“It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.” — Charles Munger

1. SEC Authorizes Bitcoin-Spot ETFs in Crypto’s Big Breakthrough — US regulators for the first time approved exchange-traded funds that invest directly in Bitcoin, a move heralded as a landmark event for the roughly $1.7 trillion digital-asset sector that will broaden access to the largest cryptocurrency on Wall Street and beyond. The Securities and Exchange Commission, whose three-part mandate includes investor protection, authorized funds from industry heavyweights BlackRock, Invesco and Fidelity to smaller competitors including Valkyrie to begin trading late last week.
The approvals also mark a rare capitulation by the SEC following opposition that lasted for more than a decade, ever since Tyler and Cameron Winklevoss first proposed a Bitcoin ETF in 2013. BlackRock Inc.’s surprise application last June, followed by an appeals court ruling that called the denial of a different application “arbitrary and capricious,” triggered a blistering rally in the cryptocurrency as speculation that US regulators would finally give their blessing to the structure.
2. Inflation Edged Up in December After Rapid Cooling Most of 2023 — The consumer-price index climbed 0.3% in December from the prior month and increased 3.4% from a year earlier, the Labor Department said Thursday. That compares with November’s 0.1% monthly gain and marks an acceleration from that month’s 3.1% annual increase. Core prices, which strip out volatile food and energy items, rose 0.3% in December from the prior month—the same monthly increase as November and slightly faster than would be consistent with the Federal Reserve’s long-term inflation target of 2%. Core prices increased 3.9% from a year earlier, a modest slowing from November’s 4% annual increase. Thursday’s report isn’t likely to change the Fed’s near-term policy outlook.
3. PPI report shows U.S. wholesale prices declining for a third straight month — the decline in wholesale inflation last month offers a bit of relief after a hotter-than-expected increase in the consumer price index. The CPI posted the biggest gain in December in three months. A separate measure of “core” wholesale prices that strips out volatile food, energy and trade margins rose a mild 0.2%% last month, the government said. That matched the Wall Street forecast. The cost of goods fell 0.4% in December because of another decline in energy prices. Food prices also fell. The cost of wholesale services, where inflation is running the hottest, was flat in December.
4. SEC Approves Bitcoin ETFs for Everyday Investors — The SEC decision clears the way for the first U.S. exchange-traded funds that hold bitcoin to be sold to the public. Expectations of U.S. regulatory approval for such funds drove the price of bitcoin to the highest level in about two years. The digital currency traded just below $46,000 late Wednesday, up from $17,000 in January 2023. Until now, everyday investors who wanted to buy and sell digital currencies have had to either trade on crypto exchanges and incur hefty transaction fees or purchase products that track bitcoin in less direct ways. At least half a dozen bitcoin-futures ETFs are already on the market. Those funds use futures contracts to provide exposure to bitcoin price moves, though they have been criticized for often straying from bitcoin’s price.
All 11 applications filed by asset managers including BlackRock, Fidelity Investments, ARK Investment Management, Invesco, WisdomTree Bitwise Asset Management, Valkyrie and Grayscale Investments have been greenlighted to list. The new funds, known as spot-bitcoin ETFs because they buy and sell the digital currency itself, are expected to begin trading on Thursday.

The week ahead — Economic data from Econoday.com:

There isn’t a single formula. You need to know a lot about business and human nature and the numbers… It is unreasonable to expect that there is a magic system that will do it for you. — C Munger

