The Market Likes Inflation (For Now)

Prices keep rising... Mr. Market likes it... We've seen this before... A big bitcoin bet... Some MicroStrategy insiders are selling... No one's buying... Beware a 'meme stock' revival...

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Apparently, most investors aren't all that concerned with high(er) inflation these days...

That's what I (Corey McLaughlin) can take today from the market's reaction to the latest inflation report from Uncle Sam this morning...

The consumer price index ("CPI") for November increased 0.3% for the month, its highest pace since April, and 2.7% year over year. That's well above pace for the Federal Reserve's supposed 2% goal for an annual inflation rate.

This data, combined with other stats from October that we've discussed in previous editions, shows inflation has most recently been on a pace closer to 4% than 2%. The mainstream view, though, is that this trend will somehow resolve itself. Here's CNBC today...

Much of the November increase in the CPI came from shelter costs, which rose 0.3% and have been one of the most stubborn components of inflation. Fed officials and many economists expect housing-related inflation to ease as new rental leases are negotiated, but the item has continued to increase each month.

We've heard this story before...

I will start back in 2020. That's when policymakers didn't seem to give a second thought about how "unprecedented" trillions of dollars in monetary and fiscal stimulus in response to the pandemic just might lead to higher prices in the economy...

In 2021, even as inflation numbers were rising, Fed Chair Jerome Powell declared the trend "transitory"...

In 2022, it was widely believed that a rapid pace of rate increases was going kill 40-year-high inflation relatively quickly and lead to a Fed "pivot" – which never came. All we got were several bear market rallies that went bust until that October...

Finally, the pace of inflation started slowing down. But then, by this summer, Powell was acknowledging that in the best-case scenario, inflation would likely settle "between 2% and 2.5%" by 2025.

We hope inflation doesn't get totally out of hand again. But hope isn't a strategy.

Rents and home prices have soared over the past four years. And, most recently, mortgage rates have increased since the Fed started cutting interest rates in September. Yet the central bank has remained steadfast in its rate-cutting plans to find a "neutral" policy stance. You could also describe that as juicing the economy.

After today's report, federal-funds futures traders boosted their odds of another 25-basis-point rate cut this year to around 95%.

And enough investors believe this is good...

We've got high(er) inflation again and the market expects more help from the Fed. Is this 2021 all over again – the days of a blistering pandemic bull run... before all the fun ended in 2022 once the central bank finally acknowledged inflation was a problem (and raised rates in an effort to cool it)?

Perhaps.

Fed-funds futures traders are pricing in fewer rate cuts in 2025 than they did previously, though they still expect multiple rounds of cuts next year.

As we wrote about last week, the Fed's stance might (or should) change from "easing" to at least something considered "neutral." And if or when it does, it could lead to a shift in market sentiment. Until then, though, Mr. Market says all's well – on the surface at least.

Today, the major U.S. indexes were mostly higher. The tech-heavy Nasdaq Composite Index led the way, up 1.8% to a new all-time high. The benchmark S&P 500 Index closed 0.8% higher, and the Russell 2000 Index was up 0.5%, though the Dow Jones Industrial Average was down 0.2%.

Gold also rose... And bitcoin, after trading below $100,000 for the past few days, cracked above the psychological milestone once again as cryptocurrency sentiment remains at "greedy" historical values.

Speaking of that...

One company's big bitcoin bet is paying off (for insiders)...

We've mentioned MicroStrategy (MSTR) a couple times in the Digest this year... This is a software company that converted itself into a bitcoin play. Michael Saylor, the software company's chairman and co-founder, famously began adding bitcoin to its balance sheet in 2020.

By now, it owns more than 400,000 bitcoin. That puts it as the third-largest single owner, behind only bitcoin creator Satoshi Nakamoto and crypto-trading platform Binance, according to Bloomberg.

As a result, the stock has turned into a proxy for bitcoin. And it's now a favorite among retail investors and traders. Saylor even went on a livestream with Barstool Sports founder Dave "Davey Day Trader" Portnoy to explain the bitcoin thesis.

