They're going to spend, and most people are like that.

And so I would say it this way. If you take nothing else from this video, who knows if the market is reached bottom. I don't think it has. I think as we reprice assets and interest rates go up, I do believe the market could easily go lower. I don't believe today was a capitulation. I don't think all of a sudden the Bears have gone into hibernation and now the Bulls are going to come out and put us into another Bull Run. I don't believe that when I look at the data.

Now, what I will say is this, in short: when the Federal Reserve breaks something, that's either the back of the consumer, i.e. hard recession, right, and no soft landing, or they break something with our foreign trading partners by raising rates too much, ier dollars getting so strong that it's crippling foreign entities. Just understand that when they break something is when they'll get off the gas. And I believe, looking at the economy, I still think we're in some type of recession, certainly global, but they have not broken anything at this point. If they had, we'd see inflation, it should have moved down today, not up. We'd see things changing. But I don't think they've broken it, and I think they'll stay on the gas until they do.

Right. And to add to that, the Fed's goal for inflation over the long run is two percent. We're far, we're only six and a quarter away from that. We're a few percent away from that.

So a few times three.

Yeah, a few times threes, exactly right. So a lot. I agree, Phil. I think that I just don't see the Fed slowing down. They're not at their goal, far from it, or from it. Now they could stop. Someone, I heard someone recently say, they should just pivot for a little while and put the brakes on this thing, which makes more sense? Slow spending while people still have some money, or wait till they spend everything so they can't spend? Are they in a worse position? Who knows. But I believe that we need to get this rate where it needs to be, bring inflation down.

And I think, just a slight side note here, I think our leadership in this country needs to recognize that we have over regulated at this point. We are taking away so many of our resources due to regulation. If we get rid of some of that, that immediately would have an effect on not just jobs and income, but it have an effect on cost of goods. Lots and lots of things are affected by the red tape, the regulation that's been put in place, that I think is maybe just a little bit too aggressive, in my opinion. So yeah, lots of a lot of interesting stuff going on here, and lots to learn from one chart, and we just got started.

Absolutely. Just to piggybacking what you were just saying, and going into, we're near elections. What, if any, impact would the elections have on the market? If the elections go a certain way, are we gonna get a positive reaction? If they go a different way, we're getting a negative reaction?

In my opinion, I think if we have a Republican dominated election, I think we'll have a short-term pop in the market. But unfortunately, I think that's going to be all optimistic, all hope. But that election is not going to fix the economy in a week or two weeks or three weeks or a month. Still going to take some time. So I think we might get a quick pop in the market. I don't know if it will have legs or be sustainable.

Now, I think that's reasonable, Roger. I might just add a little something to that. I don't know that I would disagree with you, but I'll add a little something. I think that when you look at history, in an election year and the second year of a new, of the presidency, coming out of that midterm election, you typically get a rise in the market. You also tend to be reaching a point where the current president would be spending more, where you'd see a lot more infrastructure spending, or those things can drive the market.

Here's what I am just not sure of at this point. Regardless of the election, I think it could absolutely be helpful to the market. Here's what will make it more than a pop: if we get the right folks elected and it changes consumer sentiment and confidence, you could see this market take off, particularly if we see it pull back in October. October is historically a really good month in the market, so we're fighting historical trading here, right? So we're fighting that. So it could be a good market.

But if it were to pull back a little bit, if it were to reach, say, the 3300 mark on the S&P 500, which would get us really, really close to where we peaked just before going into Covid, and I do believe that is a fairly valued market there. I think right now we're still overvalued, but I think that's a fair value. If we reach that point, and all of a sudden we had an election result that gave people confidence, because right now, Roger, you look at the sentiment reports, you look at the confidence reports, there is none. It is dying, it's weak right now.

We need a capitulation, meaning confidence changes, and there's a catalyst for that, and it could be the election, Roger. And if that happens, it won't be a pop, we will run, because that'll be leading us out of this perceived recession. But if we don't get a change in confidence, your pop idea is probably right, and then it probably comes down again because nothing has changed. And if we don't get a change in, say, leadership, then I believe there's a chance that we keep doing more of the same, and I think that is deleterious to the economy. Is certainly not gonna, it's not fixing anything. Just look at the chart, right? Tells you everything.

I thought you brought in some great points on the economy. I think right now, though, the thought process is, the whole concept of this was, when do we get back in the market? And to the point of going through the charts, one, we never got fully out of the market. Those who are still in cash, I think the dollar cost average we talked about last episode is a great way to dip back into the market and continue to do that, no matter what the volatility of the market is. If your time frame is three years or longer, continue to put money in on a dollar cost average.

If you're sitting on a little bit of cash, there's some great entry points. Assembly stocks, look at ones, in my opinion, where the dividend yield is greater than a one-year CD. If you think about that way, you can get a greater yield than one year CD, plus a chance for appreciation, plus it's a long-term investment. I'll just throw one stock out there for example. Verizon's now got about six percent yield on it, better than your four-year, excuse me, better than your 12 month CD, and chance for appreciation. So I think there's a lot of great stocks out there that pay good dividends, that you get paid to wait for those stocks to rebound.

Yeah, and also to Roger's point, while we're sitting in cash, we're not out of the market, but we do have significantly more cash than we might normally hold. At least we're able to get something on that cash now, whether it's through CDs, which we've been buying a lot of those. We're buying a lot of treasuries, we're buying a lot of short-term paper that's still getting us two and a half to four percent. At least we're not sitting on zero percent when we're holding cash. So I think there's a huge benefit there. So cash is not a horrible position today, and we view it as a position. It's not just putting money on the sidelines that we're not managing. We're still using that cash, I believe, judiciously, looking for points of re-entry.

And so what would be those points? And Roger, I think you mentioned it in the last show. It's really when a number of our other technicals begin to show us, if not a capitulation, a reversal in this sentiment and a little bit of trend change that is sustainable. And as we begin to see that, we'll start to slowly move back in. You might want to speak to that.

But I agree. And so to be a contrarian, if you will, when you see everybody selling and everybody getting on the market and everybody running for the hills, that's time to step up to the plate and get back in the market.

Sentiment's the lowest we've seen in a long, long time. As we look at that chart almost daily, it's been really, really weak, and I don't know if we're at a phase or a stage of capitulation. It hasn't occurred. Today might look like it. I don't believe that's what occurred, but we could be getting close. The numbers prove that. And when we reach that point, then I think, yes, we look forward to getting back into the market. And when we do, I think it won't be perfect, but it will certainly be better than where the market was priced just a few months ago, and I think our clients will appreciate that. So great strategy that has to be applied here, but it's not just come out of the market, jump back in on a whim.

Exactly. And again, if you're telling, if your time frame is three months, stay out of the market. If your time frame is three years over, get ready to get back in the market.

With that, Spell, these things are fun, man. What do you think? What are you thinking about over there? I see your mind turning. This is an economics guy over here, so I know he's thinking of something.

Yeah, Phil, you mentioned a few good points, and Roger, you did as well, as it relates to economics. You mentioned supply and demand, you mentioned CPI, you mentioned inflation. All of those things are right up my alley. Supply and demand is so important. When the Fed is going to raise interest rates, they're trying to affect consumer demand. There's a supply and a demand curve. Demand is trying to be shifted to the left, which would in effect drive down prices, and that's, Phil, to your point, how inflation falls. So that's the relationship there with supply and demand, and how the Fed uses its tools, interest rates being one of their tools in their toolbox, to press on inflation. So really cool points that you guys made. I'm glad that I'm able to pick up on some of the things that you're saying. It is very complex, and I know our viewers will appreciate your willingness to take the time to explain some of those things.

We love doing that. That's a lot of fun, and our viewers get something out of that.

Yeah, we get something out of it. It allows us to flex our muscle a little bit, get away from the desk and do something more fun. Some days we're just sitting in there, either a few of us, or maybe we're just one-on-one with the monitor. And so this is great. But by the way, I meant to ask you about your pink lapel pin.

Oh, yes.

And I don't remember if we were wearing pink in the first show that

we did. I think we were... So we're wearing pink. It's October, it's Breast Cancer Awareness Month. And Phil, I hope you don't mind me sharing this, but your wife Natalie survived breast cancer, so she's certainly one of the primary reasons that everyone in the office is wearing pink throughout the month of October. But she's not the only reason. We wear pink to support all breast cancer survivors, men and women.

Men and women, they're everywhere, and probably if you're watching this show, you have someone that's been affected. Yep. We all have it within our families, and what a blessing it is to know survivors. I think it's awesome to support them. So to all of you out there, if you know someone or you're a survivor, congratulations, and just know we're thinking about you, supporting you, and hoping for the best if you're dealing with a current battle, or a family member might be.

So yeah, that's awesome. I'm glad we're, and we're all doing it. We've done this for a number of years, and absolutely, Roger actually started it years ago. And he let somebody talk us into it, somebody that wanted to raise money, and his quick start got in the way. And so at any rate, a lot of fun, a lot of fun. No doubt, great point.

You got pink in your tie today. We all do. I think we all have pink in our ties today. Man, it's looking good. Yeah.

Well, thank you for joining us. Thank you for your questions. Again, if you like the video, leave a like, subscribe to our channel, and if you have ideas, thoughts, questions, anything, feel free to comment, call us at the office. We're here for you. Thanks for your questions, and we'll see you on the next one.

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