1. Fed Minutes Suggest Rate Hikes Are Over, but Offer No Timetable on Cuts — At the meeting, the rate-setting Federal Open Market Committee agreed to hold its benchmark rate steady in a range between 5.25% and 5.5%. Members indicated they expect three quarter-percentage point cuts by the end of 2024. Officials noted the progress that has been made in the battle to bring down inflation. They said supply chain factors that contributed substantially to a surge that peaked in mid-2022 appear to have eased. In addition, they cited progress in bringing the labor market better into balance, though that also is a work in progress.
The “dot plot” of individual members’ expectations released following the meeting showed that participants expect cuts over the coming three years to bring the overnight borrowing rate back down near the long-run range of 2%.
2. U.S. Auto Sales Bounced Back in 2023 — The U.S. auto industry rebounded in 2023 with many car companies reporting double-digit sales gains, marking a return to normalcy for a sector that has been on a roller coaster since the start of the pandemic. Automakers’ results were boosted by pent-up demand and better availability on dealership lots. A six-week United Auto Workers strike this fall did little to dampen the industry’s momentum and electric-vehicle sales continued to rise, albeit at a slower rate than in the previous year. Analysts project industrywide sales of new cars in the U.S. could reach nearly 15.5 million in 2023, about a 13% increase from the prior year, once all car companies have released their figures.
3. Money-Market Fund Assets Rise to New All-Time High — Money-market fund assets rose to an all-time high, led by inflows into the government sector as investors sought to protect their cash at the end of the year. About $78.6 billion flowed into US money-market funds in the week through Jan. 3, according to Investment Company Institute data. Total assets rose to $5.965 trillion from $5.89 trillion the week prior. Retail investors have been piling into money funds since the Federal Reserve began one of the most-aggressive tightening cycles in decades in 2022. But last month, the Fed signaled that campaign is over and projected deeper interest-rate cuts this year.
4. Job Gains Picked Up in December, Capping Year of Healthy Hiring — The U.S. economy added 216,000 jobs last month, the Labor Department reported Friday. That was larger than November’s gain of 173,000, and better than forecasters were expecting. Hiring was revised down in both October and November. For all of 2023, employers added 2.7 million jobs, a slowdown from 2022, but a better gain than in the years preceding the pandemic. Hiring was broad-based last month, with healthcare and government leading job gains. Transportation and warehousing employers shed jobs. The unemployment rate in December held at 3.7%. The jobless rate began 2023 at 3.4%, matching lows not seen since the late 1960s, and remains low despite inching higher late last year.
Wages rose a healthy 4.1% last month from a year earlier. More broadly, there are signs the tight labor market conditions that prompted employers to offer robust pay raises in early 2023 continue to wane.

In a look back at 2023, data provider FactSet took a look at the biggest daily market moves in both directions.

The week ahead — Economic data from Econoday.com:

1. Fed Official Says Rate Cuts Could Be Needed Next Year to Prevent Overtightening — San Francisco Fed President Mary Daly said her outlook for interest rates and inflation was “very close” to the median of projections from 19 Fed officials last week. Most of them penciled in at least three rate cuts next year amid a faster decline in inflation than they anticipated. Daly said she is watching the effect that restrictive policy has on the labor market. When the unemployment rate starts to rise, it tends to go up by a lot and not by only a little bit, Daly said. As a result, “we have to be forward looking and make sure that we don’t give people price stability but take away jobs.”
Daly said she thought interest-rate policy was in a “good place” to achieve that result. In a notable shift, she said the Fed’s focus now needed to turn toward paying attention to both sides of its mandate.
2. Home Sales Ticked Up in November After 5 Months of Declines — home sales ticked up from 13-year lows in November after five consecutive months of declines, even as mortgage rates near their highest levels in two decades continued to weigh on sales.
Existing-home sales, which make up most of the housing market, increased 0.8% in November from the prior month to a seasonally adjusted annual rate of 3.82 million, the National Association of Realtors said Wednesday. November sales fell 7.3% from a year earlier. Existing-home sales for the full year in 2023 are on track to be the lowest since at least 2011. Affordability has improved slightly since then, as mortgage rates have declined for seven consecutive weeks and fell below 7% last week. That could spur more home-buying activity in early 2024, real-estate agents say.
3. U.S. third-quarter GDP growth trimmed to 4.9%, with consumer spending not quite as strong — growth of gross domestic product, the official scorecard for the economy, was reduced from a previously reported 5.2% in the government’s third estimate. It was still the biggest increase in GDP in a decade, however, excluding the pandemic years of 2020-21.
Yet while the economy is still growing, it’s cooled off quite a bit. GDP is forecast to increase by a mild 1% to 2% in the final three months of 2023. Business investment, the next biggest part of the economy, expanded at a slightly stronger 2.6% pace. Business profits, meanwhile, increased for the second quarter in a row. They rose 3.4%.
The annual rate of inflation in the third quarter was revised down to 2.6% from 2.8%. The increase in the core rate that excludes food and energy was marked down to 2% from 2.3%.
4. Prices Fell in November for the First Time Since 2020. Inflation Is Approaching Fed Target — the personal-consumption expenditures price index fell 0.1% in November from the previous month, the first decline since April 2020. It was up 2.6% on the year. Excluding food and energy prices, the index was up 0.1% on the month, same as in October. On the year, core inflation was up 3.2% in November, down from 3.4%. The Federal Reserve targets 2% annual inflation using the PCE price index.
On a six-month annualized basis, core inflation eased to 1.9%, suggesting the Fed is well on its way to reaching the target. Consumer spending, meanwhile, was up 0.2% on the month in November, higher than 0.1% in October and a sign of confidence in the economy on the part of American households. Overall personal income was up 0.4%, better than 0.3% in October.

