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Romain Fournier

Chief Editor
Having worked in the British, French and Swiss financial press, Romain is able to report on local and international issues, as comfortable in French as in the language of Shakespeare, Romain Fournier leads the editorial team at Marketscreener. Fine connoisseur of the English-speaking markets, Romain delivers an editorial every day on US and UK markets.

Inflation will not go down so easily

12/09/2022 | 09:40am EST
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It was the reading every investor was waiting for, and it ended being rather disappointing. Monthly producer prices data came in higher than expected, which could mean that the Federal Reserve will keep raising interest rates for longer to tame high inflation.

The Bureau of Labor Statistics report said the Producer Price Index for final demand advanced 0.3% in November, seasonally adjusted, above the 0.2% expected by economists. Final demand prices also rose 0.3% in both October and September. On an unadjusted basis, the index for final demand progressed 7.4% for the 12 months ended in November, vs 7.2% expected.

"In November, most of the increase in the index for final demand is attributable to a 0.4-percent advance in prices for final demand services," the Bureau said. The index for final demand goods inched up 0.1%.

In the 12 months through November, the core PPI advanced 4.9% after increasing 5.4% in October, while a gain of 4.7% was expected.

However, even if it does not slows down as fast as expected, these figures show that inflation is still cooling. Investors still give a 75% chance that the Fed will hike rates by 0.5% at its December 14 meeting, while a 0.75% rate hike is given a 25% chance of happening.

In the absence of good economic news in Europe and the United States, investors are clinging to the changes underway in China to find sources of optimism. Finally, the country seems to be acting as a catalyst for a small recovery in equity markets. Beijing's announcements in favor of a relaxation of the national health policy have turned this week into a steady stream of measures that sound the death knell for the zero-covid policy.

There is a parallel with the accumulation of measures in favor of Chinese real estate, which have also turned into a kind of tidal wave of support.

After some hesitation, Wall Street finally got back on track on Thursday. The Nasdaq recovered 1.2% and the Dow Jones 0.6%. In Europe, red dominated, but with small gains for the northern stock markets of the region, such as Germany, the Netherlands or Sweden. But make no mistake about it: while China has put the indexes more or less back on track, investors' first focus is still the trajectory of U.S. key rates.

I'm taking advantage of this last session of the week to talk about a topic inspired by the many comments I see on Twitter about Musk. Many investors believe that a company whose price has soared during a period will be able to do the same again after a sharp decline. This is usually a mistake, or a really bold bet. For example, it took almost 14 years for an investor who invested in the Nasdaq on January 1, 2000 to recover his initial losses. Now, investing in the Nasdaq at the beginning of 2000 was not a bright idea, but investors who enter at the bottom and exit at the top are like Santa Claus, they don't exist.

I bring this up because we hear and read a lot about assets that investors love that collapsed this year and that they can recover fairly quickly because they had shown what they could do on the way up. This is a mistake. The irrational exuberance and bubbles that dominated the years leading up to 2022 cannot be the basis for a reasonable investment process. Thus, history and mathematics help to decide the question: should we hold on to stocks that tumbled after their heydays until they recover or abandon them to reposition on more qualitative assets? It is of course the second option that should be implemented.

To hammer home the point, I borrow the words of economist Joachim Klement, who has two recommendations to make after such an experience (like me, he lived through 2000, 2007). First, investing in highly volatile assets is dangerous in the short term but also in the long term because once at the bottom of the hole, the volatility is a drag for years. What matters in the long run is not the returns, but the ratio between returns and volatility. Secondly, the core of the savings should be placed in solid assets with reasonable return promises. It is not forbidden to vibrate on ARKK Innovation or crypto-currencies, but with a small fraction of your portfolio. Klement reminds us that these are bets and not investments, with the risks that this entails.

 

Economic highlights of the day:

In the U.S., producer prices and the preliminary consumer confidence index from the University of Michigan are the main indicators. All the macro agenda is here . This morning, China reported a 1.6% increase in November consumer prices (consensus 1.6%), while producer prices contracted by -1.3% (consensus -1.5%).

The dollar is slightly up to EUR 0.9481 and down 0.3% to GBP 0.8147. The ounce of gold is again flirting with 1800 dollars. Oil is stabilizing after yesterday's rebound, with North Sea Brent crude at USD 76.39 per barrel and U.S. WTI light crude at USD 71.69. The yield on 10-year US debt is sailing around 3.45%. Bitcoin is trading around 17,200 dollars.

 

In corporate news:

* Broadcom expects sales for the current quarter to be above expectations on the back of strong demand for chips used in demand for chips used in data centers and networking equipment. The stock gained 3.5% in the pre-market.

 * Activision could deepen its losses of the day before after the after the procedure initiated by the U.S. competition regulator to block the to block the purchase of the video game publisher by Microsoft. The share was down 1% in pre-trade after having already given up 1.54% on Thursday.

 * Tesla will suspend the assembly of the Model Y in its its Shanghai plant between December 25 and January 1, according to an internal document and two people with knowledge of the case.

