From the Desk of Joe Rollins
I have many issues I would like to cover within this posting, which will give you some insight into why I titled this “Locked and Loaded.” First, I would like to discuss the economy and why the slowing of the job market is extraordinarily positive for the U. S. economy. I would also like to explain to you why an index used by the Federal Reserve is more than likely incorrect. The CPI is used for many things in the U.S. economy, but I analyzed it this week, and I decided that it is flawed beyond repair. The most important issues I would like to discuss are the earnings of major corporations and how they held up during the third quarter. While certainly, the economy is the most crucial component of future stock prices, earnings are very much related. If the economy is strong, you would expect earnings to be strong, and that is precisely what we found out in the third quarter.
After nearly two years of arguing, I finally convinced the world that there will be no recession in 2023 and likely none in 2024. It was already confirmed that there was no recession in 2022, although virtually all the so-called experts predicted that recession was most certainly a reality. I argued over the last 20 months that there cannot be a recession when there is full employment. As long as there is full employment, you have people spending and therefore holding the economy higher. I guess everyone else missed that not-so-trivial point.
It is interesting to note that the Federal Reserve has been wrong so often that it needs to gain credibility; I will give you a couple of examples. Going into 2023, the Federal Reserve predicted that by the summer of 2023, we would have a recession. They also projected that unemployment would be 5.5% by mid-2023 and reaching close to 6% in 2025. I guess their predictors could have been better.
I want to cover many other interesting items, but I must report on the relatively slow month of October. The reason that I highlighted the title of this posting is that we are going into the best time of the year for stock gains. We are already seeing a higher move, which I will refer to later. For October, the Standard and Poor’s Index of 500 stocks was down 2.1% but continues to be up 10.1% for the one-year period then ended. The NASDAQ Composite was down 2.7% but is still up 18% for the one-year period then ended. The Dow Jones Industrials Average was down 1.3% in October and is up 3.2% for the one-year period then ended.
I always like to compare bonds to stocks; the Bloomberg Barclays Aggregate Bond Index was down 1.7% in October and is up a miniscule 0.3% for the one-year period then ended. It was terrific that Barron’s weekly publication came out last week, and the title in large letters indicated that it was “Time To Buy Bonds.” At the time, the 10-year treasury was hovering at 4.9%, and therefore, if that interest rate did not move, you would earn that rate of return over the one-year period. Interestingly, towards the beginning of November, the S&P 500 generated a total return of 5.9% in one week. Therefore, in one week, you would have earned essentially the exact amount that you would have made in one year holding the bonds.
Much has happened in the first week of November that is highly favorable for the stock market. First, the 10-year treasury has fallen from roughly 5% to 4.52%. Such a significant drop in a 10-year treasury in such a short period is very unusual. Also, as you know, the lower the interest rates are, the better it is for stocks. The reason the bond interest rate dropped so much over such a short period had to do with several factors. First, the Federal Reserve indicated, to no one's surprise, that they would not increase interest rates at their most recent meeting. In addition, it was announced that the Treasury would borrow less money to cover the deficits on a seasonally adjusted basis. Most importantly, it was announced that for October, only 150,000 new jobs were created, which was below estimates and indicated that there would be a softening in the upcoming labor market. More importantly, the soft number for October was coupled with revisions of the prior two robust employment reports, and 101,000 previously reported new jobs were eliminated from those calculations.
As reported last month, the GDP in the third quarter of 2023 was announced at 4.9%. With GDP that is close to 5%, how can anyone say we are close to recession? The unemployment report most recently announced at 3.9%, well below the projected amount by the Federal Reserve and historically close to full employment.
Those three factors are enormous and increase the outlook for the economy as we advance. Even though the third quarter GDP was at 4.9%, all learned forecasters now indicate that GDP in the fourth quarter will be 1.2%. The average economy reader would be startled to think that a reduction in GDP from 4.9% to 1.2% would be a good thing. However, that is precisely what I have been arguing for some time. We need to reduce economic growth to reduce the pressures to increase interest rates further. As the economy slows down, there will be a natural reduction of inflation due to less competitive pressures on prices and wages.