Merry Xmas and wishing everyone a happy, healthy and prosperous New Year. The staffs at EGS Capital.

“To get what you want, you have to deserve what you want. The world is not yet a crazy enough place to reward a whole bunch of
undeserving people.” ― Charles T. Munger

1. Inflation slowed to a 3.1% annual rate in November — The consumer price index, a closely watched inflation gauge, increased 0.1% in November, and was up 3.1% from a year ago, the Labor Department reported. Economists surveyed by Dow Jones had been looking for no gain and a yearly rate of 3.1%.
While the monthly rate indicated a pickup from the flat CPI reading in October, the annual rate showed another decline after hitting 3.2% a month earlier. Excluding volatile food and energy prices, the core CPI increased 0.3% on the month and 4% from a year ago. Both numbers were in line with estimates and little changed from October.
The November numbers are still well above the Fed’s 2% target, though showing continuing progress. Policymakers focus more on core inflation as a signal for longer-term trends.
2. Fed holds rates steady, indicates three cuts coming in 2024 — The Federal Reserve on Wednesday held its key interest rate steady for the third straight time and set the table for multiple cuts to come in 2024 and beyond. With the inflation rate easing and the economy holding in, policymakers on the Federal Open Market Committee voted unanimously to keep the benchmark overnight borrowing rate in a targeted range between 5.25%-5.5%. Along with the decision to stay on hold, committee members penciled in at least three rate cuts in 2024, assuming quarter percentage point increments. That’s less than market pricing of four, but more aggressive than what officials had previously indicated.
3. US Producer-Price Inflation Cools to Below 1% as Energy Slides — The producer price index for final demand was unchanged from a month earlier. Excluding food and energy, the so-called core PPI was also flat, Bureau of Labor Statistics data showed.
From a year ago, the overall measure was up 0.9%, while the core gauge was up 2%, the least since January 2021. Services prices were unchanged for the second straight month. Goods prices were also unchanged after a steep decline in October. Energy costs fell 1.2% last month.
4. Strong Holiday Spending Adds to Signs U.S. May Beat Inflation Without Downturn — Signaling a strong start to the holiday season, retail sales rose a seasonally adjusted 0.3% in November from the month before, the Commerce Department said Thursday. That was a rebound from October’s downwardly revised 0.2% decline and a surprise to economists who had expected sales to fall again last month.
The data extended a week of positive readings for the U.S. economy. The unemployment rate fell in November, inflation cooled and the Federal Reserve pivoted Wednesday away from raising interest rates and toward considering when to cut them. The good tidings have ignited a rally on Wall Street, pushing the Dow Jones Industrial Average to a record high and caused yields on the 10-year Treasury note to fall below 4% on Thursday.

The week ahead — Economic data from Econoday.com:

“Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Systematically you get ahead, but not necessarily in fast spurts. Nevertheless, you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. At the end of the day – if you live long enough – most people get what they deserve.” — C Munger

