Hi Again,
Different sectors are in recession and many sectors are in an economic slowdown but the overall
economy is not expected to get in to a recession as the Federal Reserve is doing everything possible
to prevent a recession in the US. Manufacturing is in a recession for sure. There is a slowdown in
transportation. As you may have noticed, Schlumberger has been in a bear market for a long time
and this shows what is happening in oil and drilling in the US. There has been a lot of oil well
shutdowns in Texas. During the recession created by the mortgage crisis, the only bright spot was
Texas with its booming Oil industry. In 2008, we had 156,588 oil producing wells in Texas. In 2015,
It peaked at about 193,000. In 2018, it was down to 187,000. Now on a monthly basis, it keeps going
Down significantly. Fed Chairman expect US GDP to grow more than 2% in 2019. In most countries,
The tool of using monetary policy to stimulate the economy is over; and that is due to negative
interest rates in most countries. However the US Federal Reserve is not out of ammunition. Recently
I asked a Sr. VP at Western Mercantile Bank if we are heading towards a recession and what they
expect in terms of their revenue for the next 12 months; and he said that they expect their revenue
to grow 20% over the next 12 months. I thought he was overly optimistic but after our conversation,
the Federal Reserve embarked on another program for which that asked not to be called a “QE
Program” to reduce short-term interest rates so banks could lend more and make more money. During
the QE program after the mortgage crisis, the Feds bought 10 year and 20 year treasuries but this
time around the Feds are buying at the very low end Treasuries. For decades, Feds lowered interest
rates to stimulate the house building and buying market which in turn leads to economic growth in
the total economy. In 2018 the Feds started to increase interest rates and home building stocks
took a dive. On 12/24/18, ITB (index for home builders) hit a low of $29.99. On 10/8/19, it was
at $45.27- 51% gain in about 10 months!! Chasing momentum stocks is not a prudent investment
strategy. On the other hand being a contrarian one has to be careful “not to catch a falling knife”.
I was thinking of adding Fedex to our portfolio but I am not sure about Fedex. Last time it reached a
high was on 1/16/18 when it reached $274. Now it is at $150. However the PE is still too high at 88!
A couple of months ago, a Fedex pilot told me that he does not see an economic slowdown affecting
Fedex. He said that business with China has been going down for a few years and it is due to
many companies pulling out of China due intellectual property theft. He also said that there has
been an increase in business with India and Africa. According to this pilot, planes to South Africa go
full but come back empty (all exports from the US) but planes to India gets full both ways. I told him
that their CEO told Wall Street to expect lower revenue figures in the future and he replied, “That is
not what we hear from our bosses”. Interestingly just a few days the FedEx CEO once again told
Wall Street to expect lower revenue figures in the future. If you look at the bigger chart of Fedex,
starting from 1976, the chart made a triple top which is not good for the long term. At this time the
market is close to an all time high and a severe correction would be very healthy for the market but I
do not know if that is in the cards for us.
Have a great month.
Fernando