We are now entering the optimal time when the economy will grow somewhat, but employment will stay high, and earnings will stay even higher. That is the “Goldilocks Economy” that I expect for most of 2024. Many will argue that it is a negative that the economy is slow, but I would say that a slowdown is a good thing. Also, remember that the Federal Reserve is a political animal, and next year is a political presidential election. I would not be shocked, and in fact, I expect that sometime during 2024, you will see the Federal Reserve cut interest rates twice before the presidential election in 2024. Historically, election years are almost always positive for stocks just due to the ability of a sitting president to impact the economy and, therefore, increase prices. In 2020, the S&P 500 was up 18.4%.
Employment is a funny thing since it is so transitory. Few jobs were added during October, but you can expect an avalanche of new jobs going into the Christmas season. Many argue that one of the reasons the labor market was soft during October was that there were 30,000 UAW workers out due to a strike in the automobile industry. Since those employees were not working, they were deemed unemployed, reducing the number of new employees added. However, large employers have already indicated that they will add more than five million new part-time workers during the holiday season. Amazon alone has forecasted the hiring of 250,000 new employees to handle the Christmas crunch. Even though the unemployment rate has ticked up to 3.9%, I would not expect the upward trend to continue as we go forward. I would be surprised in 2024 if unemployment ever gets above the 4% level.
I have been arguing for a long time that the CPI indicator was incorrect. As you know, the CPI indicator is used for many things throughout the economy. It is, however, the most critical indicator of inflation. During the summer of 2021, inflation reached an unsustainable 9.6%. That rate has dropped dramatically, where the inflation rate is now deemed to be 3.5%, which is a considerable decline over the intervening 20 months. However, my assessment is the CPI is miscalculated, and maybe the Federal Reserve is making a big mistake relying upon the CPI as they did in forecasting a recession in the summer of 2023.
A significant indicator of the CPI is the cost of housing. This index looks at the increase in rents as being a component of the CPI, and therefore, as rents go up, so does the CPI ratio and, hence, inflation. However, reviewing the data leading to the calculation, you will note that the index used for the CPI housing is over one year old. We all know that when inflation was at its worst in 2021, rents, along with everything else, were going up virtually every month. However, that trend has stopped. Rents are now flat, and the cost of housing should be constant. However, when calculating the CPI, the Federal Reserve uses that index, which is outdated and incorrect. The inflation rate is already at 2%, in my opinion. Therefore, it meets the Federal Reserve’s requirements to be at 2% or lower.
I mention this because it is essential to understand the future moves of the Federal Reserve. While they may increase interest rates one more time at the end of 2023, it will be the last increase. However, as indicated above, they will note the reduction of inflation and likely cut interest rates during 2024. I know it sounds counterintuitive, but they have to increase rates high enough so they have the comfort to cut them next year. Even though Federal Reserve Chairman Powell now indicates that we will “have higher interest rates for longer,” he has clearly shown that he and the people in the Federal Reserve who forecast the economy are rarely accurate. They are so inaccurate it makes you wonder about the competence of the staff on the Board. Remember, the tea leaves are apparent for an economy that is slowing in 2024 and will likely need a boost in confidence by a rate cut. Given that 2024 is a presidential election year, the Federal Reserve will be accommodating and, therefore, likely to follow through with some rate cuts.
As mentioned previously, the number one factor that affects the value of the stock market is the economy. The second most important indicator is the earnings of the corporations. I guess you could argue that they are linked hand-in-hand when it comes to stating that if the economy is good, profits will be good and vice versa. So, the secret of investing in stocks is knowing when earnings will be reasonable compared to the opposite.
I picked up The Wall Street Journal the other day, and the bold headlines read as follows, “Exxon, Chevron Profits Surge As Mega Deals Bind Them To Oil.” I was a little taken aback by that article because, as we all know, oil is an industry whose future is not very bright. During the quarter, announcements were made by Ford and GM that they were abandoning their aggressive plans for the production of electric cars since they could not be produced efficiently and profitably. As we all know, EV cars are the wave of the future and have been mandated by the state of California as exclusive beginning in 2030. The world is attempting to move away from oil, and you would think that these vast oil companies would respond by reducing their exposure to oil, but that is not the case. They are buying more oil companies and becoming more significant in the industry.
The main thing I want to illustrate here is that so many people investing in stocks get so tied up in the whirlwind minutia that they do not look at the facts. For example, this headline from The Wall Street Journal appears most favorable to the oil companies. Therefore, if you look at the underlying numbers, you will see that Exxon for the third quarter of 2023 made $9.1 billion and Chevron made $6.5 billion; excellent numbers for sure, but are they earthshaking, as this article would lead you to believe?