1. Bank of Canada Expected to Hold Rates Steady on Deteriorating Outlook –Bank of Canada Gov. Tiff Macklem said interest rates may be at an appropriate level to wrestle inflation down further to the central bank’s 2% target. Economists say those remarks were prescient given new indicators measuring price increases, gross domestic product and the health of the labor market. Headline inflation in Canada cooled to 3.1% in October, from 3.8% in the prior month, and a peak of 8.1% in June 2022. More important, three-month measures of core consumer prices—which strip out volatile items like food and energy—fell to their lowest levels since early 2021. The Bank of Canada sets rate policy to achieve and maintain 2% inflation, and central bank officials have repeatedly said they need to see evidence of sustainable deceleration in core inflation before rate cuts can be entertained.
2. Moody’s Faces Growing Backlash Over Its Negative Outlook on China — New York-based Moody’s on lowered its outlook on China’s credit rating to negative from stable and kept its A1 investment-grade rating on the country—which it hasn’t changed since 2017. The credit rater said the growing debt problems of some cities and provinces would force China’s central government to provide financial support when economic growth is slowing. The country is also grappling with a deep property slump.
The change in Moody’s view led to a raft of similar changes to its outlooks for China’s state-owned banks, insurers and companies, including 22 local government financing vehicles that have issued international bonds. Moody’s also shifted to a negative credit-rating outlook for Hong Kong and Macau, both semiautonomous regions of China. That similarly cascaded down to its outlook for other companies, including the operator of Hong Kong’s subway system.
3. U.S. Wholesale Inventories Fell Again in October — Inventories at merchant wholesalers were 0.4% lower at the end of October than the same point a month earlier, according to adjusted Commerce Department figures released. Economists had expected inventories to slip by 0.2%, according to a poll carried out by The Wall Street Journal.
In September, inventories stayed at the same level as in August, according to revised figures that had previously shown a slight and unexpected rise.
Inventories of nondurable goods led the decrease in October, slipping 1.0%, with petroleum levels falling the fastest. Durable goods, on the other hand, increased slightly on the month, led by rising machinery stocks.
4. U.S. Consumer Confidence Jumps in December as Inflation Pressure Eases — A preliminary reading Friday of the University of Michigan’s consumer-confidence index show it surging to 69.4 points from 61.3 at the end of November. Economists polled by The Wall Street Journal had expected it to rise less sharply to 62.4.
The jump reverses four previous months of declines, though confidence remains well below levels before the Covid-19 pandemic, survey director Joanne Hsu said. Consumers are confident that inflation will fall more rapidly than previously expected, seeing it at 3.1% for the year ahead compared with 4.5% previously, the survey showed.

The week ahead — Economic data from Econoday.com:

‘Avoid crazy at all costs’ –– Charles Munger

1. Fed’s Waller, Bowman Open Door to Another Interest Rate Pause in December — Two Federal Reserve officials who led the push for higher interest rates to curb inflation last year signaled they could be comfortable holding rates steady for now, reinforcing expectations that the central bank’s current hiking cycle is done. While the remarks don’t fundamentally change expectations for the Fed’s December meeting, Waller’s comments in particular suggest support is widening among officials for an extended policy pause amid signs that economic activity, inflation and the labor market are cooling.
2. U.S. GDP grew at a 5.2% rate in the third quarter, even stronger than first indicated — Gross domestic product, a measure of all goods and services produced during the three-month period, accelerated at a 5.2% annualized pace, the department’s second estimate showed. The acceleration topped the initial 4.9% reading and was better than the 5% forecast from economists polled by Dow Jones. Primarily, the upward revision came from increases in nonresidential fixed investment, which includes structures, equipment and intellectual property. The category showed a rise of 1.3%, which still marked a sharp downward shift from previous quarters.
Government spending also helped boost the Q3 estimate, rising 5.5% for the July-through-September period.
However, consumer spending saw a downward revision, now rising just 3.6%, compared with 4% in the initial estimate.
3. Fed’s favorite gauge shows inflation rose 0.2% in October and 3.5% from a year ago, as expected — the personal consumption expenditures price index, excluding food and energy prices, rose 0.2% for the month and 3.5% on a year-over-year basis, the Commerce Department reported. Both numbers aligned with the Dow Jones consensus.
Headline inflation was flat on the month and at a 3% rate for the 12-month period, the release also showed. Energy prices fell 2.6% on the month, helping keep overall inflation in check, even as food prices increased 0.2%.
Goods prices saw a 0.3% decrease while services rose 0.2%. On the services side, the biggest gainers were international travel, health care and food services and accommodations. In goods, gasoline led the gainers.
Personal income and spending both rose 0.2% on the month, also meeting estimates and indicating that consumers are keeping pace with inflation.

