The Crucial Week: Unpacking January's Impact on 2024's Financial Landscape

Embark on a journey through the intricate landscape of current events and financial forecasts with us and our esteemed guest, Brad. We'll navigate you through the twist and turns of the global stage, from the enigma of the presidential race to the unfolding drama in Jordan, painting a comprehensive picture of the forces shaping our world. As the tech titans line up to reveal their quarterly magic, we also scrutinize the anticipated impact of AI breakthroughs like Google's BARD and Microsoft's ChatGPT alliance. You won't want to miss our dissection of what these developments mean for the future of tech and your investment strategies.

Our ears are to the ground, catching every vibration from the financial sector to the Federal Reserve's whispers. Amazon's latest gambit in AI, AWS, and the ad space is about to be unveiled, while Meta prepares to showcase its fight in the social media arena with Reels. We'll also decode Jerome Powell's fiscal signals and look ahead at the Treasury's chess moves under Jack Frost's guidance. All the while, we're keeping an eye on the job market's pulse. With market concerns like Evergrande's tremors and international political plays at our fingertips, Brad and I will help you interpret the economic omens that could herald the next seismic shifts in the marketplace.

** For informational and educational purposes only, not intended as investment advice. Views and opinions are subject to change without notice.

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Transcript

Alan Eppers: 0:00

And now introducing Mr Keith Lanton.

Keith Lanton: 0:04

Hi, good morning everyone. The weekend was enjoyable. Today is Monday, January 29th Last Monday of January, still the very beginning of 2024. And this week there's going to be a lot of news that could give us a lot of insight into the rest of the year. So sometimes some weeks are more insightful than others. Of course, we can't get all the insights we'd like. We've got a presidential election that remains uncertain and we have all sorts of geopolitical events going on in the world, both in the Middle East, Ukraine, Russia, and, of course, the US potentially getting further dragged into the conflict. They have to have horrific events over the weekend in Jordan. So this morning we will talk about what we've got going on this week, how that could set the table for a lot of the rest of the year, and how markets interpret a lot of the information that we received.

Keith Lanton: 1:08

Again, the most important part of investing, in my opinion, is to know yourself, know your risk tolerance, know the volatility that you can handle, build a portfolio around that and rebalance when appropriate. And if you find yourself getting ahead of your skis in terms of not being comfortable with volatility when it hits, we'll use that as an opportunity to recalibrate in your head which you are comfortable with, and when things get back to what I would call a more stable equilibrium, perhaps it's time to reassess the risks that you felt when things were getting really ugly in the marketplace. Right now we're not in an ugly place, so sometimes we can feel overly positive or euphoric, so keep that in mind as well. When markets are approaching or hitting new highs every day, it's easy to get overconfident. I'm going to start the day off with a anecdote from Warren Buffett and then we'll get into what's going on in the financial world, and then we will turn it over to Brad to talk about what is really one of the main drivers of the overall foreign and domestic economic markets, and that's the bond market, the fixed income market, which is a return to its place of being the real barometer for folks' comfort, for risk and what markets may look like. But first, on this Monday morning. Perhaps you've had a stressful Monday morning. I hope not, but Warren Buffett had a quote that's Jean's clear author of Atomic Habits shared a week or so ago, and this is on keeping your temper in check and not losing your cool, which is something that could happen on a Monday morning.

Keith Lanton: 2:56

So he said, my good friend and hero, tom Murphy, had an incredible generosity of spirit. He would do five things for you without thinking about whether you did something for him. After he was done with those five things, he'd be thinking about how to do the sixth. He was also an extremely able person in business and was kind of effortless about it. He didn't have to shout or scream or anything like that. He did everything in a very relaxed manner.

Keith Lanton: 3:19

Forty years ago, tom gave me meaning Warren Buffett one of the best pieces of advice I've ever received. He said, warren, you can always tell someone to go to hell tomorrow. It's such an easy way of putting it. You haven't missed the opportunity. Just forget about it for a day. If you feel the same way tomorrow, tell them, but don't spout often a moment of anger.