Something that has happened is there continues to be a massive shortage of labor. Without adequate workers, companies are forced to produce more with fewer people or to improve their technology to increase profits. Most recently, it has been announced that productivity in the United States increased to 3.5% in the second quarter of 2023 and made a considerable increase of only 1.4% annually going back to 2008. This substantial increase in productivity allows companies to be more profitable with fewer employees.
One of the biggest misnomers these so-called stock market experts keep throwing out is that the consumer is tapped out. I’ve never really understood what they’re talking about in this regard. As long as people have a job, they have income to spend. Everyone has to buy food, clothing, and other necessities of life. The only time they do without these necessities is if they don’t have a job. With unemployment at 3.9% and close to 10 million job openings, everybody in the U.S. who wants a job has a job. As long as these people are working, they will continue to earn money to buy necessities. Of course, this should relate to buying things that they consider to be important, like technology. We are seeing a revolution in technology that is unprecedented.
Even though the experts keep saying that the economy is slow and that it would be impossible to continue to increase sales, the third quarter of 2023 proved them incorrect. For example, take the tech companies and their increase in sales in the third quarter. Tesla’s revenue is up 9%, Alphabet (Google) grew 11%, Microsoft and Amazon expanded 13%, and Meta Platforms increased 23%. Of course, Nvidia stood out, improving its revenue by a staggering 88% during the quarter. Do those numbers give you any idea of the economy's strength since virtually all those companies sell consumer discretionary items? That means they are discretionary for the consumer to buy, but the consumer continues to purchase these items, or the revenue would not increase.
I mentioned that the real reason stocks go higher is profits. Did you look at the earnings in the third quarter for the major tech companies? For the third quarter of 2023, Apple showed a profit of $24 billion, Microsoft’s profit was $22.3 billion, and Google profited $19.7 billion. Even Meta (Facebook) delivered a profit of $11.6 billion for the quarter. Above, I mentioned that Exxon made $9.1 billion for the quarter, and Chevron made $6.5 billion. Each one of those tech companies far exceeded the profits of the so-called blue-chip oil companies.
Another example I would like to quote is that if you want to consider true blue-chip stocks, you would have to consider IBM in that category. It is the bluest of the blue stocks and the original tech giant. During the most recent ending quarter, IBM had gross sales of $14.8 billion and a net profit of $1.7 billion. Impressive numbers indeed, but minuscule as compared to the tech companies. For example, IBM’s gross sales of $14.8 billion for the quarter were substantially less than Google’s net profits at $19.7 billion. Therefore, Google made more profits than IBM even had sales.
Here is another example I thought might clarify the magnitude of the earnings of these corporations. Apple recently announced that they earned net profits for the quarter of $23 billion. To put that in perspective, I will do the arithmetic for you. There were 90 days in the quarter, meaning Apple earned a net profit of $256 million daily. I often think to myself how discouraging it would be to try and invest in cash at Apple when, if you took a long weekend off, you would have to deal with close to $1 billion in new money when you came back to work the next day. Apple also reported that they have on hand cash over $100 billion, meaning it is doubtful that they would need to borrow money in the future.
It was also announced on Friday that Berkshire Hathaway had accumulated $157 billion in excess cash. Because they can earn money market rates close to 5% on short-term treasury bills, their earnings increase substantially on the interest income only. Assuming they can continue to get close to 5% short-term rates, they will earn close to $8 billion annually in interest income alone. What I am trying to emphasize is these profits are beyond anything anyone has ever seen in America and world finance. These profits are so extraordinary as to illustrate how strong the economy is. For all those so-called experts that forecasted recession, the downturn in corporate profits, and, therefore, significantly lower net income, I think this illustrates they were just wrong.
And yes, it is for tech companies, but how does it affect everyone else? At this point, of the 500 large companies in the S&P 500, 250 have published their reports so far this reporting season. As I am currently writing this posting, the reported earnings are 7.7% above their estimated earnings. This is the best over-percentage of the last ten years. If the economy were poor and consumers were cutting back, how can you possibly justify the GDP growth during the third quarter of 4.9% and earnings above estimates of 7.1%? I think it is pretty clear that these earnings and the increase in sales support the economic concept that the economy is just fine. Not too hot, not too cold, but just right, a beautiful “Goldilocks” economy.