The week ahead — Economic data from Econoday.com:

1. Home Sales Fell to a New 13-Year Low in October — Home-buying affordability sits near its lowest level in decades, pushing many buyers out of the market. Existing-home sales for the full year in 2023 are on track to be the lowest since at least 2011, according to economist forecasts.
Existing-home sales, which make up most of the housing market, decreased 4.1% in October from the prior month to a seasonally adjusted annual rate of 3.79 million, the lowest rate since August 2010, the National Association of Realtors said Tuesday. October sales fell 14.6% from a year earlier. Sales have been near 2010 levels in recent months.

Here is the market recap for the week
Sector Performance

Most sectors of the market were higher last week, with technology and communication services stocks leading the gains. The technology sector rose 2.1%, while the communication services sector advanced 1.9%. Other sectors that performed well included financials (up 1.3%) and consumer discretionary (up 1.2%).

Notable Developments

— In addition to the factors mentioned above, there were a few other notable developments in the market last week:
— Fed’s monetary policy outlook: Comments from Federal Reserve officials last week suggested that the Fed may be nearing the end of its rate-hiking cycle. This news was seen as positive for the market.
— Geopolitical tensions: Geopolitical tensions remained elevated last week, but they did not appear to have a significant impact on the market.

The week ahead — Economic data from Econoday.com:

I know where I’m getting out before I get in. — Bruce Kovner

1. US Inflation Broadly Slows, Erasing Bets on More Fed Rate Hikes — The so-called core consumer price index, which excludes food and energy costs, increased 0.2% from September, according to government figures. Economists favor the core gauge as a better indicator of underlying inflation than the overall CPI. That measure was little changed, restrained by cheaper gasoline. The Bureau of Labor Statistics figures reflected increases in rent and personal-care products and services, as well as health insurance due to a methodological change in how the government calculates it. Meanwhile, airfares and used-car prices declined.
Shelter prices, which make up about a third of the overall CPI index, climbed 0.3%, half the prior month’s pace. Economists see a sustained moderation in this category as key to bring core inflation down to the Fed’s target. A key measure of rent as well as hotel stays stepped down.
Excluding housing and energy, services prices climbed 0.2% from September and 3.7% from a year ago — the lowest in nearly two years — according to Bloomberg calculations. While Powell and his colleagues have stressed the importance of looking at such a metric when assessing the nation’s inflation trajectory, they compute it based on a separate index.
2. US Producer Prices Decline by Most Since April 2020 on Gasoline — The producer price index for final demand decreased 0.5% from a month earlier, a sharp slowdown that’s largely reflective of a decline in gasoline prices. Excluding food and energy, the so-called core PPI was unchanged, government data showed.
From a year ago, the overall measure was up 1.3%, while the core gauge posted the smallest annual increase since the start of 2021. Over 80% of the decrease in goods prices was due to a 15.3% slump in the cost of gasoline, the government report. Services costs, meanwhile, were flat after rising six straight months.

The week ahead — Economic data from Econoday.com:

“Do not SELL lower low, Do not BUY lower high”