Keith Lanton: 3:40

So with that thought in mind, we will get right into this week's events and, as I said, pretty chock full of information. Barron had a quote there are decades when nothing happens and there are weeks when decades happen. That's from Vladimir Lenin, and the coming week may not pack in 10 years worth of market and economic news, but it's certainly shaping up as the most eventful one for investors so far this year. So here we are. It's just the last week of January and this week we are going to get us a whole bunch of facts you can believe that to help us determine if the narrative the market has been telling itself the power higher still rings true. Five of the Magnificent Seven release earnings and perhaps, with the recent sell-off in Tesla, we are down to five of the six. I don't know if they'll call them Magnificent Six, but let's call them the Magnificent Six for now. So five of perhaps the biggest drivers of the markets will be releasing their earnings on Tuesday and Thursday of this week. Tuesday we get Google and Microsoft's results after the bell, and Thursday we get Amazon, meta and Apple, and the markets will get gobs of information when we get these earnings. So let's just take a look at them individually.

Keith Lanton: 5:08

Microsoft, when it announces earnings, will shed more light on its AI artificial intelligence ambitions. Investors will be waiting with bated breath to learn when and if, and perhaps how, microsoft will monetize artificial intelligence. Microsoft will also share details about Azure, that's, its cloud solution, and they will also be talking about their partnership with ChatGBT, after all of the so-called operatic mechanisms that went on between ChatGBT and their board, and then Google, also known as Alphabet, will tell us about the advertising market, which is as good of a barometer as any, in my opinion, for the overall economy. In addition, we will get more data on whether or not Google is keeping up with the big boys like Microsoft, and there is your solution in Amazon and there Amazon Web Services solution in the cloud. There's been lots of concerns that Google has also ran to Microsoft and Amazon, and we'll hear also, and perhaps equally importantly, about Google's artificial intelligence initiatives, specifically what they call BARD.

Keith Lanton: 6:18

Now, not a lot of people may remember that Google was arguably the tech pioneer of artificial intelligence, and many of Google's engineers are and were AI leaders. Some were founders and early members of the ChatGBT team. So Alphabet slash. Google could not seek to monetize AI at first, but they may have the potential to catch up and possibly even leapfrog Microsoft and ChatGBT, given their vast stores of consumer preferences and data through all those searches and those Gmail that many of us engage in, and the fact that they still have lots of engineers with lots of artificial intelligence expertise. It'll be certainly something that the markets are focused on what Google has to say about their AI, going forward in their AI ambitions and then on Thursday, markets will follow Tim Cook of Apple's commentary very closely.

Keith Lanton: 7:18

Markets will be very focused on China's sales and the Chinese market, of course. With the Super 5, let's say reporting this week, apple is perhaps the greatest insights we will have into the Chinese economy. They have the most exposure out of any of these companies by far, and this will give us a lot of inclination as to how China's economy is performing. They are the second largest economy in the world and if the second largest economy in the world is sputtering Well, that's something that would cause concern for the global economy and even for the United States. We can't outrun the rest of the world. We'll also be focusing on whether or not Apple, if it is having any issues in China, whether those issues are unique to Apple and the unique dynamic with Apple and their phones and their competition with Huawei are having, or whether or not it's a broader effect of the Chinese market and what that may mean for all of us going forward. And then we will get investors who want to hear about Apple's plan to reignite growth. They'll want to hear about Apple's artificial intelligence initiatives, about their auto ambitions and about how their new virtual reality headset will work and what investors can expect with respect to that new product. And the hits keep coming.

Keith Lanton: 8:40

Amazon is going to provide markets with information about three key areas. Number one commerce. How is the US consumer holding up? Two, we talked about AWS, amazon Web Services, cloud and Amazon's ambitions with respect to you guessed it artificial intelligence. And then we will hear from Amazon about advertising, because advertising is becoming a bigger and bigger piece of Amazon's business model. If you go and search for products on Amazon, some of that is being paid for by advertisers. What you see when you do search their website. And they're also moving aggressively into advertising on Amazon Prime, as they are seeking to roll out an advertising service. So, for those of you who have Amazon Prime as your video service, if you want to continue to watch Amazon Prime without ads, you're a Prime member you'll have to start forking over $2.99 a month or you will be watching some ads on your Amazon Prime. And then, finally, meta will announce earnings and give us insights into advertising, like Google, about their AI ambitions, and Mark Zuckerberg has been very talkative about how Meta is using artificial intelligence to fine tune their algorithms and to improve their advertising results, and to let us know if Reels, which is their competitor to TikTok, is taking market share from TikTok and, if they are, how effective they are in being in taking that market share. So that's just the earnings.

