Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Wednesday, Aug. 14. The Bottom Line segment of today’s podcast starts at (2:35) and Stocks on the Contrarian Radar at (4:47) for listeners who want to skip ahead.
State of Play
Stocks rallied yesterday after producer prices showed more signs of dropping inflation. As we look at our board of indicators for signs of direction at 0640, some risk-on appears to be developing ahead of the CPI at 0830:
Stock index futures are flat with the exception of small caps, which are up a bit. The Russell 2000 is pointing to a gain of 0.4% at the open;
Cryptos are rallying again, with Bitcoin up 5% to trade north of $61,000 again;
Bonds are consolidating after yesterday’s PPI-fueled rally. The 2-year yields 3.93% with the 10-year yielding 3.84%;
Commodities aren’t doing much. WTI crude oil is down 0.5% to trade around $78/barrel. Copper is unchanged.
Today’s Known Events
Yesterday we had producer prices. Today’s it’s the turn of consumers. The CPI is out at 0830. The numbers we’re anticipating:
0.2% month-over-month increase in headline CPI, after a drop of -0.1% seen last month;
3.0% year-over-year increase to headline CPI, identical to last month;
0.2% MoM increase to Core CPI (0.1% last month);
3.2% YoY increase to Core CPI (3.3%).
The Bottom Line
The Contrarian told you yesterday that producer prices would be a non-event. That turned out to be wrong. Apparently investors do still care about inflation. They weirdly never really cared about the PPI before. Only on certain occasions.
Maybe the market was just looking for a reason to rally? Either way, the ‘Black Monday’ from a week ago is already a distant memory. Tech is rallying again. Small caps are even rallying again.
All systems go for the bull market? Maybe not so fast. At risk of playing Debbie Downer, The Contrarian remains on alert about the state of the consumer. Home Depot (HD 0.00%↑) earnings yesterday were just the latest. But then if people remain gainfully employed it stands to reason that they will keep spending money. Which brings us back to the labor market being the key thing to watch, rather than inflation. Initial jobless claims print tomorrow morning…
Stocks on the Contrarian Radar©️
Owens Corning (OC 0.00%↑), a supplier of construction materials, dropped by 4% overnight, for reasons that remain elusive. It rose yesterday even after Home Depot earnings. OC’s own earnings were last week and they weren’t great, causing a sell-off at the time. Maybe that should have been the telling sign for HD earnings? Anyway, over the last month the stock is down 10% after a nice run year-to-date:
OC is a pretty obvious recession proxy as home construction (and home repairs) are one of the first things to go when there is a slowdown. And yet, the valuation is pretty compelling. OC trades at just 11x forward earnings, 1.2x forward sales, and 6x forward cash flows. True its outlook presented in last week’s earnings was not great and that can be expected to eat into those multiples next quarter. But if OC gets cheaper, and with interest rates coming down, could this be a buy?
There may be crazier ideas. The company is still working through an acquisition (Masonite) that carries some risk. It took on some debt to finance it but is making all the right noises about paying it down.
It’s interesting to hold OC up against Rocket Companies (RKT 0.00%↑), a proxy for mortgage financing in the US. As you can see these two have tracked each other pretty closely over the last year. Except when they didn’t:
If relative value plays are your thing, this may be the bigger opportunity. Figure the price will converge again at some point, whether that is due to RKT dropping or OC rallying. But over the long term, OC may be interesting in its own right.
Full disclosure: The Contrarian has no position in Owens Corning. He does have a small position in RKT.
Housekeeping
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