1. China’s Exports Tumble Again in Fresh Sign of Economic Trouble — China’s exports fell for the sixth straight month, adding to pressure on Beijing to boost spending at home as a big rise in global interest rates and wars in Ukraine and the Middle East weigh on the world economy. Chinese exports fell 6.4% in October compared with a year earlier, to $275 billion, China’s General Administration of Customs said Tuesday, a steeper decline than the 6.2% fall recorded in September. Diminishing exports show global demand for Chinese goods is subdued as consumers and businesses contend with slowing growth and higher borrowing costs. Other Asian export powerhouses, such as South Korea and Taiwan, have also reported months of feeble overseas sales.
2. Citrix Owner Becomes Latest U.S. Company to Retreat From China — Cloud Software Group, which owns enterprise-software brand Citrix, is ceasing business transactions in China, becoming the latest U.S. company to pull back from China. Cloud Software Group is the latest U.S. technology company to withdraw or significantly shrink its business operations in China as the economy slows and national-security and data-related concerns grow.
This year, Microsoft’s LinkedIn closed down its China-focused jobs app, following its exit from its social-media business in the country. Salesforce shifted to a model in which it relies on a local partner to operate some of its products and services in China. It also laid off staff in mainland China and Hong Kong and closed its Hong Kong office, The Wall Street Journal reported.
3. Jerome Powell Outlines Cautious Approach to Raising Rates or Declaring End to Hikes — Fed Chair Jerome Powell said it was premature for the central bank to declare a conclusive end to its historic interest-rate increases of the past two years even though he didn’t make an argument for raising rates further right now. The Fed has raised interest rates this year to a 22-year high to combat inflation by slowing economic activity. Officials are committed to achieving a rate setting that is “sufficiently restrictive” to bring inflation down to its 2% goal over time. “We are not confident that we have achieved such a stance,” Powell said in remarks prepared for delivery at a conference in Washington on Thursday. Powell said officials would monitor economic conditions closely to avoid the risk of having raised rates too high and the risk of having been “misled by a few good months of data.”
4. US Credit-Rating Outlook Changed to Negative by Moody’s — the rating assessor lowered the outlook to negative from stable while affirming the nation’s rating at Aaa, the highest investment-grade notch. Amid higher interest rates, without measures to reduce spending or boost revenue, fiscal deficits will likely “remain very large, significantly weakening debt affordability,” Moody’s said. Moody’s is the only of the three main credit companies with a top rating on the US after Fitch Ratings downgraded the US government in August following the latest debt-ceiling battle. S&P Global Ratings stripped the US of its top score in 2011 amid that year’s debt-limit crisis.

The week ahead — Economic data from Econoday.com:

1. Fed Extends Pause on Interest-Rate Hikes but Keeps Door Open to Higher Rates — The Federal Reserve left interest rates unchanged at a 22-year high and signaled rates would remain elevated well into next year to keep inflation moving down. At the September meeting, most central-bank officials projected one more rate increase this year, but some have spoken in recent weeks as though they aren’t eager to hike again unless hotter-than-expected economic data force them to. That is a change from earlier this year, when they were more concerned about tightening too little. Officials have been trying to balance two risks. They don’t want to overdo rate rises to avoid causing an unnecessarily severe downturn. They also don’t want to allow inflation to reaccelerate or to settle at levels well above their 2% target. “We’re getting to a place where the risks are closer to being in balance,” Powell said.
2. US Productivity Grows by Most Since 2020, Labor Costs Decrease — US labor productivity advanced by the most in three years, helping to alleviate the inflationary impact of recent wage growth. Productivity, or nonfarm business employee output per hour, rose at a 4.7% annualized rate in the third quarter after climbing 3.6% in the prior period, data from the Bureau of Labor Statistics showed late last week.
Unit labor costs, or what a business pays employees to produce one unit of output, decreased at a 0.8% rate after climbing 3.2% in the second quarter. It marked the first decline since late 2022. Quarterly productivity figures are quite volatile, but overall, the back-to-back advances suggest companies are stepping up efforts to improve efficiency. Despite high borrowing costs, business investment has held firm, supporting long-term economic growth.
3. Sharp U.S. Hiring Slowdown Signals Cooling Economy Ahead — Employers added 150,000 jobs in October, half the prior month’s gain and the smallest monthly increase since June, the Labor Department said Friday. The unemployment rate rose to 3.9%, up a half-point since April, and wage growth slowed. The figures are likely to bring the Federal Reserve’s historic interest-rate increases to an end by providing stronger evidence that higher borrowing costs have slowed the economy. The report could also mollify concerns that brisk consumer spending this summer would lead hiring or wages to reaccelerate.
4. Tech Giants Spend Billions on AI Startups—And Get Just as Much Back — Amazon, Google and Microsoft have spent the past year investing billions of dollars in artificial-intelligence startups—while also charging those fledgling companies a similar amount to use their cloud platforms. The deals are making the big tech firms the largest backers and most direct beneficiaries of these startups, reflecting how some of the AI boom’s biggest rewards keep going to the most powerful players. The value of the tech giants’ stakes could shoot up if the startups take off. And if not, they still will have turned chunks of cash into revenue.

The week ahead — Economic data from Econoday.com: