April 13, 2022

Meeting Expectations

The Consumer Price Index number came out Tuesday and the Year-over-Year (Y/Y) number increased from 7.9% to 8.5%.  Yes, that means consumer prices are still headed in the wrong direction, but the market reacted favorably in the morning after the report came out.

Why the paring of the losses from the previous day? Well, the “good” news is that the consensus range of the CPI number was anywhere between 7.7 and 8.6% and we fell within the range.  The market has been pricing in an expected 0.5 point increase from the Fed in May, so while rising prices won’t help anyone at the stores, the CPI data didn’t surprise anyone.  This is showing us that prices of commodities and supply chain issues are still prevalent.  The numbers met expectations and started the day off with a short-term bump off some lows, but we’ll dive deeper into that in a bit. 


Aside from earnings, we still have one report coming out this week that needs our attention and that is the Retails Sales number that will get reported along with Jobless Claims this Thursday at 8:30a.  Since retail makes up about ⅔ of the US economy, we want to know how consumers are reacting to higher prices.  The report will help us determine if consumers are shrugging off inflation and still buying goods and services or if the rising consumer price index is starting to alter consumer behavior and sentiment.  




The chart of the day today comes from Cleveland-Cliffs Inc (CLF)


Consumer price index

CLF is a steelmaker and a mid-cap stock.  Russia’s invasion of Ukraine caused crude iron prices or soar by more than 50%, but CLF invested in a process that uses an alternative, environmentally friendly alternative to imported crude iron.  With the recent decline, the stock is looking cheap at 5.1 times forward earnings.  Sales jumped from $5.35 billion in 2020 to $20.44 billion in 2021.  Look out for resistance at $35.83 (the current price is $31.56).  


The Energy sector was hit in Monday’s sell-off but is back on top of the leader board on Tuesday in terms of relative performance.  Technology came back a little bit but is still underperforming over the longer time frames. The big news yesterday was that Nivida (NVDA) was downgraded from outperform to neutral, citing slowing PC demand.  Apparently, they haven’t read the Wealthy Investor Society newsletter that talks about all the long-term reasons why NVDA is a buy because of their expansion into the metaverse.  



Yesterday we talked briefly about using inverse ETFs to hedge your portfolio.  And while I am by NO MEANS a money manager or qualified to give you advice about your specific situation, I did want to bring up some example guidelines for portfolio management when using inverse ETFs.

When thinking about hedging using inverse ETFs, you should think about setting aside no more than 10% of your portfolio.  Next, no one hedge position should be greater than 2% of the total portfolio, or in other words, a single hedge position should not exceed 20% of your max hedge capital.

Let’s break that down with an example.

$100k portfolio
$10k (10%) set aside for portfolio hedging
1 hedge position should cost < $2000 (20% of hedge capital of $10k)

Going back to our ProShares Short SP500 (SH) example from yesterday, you could buy up to $2000 of the SH ETF.  If the SP500 goes down, the SH shares will increase in value since they operate inversely to the underlying instrument.  

There are inverse ETFs for just about every sector and industry if you want to break your hedges down further, by focusing let’s say on the weaker Technology sector.  If you want to be a little more active, you can always reevaluate the weaker sectors either every week, month or three months and rotate in and out of your inverse hedged sectors.

What about you? Do you hedge?  What’s your favorite way to hedge a portfolio?  

If you have any questions, comments, or anything we can help with, reach us at any time

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