Keith Lanton: 10:16

This week we got more. Then on Wednesday, we hear from the Federal Reserve, while no one expects a change in race at this meeting and there are no dot plots at this meeting. So we won't get that little golden nugget of information. What we will hear is the commentaries from Jerome Powell, and he will give us his insights into the Fed's thinking, and he may share how realistic he thinks the market's expectations of six interest rate cuts are. What does that look? Is for inflation? What's keeping them up at night? All of this could drive the market, and then more.

Keith Lanton: 10:53

We will hear from the one person that the Wall Street Journal over the weekend called the most important man in finance you never heard of. His name is Jack Frost, and he is the Assistant Secretary for Financial Markets. What a title. But what does he do? He sets the mix of US government bonds that are going to be sold to investors and helps determine how much money that the government is going to raise and edit every quarter. So today the Fed Frost will announce how much the Fed plans to borrow in the next quarter and on Wednesday the Treasury will announce the structure of maturity for the next wave of Treasury auctions.

Keith Lanton: 11:32

And why is this so important? Well, you may remember that not too long ago, back in the summer, that the Fed came out with their borrowing needs and they came out with their structure of how these bonds were going to be issued, and they were skewed towards longer term bonds and the market decided they didn't like this structure at all and they felt that too many long-term bonds were being issued relative to demand and interest rates went up significantly. Then, come November, the Fed, perhaps learning a lesson from the summer, came out with the amount of money they were going to borrow and they also came out with their term structure of rates. And, lo and behold, they changed that term structure to weight things more towards the short end of the curve, meaning they were going to issue shorter term maturities. Markets like that, and some would say that was one of the big catalysts for the drive down in rates that occurred in the beginning of November. That, along with some comments from Jerome Powell about the Fed being on hold for raising rates and possibly even considered to lower rates. Put those two together and you got a powerful move in the bond market to the upside and yields to the downside.

Keith Lanton: 12:45

So be lots of attention being paid to these two pieces of information from the Treasury this week, and then on Friday we get the employment report. Now keep in mind that the Fed mandate is to keep inflation low and employment at full employment, whatever full employment necessarily means. Therefore, the jobs report is a key data point in determining Fed policy. Markets are expecting 175,000 non-farm payrolls to be created, which would be down from 216,000 last month, and the markets are expecting the unemployment rate to take up to 3.8% from 3.7%. So that's what we've got to think about as we head into last week of January.

Keith Lanton: 13:33

So what do we have going on this morning? Well, right now we've got the futures very quiet ahead of all of this tremendous news flow we're going to receive this week. S&p futures are now down 2, dow futures are down about 25 and Nasdaq futures are now up about 12 points this morning. So, with that backdrop, treasuries which we might expect to be seeing a strong flight to safety bid after Iranian-backed militants killed three US service members in Jordan and injured several others, and President Biden saying that this is seen as a significant escalation and he is vowed to respond. The Senate Armed Services ranking member, roger Wicker, called on the US to strike directly against Iranian targets, according to CNN. But so far this morning price action has indicated that the geopolitical worries, at least as we speak, are not top of mind for investors.

Keith Lanton: 14:35

I started to talk about the treasury market. We are not seeing a strong flight to safety bid. We're seeing a muted flight to safety, and oil prices perhaps the biggest indicator of what's going on in the Middle East are lower this morning by about 25 cents, indicating, at least at the moment, that market participants are not overly worried about immediate disruptions to supply as a result of the rising tensions in the Middle East. Ten-year yield is down five basins points before 11. Two-year yield is down three basins points to 4.33 percent.

Keith Lanton: 15:07

Overseas equity markets in Asia mostly on a higher note, with the China Shanghai composite down about nine tenths of one percent. Reports that a Hong Kong court has ordered the liquidation of the developer Evergrande, though there is some speculation that the company will continue to work on unfinished projects in China. At one point, evergrande was the largest by sales property developer in China, so significant. This has been a slow death, so to speak, but nevertheless a significant moment here with this bankruptcy. Japanese market and the Hong Kong market all up about one percent and India was up about two percent. Gold's up about $11.50 this morning to 2028.

