Market Recap

Posted on October 1, 2021 by Gemmer Asset

image_printPrintable Version

Market Recap


The third quarter closed on a down note with broad losses in both stocks and bonds in September. Nothing very dramatic, but notable nonetheless that both main asset classes were down in the same month. In general, only Japanese stocks and commodities were in the black during September.


There were a couple interesting economic reports in the last week. The inflation data came in hot again. Friday’s Core PCE report showed year-over-year growth of +3.62%. The headline number of +4.26% was boosted by both higher energy and food prices.




The other interesting report was on home prices. The Case-Shiller index was up +19.7% year-over-year in July, as you can see below.



And depending on which price index you use, the price-to-rent ratio is near or at all time highs.



Energy Markets in Turmoil


Over the last few days we’ve seen some pretty amazing moves in energy prices around the world. Clearly crude oil prices have been on a tear lately, as you can see below.



But probably more important are some of the prices spikes in China and Europe for both coal and natural gas. For example, coal prices in China have more than doubled this year.



I’m not sure coal is that beautiful, but soaring prices are leading to power outages in parts of China.



And you thought it was only California that had rolling blackouts?!


Analysts think there are multiple reasons for the power problems :


– Reduced mining production because of safety incidents and anti-graft investigations.

– Limited coal imports due in large part to a ban on the importation of Australian coal.

– Because of the high price of fuel, many of China’s coal-fired power plants, most of which have run at far below their full capacity for years, refused to operate at loss, and shut off production.


India also uses a lot of coal for power generation, and inventory levels there are getting tight.



Europe is struggling with both coal and natural gas – nat gas prices have soared in the U.K. for example.



The knock-on effects are both predictable and somewhat surprising. Of course, electricity rates are up (chart below shows French power prices).



But natural gas is an input into fertilizer production.



Higher energy prices = higher inflation, right? Here experts disagree (shocker, I know). Certainly, energy is a component in the inflation data and a key input cost. But if prices stay this high, economic activity is going to struggle in both China and Europe. Lower growth is typically disinflationary or deflationary. It is going to be an interesting winter, especially if it proves to be cold.


The Fed’s Ethics Problem


Another note on the Fed (again, I know – sorry). Chairman Jay Powell’s term ends in February next year and there is a growing debate about his reappointment. Both Elizabeth Warren (D-MA) and Sherrod Brown (D-OH) have criticized Powell’s approach to bank regulation. He’s also being knocked for not addressing climate change. Democratic senator Sheldon Whitehouse of Rhode Island said that whoever leads the Fed must use its tools to “head off the climate-driven financial crisis we know is coming”. It’s not entirely clear how…???


Powell’s Fed has also become embroiled in an ethics controversy. Two regional Fed bank presidents, Eric Rosengren and Robert Kaplan, resigned this week following revelations about their trading practices.


The two officials’ financial disclosures sparked criticism from government watchdogs after they revealed extensive stock trading in 2020, when the Fed was spending trillions of dollars stabilizing financial markets and boosting the economy. For example. last year, Kaplan made trades worth at least $1 million in 22 stocks and index funds, including Amazon, Chevron, Facebook, and Johnson & Johnson. This is from a recent WSJ piece:


‘Each of Kaplan’s financial disclosures forms dating back to when he first became Dallas Fed President on September 8, 2015 (which we obtained directly from the Dallas Fed), show that Kaplan was trading in and out of S&P 500 futures, a highly speculative form of trading used by hedge funds and day traders. Each of Kaplan’s S&P 500 transactions are listed at “over $1 million.” The phrase “over $1 million” could mean anything from $1,000,001 to tens of millions of dollars per transaction. The phrase is a form of opacity that leads to more loss of credibility at the Dallas Fed.’


Rosengren had invested in funds that owned mortgage-backed bonds, the same kind that the Fed has been buying hundreds of billions of dollars’ worth this year.


It doesn’t look like either situation is technically illegal, but it sure looks bad. And maybe a Fed member trading S&P futures should be illegal? After all, this guy was busted for gaming the system:


“The Securities and Exchange Commission today announced the filing of settled insider trading charges against Leonard R. Barr, a Michigan resident and former accountant at Domino’s Pizza, Inc.


According to the SEC’s complaint, filed in the U.S. District Court for the Eastern District of Michigan, Barr used confidential financial data he obtained through his role as an accountant at Domino’s to trade ahead of two Domino’s earnings announcements in 2016 and 2020 and obtained illicit profits of $34,180.”


Charts We Found Interesting


1. Once again another down-wave….



2. ….but the disparity between urban and rural death rates widens.



3. It’s going to be hard finding things to buy this Christmas season.



4. Russia must be coining money off this price spike!!



5. More on the link between coal inventories, coal prices, and electrical prices in China.



6. That cup of morning coffee could become a luxury.



7. Miscellaneous thought for the week: The sun’s diameter is about 1,392,000 km (864,000 miles), nearly 109 times larger than the Earth, and its mass is 330,000 times that of the Earth. In order to comprehend the sheer scale of the sun, it’s worth asking the question: how many Earth-sized planets can you fit inside the sun? Volume-wise, you could fit nearly 1.3 million Earths into the sun. That’s assuming all those millions of Earths are squished together with no empty space in between. But the Earth’s shape is spherical not a cube, so only about 960,000 Earths would fit inside the volume of the sun.




Have a good weekend.




Published by Gemmer Asset Management LLC The material presented (including all charts, graphs and statistics) is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The material is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objective, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this material is suitable for their particular circumstances and, if appropriate, see professional advice, including tax advice. The price and value of investments referred to in this material and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or prices of, or income derive from, certain investments. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Gemmer Asset Management LLC (GAM). Any mutual fund performance presented in this material are used to illustrate opportunities within a diversified portfolio and do not represent the only mutual funds used in actual client portfolios. Any allocation models or statistics in this material are subject to change. GAM may change the funds utilized and/or the percentage weightings due to various circumstances. Please contact GAM, your advisor or financial representative for current inflation on allocation, account minimums and fees. Any major market indexes that are presented are unmanaged indexes or index-based mutual funds commonly used to measure the performance of the US and global stock/bond markets. These indexes have not necessarily been selected to represent an appropriate benchmark for the investment or model portfolio performance, but rather is disclosed to allow for comparison to that of well known, widely recognized indexes. The volatility of all indexes may be materially different from that of client portfolios. This material is presented for informational purposes. We maintain a list of all recommendations made in our allocation models for at least the previous 12 months. If you would like a complete listing of previous and current recommendations, please contact our office.