For decades, everyone has been bashing Amazon since they do not make large profits, and everyone seems to disagree with the company. I love Amazon, and if we do not get a box delivered a day from them, I feel ignored. During the third quarter of 2023, Amazon generated a net profit of $9.9 billion. Remember, this company makes most of its earnings in the fourth quarter, and the third quarter is historically a down quarter. As you can see, they turned out pretty well for a down quarter.
To many, Tesla is still considered to be a startup. Many people dislike Elon Musk for personal reasons that are unclear to me since the guy is brilliant beyond belief, in my opinion. A man who has accomplished all he has accomplished by 52 is quite extraordinary. I am convinced that one day, history will look back on Elon Musk and consider him the Thomas Edison of our generation. But what about the company itself? In the third quarter of 2023, Tesla showed a net profit of $1.9 billion. They admitted it was a weak quarter since they cut prices to increase market share. To point out, Tesla made more profits than IBM. You are seeing a transformation in the automobile industry. Tesla is now the most valuable car company in the world. They will produce two million electric vehicles in 2024, and there is a high likelihood that both Ford and GM combined will produce less than one million.
I give you all these facts and figures for only one reason. I want you to evaluate profitability on headlines. As we go into the most profitable period of the year in stocks, you need to be fully invested in good stocks. With interest rates falling, the economy moderating, and earnings accelerating, there is a high likelihood that we could see a bonified Santa rally. Therefore, if you are not “locked and loaded” and fully invested, you should be moving to that level of investment as we speak.
As always, the foregoing includes my opinions, assumptions, and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
I have many issues I would like to cover within this posting, which will give you some insight into why I titled this “Locked and Loaded.” First, I would like to discuss the economy and why the slowing of the job market is extraordinarily positive for the U. S. economy. I would also like to explain to you why an index used by the Federal Reserve is more than likely incorrect. The CPI is used for many things in the U.S. economy, but I analyzed it this week, and I decided that it is flawed beyond repair. The most important issues I would like to discuss are the earnings of major corporations and how they held up during the third quarter. While certainly, the economy is the most crucial component of future stock prices, earnings are very much related. If the economy is strong, you would expect earnings to be strong, and that is precisely what we found out in the third quarter.
 |
| Penny putting a cute spell on anyone and everyone who crosses her path! |
After nearly two years of arguing, I finally convinced the world that there will be no recession in 2023 and likely none in 2024. It was already confirmed that there was no recession in 2022, although virtually all the so-called experts predicted that recession was most certainly a reality. I argued over the last 20 months that there cannot be a recession when there is full employment. As long as there is full employment, you have people spending and therefore holding the economy higher. I guess everyone else missed that not-so-trivial point.
It is interesting to note that the Federal Reserve has been wrong so often that it needs to gain credibility; I will give you a couple of examples. Going into 2023, the Federal Reserve predicted that by the summer of 2023, we would have a recession. They also projected that unemployment would be 5.5% by mid-2023 and reaching close to 6% in 2025. I guess their predictors could have been better.
 |
| Jedi Reid and Princess Leia (Caroline) feeling the Force! |
I want to cover many other interesting items, but I must report on the relatively slow month of October. The reason that I highlighted the title of this posting is that we are going into the best time of the year for stock gains. We are already seeing a higher move, which I will refer to later. For October, the Standard and Poor’s Index of 500 stocks was down 2.1% but continues to be up 10.1% for the one-year period then ended. The NASDAQ Composite was down 2.7% but is still up 18% for the one-year period then ended. The Dow Jones Industrials Average was down 1.3% in October and is up 3.2% for the one-year period then ended.
I always like to compare bonds to stocks; the Bloomberg Barclays Aggregate Bond Index was down 1.7% in October and is up a miniscule 0.3% for the one-year period then ended. It was terrific that Barron’s weekly publication came out last week, and the title in large letters indicated that it was “Time To Buy Bonds.” At the time, the 10-year treasury was hovering at 4.9%, and therefore, if that interest rate did not move, you would earn that rate of return over the one-year period. Interestingly, towards the beginning of November, the S&P 500 generated a total return of 5.9% in one week. Therefore, in one week, you would have earned essentially the exact amount that you would have made in one year holding the bonds.