Keith Lanton: 15:58

Taking a look at the European markets we are seeing mixed markets there. Germany's down a little bit, the FTSE in London is up a little bit, france is unchanged. Taking a look at some of the news over the weekend the Wall Street Journal reporting that the Fed is feeling pressure to lower interest rates amid falling inflation. It's significant that the Journal wrote that report because they do have some insights, some would say, into some of the minds and thinking of some of the Fed officials. New York Times is reporting that the US negotiators are close to an agreement for Israel to suspend fighting for two months in exchange for Hamas releasing 100 hostages. Politico reporting that Nikki Haley is committed to stay in the Republican Party race primary race through Super Tuesday on March 5th.

Keith Lanton: 16:43

President Biden saying that he supports border security and the Ukraine funding bill, but House Speaker Mike Johnson said the bill is dead on arrival. The bill would shut down the border to unauthorize immigrants If migrant encounters rise above $5,000 per day. According to the New York Times Financial Times reporting that China regulators have curved short-selling, and the Wall Street Journal reporting that President Biden is expected to award billions in ship subsidies this week. The largest beneficiaries are expected to be Intel and Taiwan semiconductor, so we'll see if that, in fact, is what takes place. Sparrins talked about that.

Keith Lanton: 17:25

The stock market, since November, has been celebrating good news, and they are concerned that it may not last. We've been getting earnings, and earnings so far this season have been hit and miss. The stock market, though, has been celebrating some good economic data. Last week saw a fourth quarter US GDP rise 3.3%, which was above estimates of 1.8%, and we've been seeing a surprise to the upside in GDP now for the past several quarters, and this has helped lift the market. Now one thing to keep in mind with the new market mindset and what the expectation and inflation has fallen meaningfully that bad economic news may no longer be good news for financial markets. We may have moved past that, maybe. Where bad financial news might actually be, if we get it might translate into markets moving down, not expectations that the Federal Reserve is going to lower rates, and that would be good for the market. That narrative may be facing an inflection point.

Keith Lanton: 18:29

Also, we're starting to see the yield curve starting to un-invert and we may think, well, a steeper yield curve is something that is good news for stocks, but that's not necessarily the case. The stock market has dropped in three of the eight times over the past 44 years when the yield curve un-inverted after being inverted for at least three months, including two drops of 10% or more the following 12 months. It could even signal a possible recession, even though it doesn't look like one's likely at the moment. In fact, a slowdown usually occurs nine months after the maximum yield curve inversion, which occurred in mid-2023, implying that one could arrive soon. Even without a recession. The slip in the data could be problematic for the S&P 500., which sits 22% above its 50-week moving average. That's a sign that the index is well above its recent trend, a dynamic that has often preceded meaningful decline in the past several years.

Keith Lanton: 19:25

And then in the up and down Wall Street column, which was entitled how Rate Cuts Effect the Stock Markets Depends on this One Thing, and what the conclusion here is is the one thing that it depends upon is why is the Fed cutting rates? If the Fed is cutting rates to be preemptive, like it was in the 1990s. That is generally viewed as a positive, meaning that they are starting to see a slowdown and they cut rates. That has largely been a positive. On the flip side, in the 2000 era, post-2000, the Fed when they have cut rates, it has been as a result of the economy already being in trouble, like in the early 2000s with the dot-com crash and, of course, 2008-2009 with the financial crisis and then in 2020 with COVID. Those were all periods where, after the markets had rate cuts and the markets continued to decline. So we'll see which of those two scenarios will play out, if, in fact, the Fed decides to cut interest rates, which they've indicated they are likely to, but nothing is done until it happens, of course.

Keith Lanton: 20:32

Finally, barron's concluded their roundtable and I'll share two stocks with you from the column. Both from Abby Joseph Cohn, who is now a professor at Columbia University, was formally with Goldman Sachs. One stock that she chose that thought was an interesting selection. Very had a favor is Pfizer, one of the great heroes during the pandemic due to its development of the COVID vaccine in Paxlova. But like other companies in the heavy reliance on COVID for their success, the stock has dropped and now Pfizer is down almost 41% over the past year and investors, that she says, have lost confidence in the company. She thinks this makes for an interesting entry point. The stock currently yields 5.6%, reflecting investor concerns. It's trading for 13 times this year's estimated earnings.