 * Lululemon expects sales and profit to be well below market market expectations for the last quarter of the year due to the due to inflation. The sportswear group was down 6% in after-hours trading.

* Costco Wholesale reported lower-than-expected quarterly results below expectations, citing the impact of inflation and increased and higher operating expenses.

* United Airlines is expected to announce a major order for Boeing 787 Dreamliner next week, two sources close to the discussions told Reuters.

 

Analyst recommendations:

  • Apple: Aletheia Capital Limited cut its recommendation to sell from hold. PT down 17% to $118.
  • Ashtead: Jefferies remains Buy with a price target raised from GBp 5500 to GBp 6000.
  • Balfour Beatty: Jefferies remains Buy with a price target raised from GBp 385 to GBp 400.
  • Costco: Fubon Securities downgrades to neutral from buy. PT up 13% $546.
  • Diageo: Jefferies still considerd the stock as a Buy opportunity. The target price is revised downwards from GBp 4500 to GBp 4300.
  • Fidelity National: Jefferies downgrades to hold from buy. PT up 7.5% to $75,.
  • Gilead: DZ Bank AG downgrades to hold from buy. PT up 0.6% to $90.
  • LondonMetric: J.P. Morgan downgrades from Overweight to Neutral targeting GBp 205.
  • Metlife: Jefferies downgrades to hold from buy. PT up 11% to $82.
  • Netflix: Wells Fargo Securities upgrades to overweight from equal-weight. PT up 29% to $400.
  • Take-Two: Citi initiated coverage with a recommendation of neutral. PT up 4.2% to $105.
  • Workspace: J.P. Morgan upgrades from neutral to overweight, targeting GBp 650.

ę MarketScreener.com 2022
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Stocks mentioned in the article
ChangeLast1st jan.
ACTIVISION BLIZZARD, INC. 1.34% 76.61 Delayed Quote.0.08%
APPLE INC. 1.37% 145.93 Delayed Quote.12.31%
ASHTEAD GROUP PLC -0.48% 5338 Delayed Quote.13.64%
AUSTRALIAN DOLLAR / US DOLLAR (AUD/USD) -0.42% 0.7077 Delayed Quote.4.32%
BALFOUR BEATTY PLC -1.24% 367.6 Delayed Quote.9.95%
BITCOIN (BTC/EUR) 3.05% 21847.5 End-of-day quote.40.97%
BITCOIN (BTC/USD) 3.11% 23747.3 End-of-day quote.42.94%
BOEING -0.73% 211.17 Delayed Quote.10.86%
BRENT OIL -0.95% 86.33 Delayed Quote.0.12%
BRITISH POUND / US DOLLAR (GBP/USD) -0.12% 1.23846 Delayed Quote.2.50%
BROADCOM INC. -1.27% 590.99 Delayed Quote.5.70%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) -0.13% 0.7502 Delayed Quote.1.72%
CAPITAL LIMITED 0.12% 103.1197 Delayed Quote.6.19%
COSTCO WHOLESALE CORPORATION 1.00% 503.29 Delayed Quote.10.25%
DIAGEO PLC 0.54% 3440 Delayed Quote.-6.25%
EURO / US DOLLAR (EUR/USD) 0.24% 1.0896 Delayed Quote.1.57%
FIDELITY NATIONAL INFORMATION SERVICES, INC. 0.59% 75.33 Delayed Quote.11.02%
GILEAD SCIENCES, INC. 0.13% 83.73 Delayed Quote.-2.47%
INDIAN RUPEE / US DOLLAR (INR/USD) 0.06% 0.012278 Delayed Quote.1.48%
LONDONMETRIC PROPERTY PLC -1.08% 190.8086 Delayed Quote.11.96%
LULULEMON ATHLETICA INC. 0.41% 310.85 Delayed Quote.-2.97%
METLIFE, INC. -0.25% 72.04 Delayed Quote.-0.46%
MICROSOFT CORPORATION 0.06% 248.16 Delayed Quote.3.48%
NASDAQ COMPOSITE 0.95% 11621.71 Real-time Quote.11.04%
NETFLIX, INC. -1.12% 360.77 Delayed Quote.22.34%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) -0.03% 0.6488 Delayed Quote.2.27%
REGION GROUP 0.74% 2.73 Delayed Quote.0.00%
S&P GSCI BRENT CRUDE INDEX 0.06% 735.9157 Real-time Quote.0.57%
S&P GSCI CRUDE OIL INDEX 0.03% 436.8628 Real-time Quote.-0.72%
TAKE-TWO INTERACTIVE SOFTWARE, INC. 2.14% 114.28 Delayed Quote.9.75%
TESLA, INC. 11.00% 177.9 Delayed Quote.44.42%
UNITED AIRLINES HOLDINGS, INC. -1.46% 48.73 Delayed Quote.29.26%
WELLS FARGO & COMPANY 0.68% 46.12 Delayed Quote.11.70%
WORKSPACE GROUP PLC -1.26% 510 Delayed Quote.16.17%
WTI -1.03% 79.694 Delayed Quote.-1.29%
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