 |
| Our newest CPA – not sure he has the stomach for tax season, but we’ll see… |
Much has happened in the first week of November that is highly favorable for the stock market. First, the 10-year treasury has fallen from roughly 5% to 4.52%. Such a significant drop in a 10-year treasury in such a short period is very unusual. Also, as you know, the lower the interest rates are, the better it is for stocks. The reason the bond interest rate dropped so much over such a short period had to do with several factors. First, the Federal Reserve indicated, to no one's surprise, that they would not increase interest rates at their most recent meeting. In addition, it was announced that the Treasury would borrow less money to cover the deficits on a seasonally adjusted basis. Most importantly, it was announced that for October, only 150,000 new jobs were created, which was below estimates and indicated that there would be a softening in the upcoming labor market. More importantly, the soft number for October was coupled with revisions of the prior two robust employment reports, and 101,000 previously reported new jobs were eliminated from those calculations.
As reported last month, the GDP in the third quarter of 2023 was announced at 4.9%. With GDP that is close to 5%, how can anyone say we are close to recession? The unemployment report most recently announced at 3.9%, well below the projected amount by the Federal Reserve and historically close to full employment.
 |
| Ava and her friend rockin’ their Mario and Luigi costumes! |
Those three factors are enormous and increase the outlook for the economy as we advance. Even though the third quarter GDP was at 4.9%, all learned forecasters now indicate that GDP in the fourth quarter will be 1.2%. The average economy reader would be startled to think that a reduction in GDP from 4.9% to 1.2% would be a good thing. However, that is precisely what I have been arguing for some time. We need to reduce economic growth to reduce the pressures to increase interest rates further. As the economy slows down, there will be a natural reduction of inflation due to less competitive pressures on prices and wages.
We are now entering the optimal time when the economy will grow somewhat, but employment will stay high, and earnings will stay even higher. That is the “Goldilocks Economy” that I expect for most of 2024. Many will argue that it is a negative that the economy is slow, but I would say that a slowdown is a good thing. Also, remember that the Federal Reserve is a political animal, and next year is a political presidential election. I would not be shocked, and in fact, I expect that sometime during 2024, you will see the Federal Reserve cut interest rates twice before the presidential election in 2024. Historically, election years are almost always positive for stocks just due to the ability of a sitting president to impact the economy and, therefore, increase prices. In 2020, the S&P 500 was up 18.4%.
 |
| Chris and Noelle Barg’s beautiful daughter – she’ll be graduating in the Spring! Congrats, Lily! |
Employment is a funny thing since it is so transitory. Few jobs were added during October, but you can expect an avalanche of new jobs going into the Christmas season. Many argue that one of the reasons the labor market was soft during October was that there were 30,000 UAW workers out due to a strike in the automobile industry. Since those employees were not working, they were deemed unemployed, reducing the number of new employees added. However, large employers have already indicated that they will add more than five million new part-time workers during the holiday season. Amazon alone has forecasted the hiring of 250,000 new employees to handle the Christmas crunch. Even though the unemployment rate has ticked up to 3.9%, I would not expect the upward trend to continue as we go forward. I would be surprised in 2024 if unemployment ever gets above the 4% level.
I have been arguing for a long time that the CPI indicator was incorrect. As you know, the CPI indicator is used for many things throughout the economy. It is, however, the most critical indicator of inflation. During the summer of 2021, inflation reached an unsustainable 9.6%. That rate has dropped dramatically, where the inflation rate is now deemed to be 3.5%, which is a considerable decline over the intervening 20 months. However, my assessment is the CPI is miscalculated, and maybe the Federal Reserve is making a big mistake relying upon the CPI as they did in forecasting a recession in the summer of 2023.
 |
| Alexis doing what she loves, while standing next to the reason she doesn’t get to do it as much as she’d like! |
A significant indicator of the CPI is the cost of housing. This index looks at the increase in rents as being a component of the CPI, and therefore, as rents go up, so does the CPI ratio and, hence, inflation. However, reviewing the data leading to the calculation, you will note that the index used for the CPI housing is over one year old. We all know that when inflation was at its worst in 2021, rents, along with everything else, were going up virtually every month. However, that trend has stopped. Rents are now flat, and the cost of housing should be constant. However, when calculating the CPI, the Federal Reserve uses that index, which is outdated and incorrect. The inflation rate is already at 2%, in my opinion. Therefore, it meets the Federal Reserve’s requirements to be at 2% or lower.
