Yesterday was just an ugly session that never got any traction, save for a halfhearted rally attempt around 1:30 PM that fizzled right after 2 PM. Speaking of fizzling, there was a surge in volume into the close, and it was still less volume than on Christmas Eve. I think low volume on down days is a good thing but growing indecisiveness for the market is not ideal.

The good news is the market held up when it could have just as easily imploded. Certainly, the weight or waiting got heavier as the session moved along, turning major stocks indices lower and market breadth decidedly negative.

Market Breadth	NYSE	NASDAQ
Advancing	1,574	1,579
Declining	1,771	2,753
52 Week High	181	134
52 Week Low	14	20
Up Volume	1.76B	1.58B
Down Volume	1.83B	2.63B

All eyes will be on the Fed, which wraps up its Federal Open Market Committee (FOMC) gathering with a communique and questions and answers period. Chairman Jerome Powell will be under the microscope.   He will have to explain why inflation is transitory, although the 10.5% month-to-month jump in beef prices will hurt, no matter what, on July 4^th.

Bond yields still believe its transitory, as the ten-year yield was unchanged. Moreover, real yields on the ten-year Treasury inflation-protected securities (TIPS) remains negative.

Higher Prices for Everyone

After the close, La-Z-Boy (LZB) posted earnings results that saw healthy growth, but management was compelled to make this statement:

Outlook: "Demand trends remain strong across the business with backlog at record levels. The company anticipates ongoing incremental increases in manufacturing capacity throughout fiscal 2022 that will enable higher delivered sales, but expects ongoing global supply chain disruptions and headwinds related to raw materials and freight costs will cause some volatility in results. In the short term, the company expects a temporary negative impact to profit margins versus very strong fourth-quarter results due to dramatic raw material price increases which will only be offset by previously announced pricing actions as the company works through its backlog in the back half of the year..."

Well, “previously announced pricing actions” means price hikes, but management still warns investors to brace for a hit to margins. They say it will be temporary, which is what investors want to hear form Jay Powell today.

Prices are going up, and this is the time to focus on those companies that can seamlessly pass them on.

GDP

By the way, it may have seemed like all the economic data yesterday bombed. But the fact that it’s slowing down and/or missing Wall Street consensus is not a disaster. In fact, the Atlanta Fed Gross Domestic Product (GDPNow) tracker saw this quarter’s GDP climb to 10.5% from 9.1%.

Today’s Session

Housing Starts climbed to annualized rate of 1.572 million, but the street was looking for 1.63 million.  Moreover, permits declined 3.0% against consensus of -1.7%.

Kinds of Inflation Matters

Today, the question isn’t about inflation but how long inflation will linger and what the Federal Reserve should do about it – if anything?

First, I want to point out there are two types of inflation:

Sticky vs Flexible

The CPI report sent shockwaves across the financial world and made for big headlines in mainstream media news as well, but the components of the report are not as frightening. 

Sticky inflation (see table), also known as slow-moving inflation, are items where price momentum usually lingers and takes a lot longer to alter direction.

In May, sticky inflation was 2.7% from a year earlier, while flexible was up 12.4%.

 

 

When studying trends like inflation, investors should also look at three-month tallies.   Here, the rise in core flexible inflation is demonstrably higher than sticky, +33.7% against 4.6%.

Flexible inflation is in our face constantly and often the sources of thorny conversations at kitchen tables, which is why they have a bigger political impact then sticky.  Remember “a chicken in every pot?”

Portfolio Approach

Yesterday, we took profits in Technology and added a new position in Technology as well in our Hotline Model Portfolio.

Comments

Until the Federal and State governments stop rewarding non work and subsidizing those will to "just get by" instead taking responsibility to improve their own, and their families lives, we will be in a continuing cycle of constricted supply and excessive demand. garro on 6/16/2021 9:36:55 AM

Last year, 2020 June, we asked for and received a bid for a shop. The price to build the shop came in at $32,000.00. Due to the covid we decided to wait a couple of months. The builder was supposed to get back to us in Sept. but didn't. We called him in 2021 Jan. and said let's get going on the shop. He came back with new bid of $ 33,000.00. Same shop, but new price. Not sure if we fully understand the flexible verus sticky inflation, we only know the price on the shop went up close to 100%. If we would have built the shop, we would have been STUCK with 100% inflation for the rest of our lives. We didn't build it. We had the money, but we put it on the bk burner. Thanks Charles Lorin K on 6/16/2021 10:45:53 AM

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