Keith Lanton: 21:27

But what does she think would spark a turnaround? She said that Pfizer has a history of successful acquisitions. One possible catalyst is the recent acquisition of Cgen, significant oncology company. Pfizer has notable product lines in oncology, immunology, cardiology and endocrinology, but some of its best known drugs have lost their patent protection. But she says some of the remaining products are being overlooked. She says everyone loves to hate Pfizer and that management has signaled that it intends to move forward with more acquisitions. She thinks that could be something that is a catalyst for the stock.

Keith Lanton: 22:01

The second company she mentioned is Henry Shine, based in Melville, where Harold and Lanterine's headquarters are located. They distribute medical and dental equipment. Company was the victim of a cyber attack in the fall and the stock dropped from 75 to 62. By the way, the symbol for Henry Shine is H, as in Hotel, s as in Sam, I, as in Ida, c as in Charles. The stock fell from 75 to 62. Now it's back in the low 70s. She thinks that the bad news from that big disruption is moving behind the company. Last year, in 2023, they earned $4.50 a share. She thinks this year they'll earn $5.50 a share and she expects the stock to trade up from the low 70s to $90 to $100 a share in 2025. Turn it over to Brad to give us some more thoughts and insights.

Brad Harris: 22:58

Good morning Keith. I hope everyone had a nice weekend. Last time I spoke I'd suggested that it was possible that the market was accounting for more rate cuts from the Fed. The Fed has been implying possibly three cuts or 75 base points, and the market was implying six cuts or 150 base points. In the last two weeks, the market has adjusted to four or five cuts, with the 10-year yield rising a little more than 30 basis points off its low yields. If the market gets in line with the Fed, we could see another 30 or so basis point rise in that 10-year treasury back up to 4.5%. However, if the Fed gets in line with the market, we could see the 10-year yield drop to 3.5%. At the moment, as I said last time, I think it is more likely that the market gets in line with the Fed, maybe with the 10-year finding a lot of support at around 4.25%, because I still think that with what the stock market has done, there's going to be more demand for rebalancing and some more demand for bonds at these livable rates. With the stock and certainly residential housing markets still hot and commodity prices much more under control, this may be a sign of a softer landing. If that's the case, there's no reason for the Fed to run to do anything. The silver lining of hire for longer for bond investors is that if bonds mature and get called and people get new money, we still have an opportunity to reinvest at a decent rate of return. get-rich-quick are not rates, but these are fair rates that will complement any balanced portfolio In municipals.

Brad Harris: 24:39

All the action in the retail world has been for long 4% municipal bonds at par cheaper. These are still available In the institutional world. However, new issues with 5% coupons are being priced at dizzying levels. I've been promoting 3% bonds in the 8-15-year range now for the last few months. I like these bonds. They're at deep discounts and I still cannot comprehend the spread between these particular bonds with 3% coupons and the bonds with the 5% coupons on an after-tax basis. So far I've been wrong, but I've been at this game for a long time and I feel that as issuance subsides and things normalize as well as a little more retail demand comes back, which I have not seen much in January, these structures will tighten and yield on 5% coupon bonds and 3% coupon bonds will become similar. As long as we're in an even to upmarket. That means, in my opinion, that these 3% bonds are going to outperform the 5% bond Over the course of the year, and I'll hand it back to Keith. Thanks.

Alan Eppers: 25:51

Thank you for listening to Mr Keith Lantham. This podcast is available on most platforms, including Apple Podcasts, Spotify, and Pandora. For more information, please visit our website at www. heraldlantern. com.

Sophie Cohen: 26:11

Opinions expressed herein are subject to change and not necessarily the opinion of the firm. Past performance is no guarantee of future results. The information presented herein is for informational purposes only and is not intended to provide personal investment advice. It is important that you consider your tolerance for risk and investment goals when making investment decisions. Investing in securities does involve risk and the potential of losing money. The material does not constitute research, investment advice or trade recommendations.