I mention this because it is essential to understand the future moves of the Federal Reserve. While they may increase interest rates one more time at the end of 2023, it will be the last increase. However, as indicated above, they will note the reduction of inflation and likely cut interest rates during 2024. I know it sounds counterintuitive, but they have to increase rates high enough so they have the comfort to cut them next year. Even though Federal Reserve Chairman Powell now indicates that we will “have higher interest rates for longer,” he has clearly shown that he and the people in the Federal Reserve who forecast the economy are rarely accurate. They are so inaccurate it makes you wonder about the competence of the staff on the Board. Remember, the tea leaves are apparent for an economy that is slowing in 2024 and will likely need a boost in confidence by a rate cut. Given that 2024 is a presidential election year, the Federal Reserve will be accommodating and, therefore, likely to follow through with some rate cuts.
 |
| The Weiss Family – only needs one more to field a team! |
As mentioned previously, the number one factor that affects the value of the stock market is the economy. The second most important indicator is the earnings of the corporations. I guess you could argue that they are linked hand-in-hand when it comes to stating that if the economy is good, profits will be good and vice versa. So, the secret of investing in stocks is knowing when earnings will be reasonable compared to the opposite.
I picked up The Wall Street Journal the other day, and the bold headlines read as follows, “Exxon, Chevron Profits Surge As Mega Deals Bind Them To Oil.” I was a little taken aback by that article because, as we all know, oil is an industry whose future is not very bright. During the quarter, announcements were made by Ford and GM that they were abandoning their aggressive plans for the production of electric cars since they could not be produced efficiently and profitably. As we all know, EV cars are the wave of the future and have been mandated by the state of California as exclusive beginning in 2030. The world is attempting to move away from oil, and you would think that these vast oil companies would respond by reducing their exposure to oil, but that is not the case. They are buying more oil companies and becoming more significant in the industry.
The main thing I want to illustrate here is that so many people investing in stocks get so tied up in the whirlwind minutia that they do not look at the facts. For example, this headline from The Wall Street Journal appears most favorable to the oil companies. Therefore, if you look at the underlying numbers, you will see that Exxon for the third quarter of 2023 made $9.1 billion and Chevron made $6.5 billion; excellent numbers for sure, but are they earthshaking, as this article would lead you to believe?
 |
| Former co-worker and current client, Nadine Hooks, stopped by to reminisce with Mia and Joe. |
Something that has happened is there continues to be a massive shortage of labor. Without adequate workers, companies are forced to produce more with fewer people or to improve their technology to increase profits. Most recently, it has been announced that productivity in the United States increased to 3.5% in the second quarter of 2023 and made a considerable increase of only 1.4% annually going back to 2008. This substantial increase in productivity allows companies to be more profitable with fewer employees.
One of the biggest misnomers these so-called stock market experts keep throwing out is that the consumer is tapped out. I’ve never really understood what they’re talking about in this regard. As long as people have a job, they have income to spend. Everyone has to buy food, clothing, and other necessities of life. The only time they do without these necessities is if they don’t have a job. With unemployment at 3.9% and close to 10 million job openings, everybody in the U.S. who wants a job has a job. As long as these people are working, they will continue to earn money to buy necessities. Of course, this should relate to buying things that they consider to be important, like technology. We are seeing a revolution in technology that is unprecedented.
 |
| Ava is all “set” for a great volleyball season! |
Even though the experts keep saying that the economy is slow and that it would be impossible to continue to increase sales, the third quarter of 2023 proved them incorrect. For example, take the tech companies and their increase in sales in the third quarter. Tesla’s revenue is up 9%, Alphabet (Google) grew 11%, Microsoft and Amazon expanded 13%, and Meta Platforms increased 23%. Of course, Nvidia stood out, improving its revenue by a staggering 88% during the quarter. Do those numbers give you any idea of the economy's strength since virtually all those companies sell consumer discretionary items? That means they are discretionary for the consumer to buy, but the consumer continues to purchase these items, or the revenue would not increase.
I mentioned that the real reason stocks go higher is profits. Did you look at the earnings in the third quarter for the major tech companies? For the third quarter of 2023, Apple showed a profit of $24 billion, Microsoft’s profit was $22.3 billion, and Google profited $19.7 billion. Even Meta (Facebook) delivered a profit of $11.6 billion for the quarter. Above, I mentioned that Exxon made $9.1 billion for the quarter, and Chevron made $6.5 billion. Each one of those tech companies far exceeded the profits of the so-called blue-chip oil companies.
 |
| Evan and Alexis all dressed up and enjoying a Fall wedding in Alabama. Looking good, guys! |
Another example I would like to quote is that if you want to consider true blue-chip stocks, you would have to consider IBM in that category. It is the bluest of the blue stocks and the original tech giant. During the most recent ending quarter, IBM had gross sales of $14.8 billion and a net profit of $1.7 billion. Impressive numbers indeed, but minuscule as compared to the tech companies. For example, IBM’s gross sales of $14.8 billion for the quarter were substantially less than Google’s net profits at $19.7 billion. Therefore, Google made more profits than IBM even had sales.
Here is another example I thought might clarify the magnitude of the earnings of these corporations. Apple recently announced that they earned net profits for the quarter of $23 billion. To put that in perspective, I will do the arithmetic for you. There were 90 days in the quarter, meaning Apple earned a net profit of $256 million daily. I often think to myself how discouraging it would be to try and invest in cash at Apple when, if you took a long weekend off, you would have to deal with close to $1 billion in new money when you came back to work the next day. Apple also reported that they have on hand cash over $100 billion, meaning it is doubtful that they would need to borrow money in the future.
 |
| You let go first. No, you let go! Joe and his buddy, Babar! |
It was also announced on Friday that Berkshire Hathaway had accumulated $157 billion in excess cash. Because they can earn money market rates close to 5% on short-term treasury bills, their earnings increase substantially on the interest income only. Assuming they can continue to get close to 5% short-term rates, they will earn close to $8 billion annually in interest income alone. What I am trying to emphasize is these profits are beyond anything anyone has ever seen in America and world finance. These profits are so extraordinary as to illustrate how strong the economy is. For all those so-called experts that forecasted recession, the downturn in corporate profits, and, therefore, significantly lower net income, I think this illustrates they were just wrong.
And yes, it is for tech companies, but how does it affect everyone else? At this point, of the 500 large companies in the S&P 500, 250 have published their reports so far this reporting season. As I am currently writing this posting, the reported earnings are 7.7% above their estimated earnings. This is the best over-percentage of the last ten years. If the economy were poor and consumers were cutting back, how can you possibly justify the GDP growth during the third quarter of 4.9% and earnings above estimates of 7.1%? I think it is pretty clear that these earnings and the increase in sales support the economic concept that the economy is just fine. Not too hot, not too cold, but just right, a beautiful “Goldilocks” economy.
 |
| Handsome little guy that Lindsay and her friend encountered while hiking last weekend. |
For decades, everyone has been bashing Amazon since they do not make large profits, and everyone seems to disagree with the company. I love Amazon, and if we do not get a box delivered a day from them, I feel ignored. During the third quarter of 2023, Amazon generated a net profit of $9.9 billion. Remember, this company makes most of its earnings in the fourth quarter, and the third quarter is historically a down quarter. As you can see, they turned out pretty well for a down quarter.
To many, Tesla is still considered to be a startup. Many people dislike Elon Musk for personal reasons that are unclear to me since the guy is brilliant beyond belief, in my opinion. A man who has accomplished all he has accomplished by 52 is quite extraordinary. I am convinced that one day, history will look back on Elon Musk and consider him the Thomas Edison of our generation. But what about the company itself? In the third quarter of 2023, Tesla showed a net profit of $1.9 billion. They admitted it was a weak quarter since they cut prices to increase market share. To point out, Tesla made more profits than IBM. You are seeing a transformation in the automobile industry. Tesla is now the most valuable car company in the world. They will produce two million electric vehicles in 2024, and there is a high likelihood that both Ford and GM combined will produce less than one million.
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I give you all these facts and figures for only one reason. I want you to evaluate profitability on headlines. As we go into the most profitable period of the year in stocks, you need to be fully invested in good stocks. With interest rates falling, the economy moderating, and earnings accelerating, there is a high likelihood that we could see a bonified Santa rally. Therefore, if you are not “locked and loaded” and fully invested, you should be moving to that level of investment as we speak.
As always, the foregoing includes my opinions, assumptions, and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.
This commentary contains forward-looking statements, which are provided to allow clients and potential clients the opportunity to understand our beliefs and opinions in respect of the future. These statements are not guarantees, and undue reliance should not be placed on them. Forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from our expectations. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.
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