Saylor talked about why MicroStrategy is such an important "bridge" between capital markets and the crypto economy. From the livestream...

So, there's a lot of investors in the world that aren't allowed to buy bitcoin. Like in the U.K., they won't let you buy bitcoin in your retirement account. So, you need to buy a company, a security... There's hundreds of trillions of dollars of money, some of it with professional money managers. They're not allowed to buy bitcoin. They're allowed to buy a bitcoin company.

So MicroStrategy, through its own purchase of bitcoin, opens itself up as an avenue for these investors to gain crypto exposure. And it's working...

The two assets have been tightly correlated over the past few years. But MicroStrategy has far outperformed bitcoin since it began buying bitcoin in July 2020. Just look at how the two have traded (noting that we've plotted the two assets on different scales)...

And now, the company's largest shareholders are taking profits off the table...

In November, insiders sold more than $61 million worth of MicroStrategy shares. That came at a time when the stock more than doubled from November 4 to its peak on November 20.

It's not the only time we've seen MicroStrategy insiders take advantage of retail interest in the company's stock. In the first four months of the year, with shares jumping nearly 70% through the end of April, insiders sold more than $480 million in stock (the red bars in the chart)...

Insiders can sell stock for a variety of reasons. That can be things like tax planning, pre-scheduled sales, and even personal expenses. So it's not always a perfect predictor of insider sentiment and the stock outlook, or the "top."

But it still shows that the folks who know MicroStrategy's business better than everyone are taking profits when the stock soars.

Insider sales, but no buys...

As our colleague Dan Ferris wrote in the October 18 Digest, insider buying can be a much better indicator of how insiders feel about the company...

[Government] filings about insider buying are a bullish sign. It means insiders believe the business is a great investment and that the stock price will rise. And they're not just saying it on a rosy conference call... but putting their own wealth on the line.

While MicroStrategy insiders have racked up $578 million in share sales this year, they have made zero purchases, according to data from FinViz. Zero. They're not even taking advantage of stock dips.

It's another sign that insiders are willing to pass on the risk to retail investors with many stocks running rampant... and a reminder to be careful about taking outsized short-term risks in today's market.

Checking in on another retail favorite...

Here's another example of the current atmosphere...

GameStop (GME) is back in the news.

Last week, meme-stock trader Roaring Kitty posted on his X social media account for the first time in months. Roaring Kitty, whose real name is Keith Gill, gained a following for his bullish case on the video-game retailer during the meme-stock bubble in 2021.

In this latest post, Gill didn't even mention GameStop. He simply shared a picture resembling a Time magazine cover from 2006 with a computer screen. But that was still enough to send GME shares shooting higher and get them halted on volatility last Thursday.

Last night, GameStop actually reported that it flipped to a profit in the third quarter, though its revenue dropped 20%. The stock was up almost 8% today.

But don't fall for another meme-stock rally...

As we've said, a lot of stocks are already trading at expensive valuations, and certain ones are showing signs of speculative froth that's disjoined from reality and their quality...

GameStop's revenue has been in a steep downtrend since peaking back in 2012. The underlying business is in decline.

There are a lot of better places you could put new money to work.

For example, yesterday, I talked more about the "Mar-a-Lago man" – Brad Thomas, the founder of our corporate affiliate Wide Moat Research... And I discussed that while he's an expert in real estate, he also uses the insights he has learned over the years (about which companies make good tenants) to pick the stocks of great businesses, too.

And just a few days ago, he told his readers to stay far away from a company like GameStop. In his free daily e-letter on Monday, Brad wrote that the company is "not worth your time or money."

If you're looking for a good one, for starters, our Stansberry's Investment Advisory team just published a comprehensive portfolio review of key positions in the model portfolio, including a number of recommendations that are still attractive buys today.

And stay tuned, as always, to your other favorite publications from our editors and analysts for more recommendations and insight.

As we've discussed here the past few days, Brad also recently went live with a new free presentation. He shared an opportunity in an overlooked group of stocks that he says represents "the most wildly asymmetrical market opportunity today."

Today is the last day you can view Brad's presentation with the full details and get access to a free bonus that he has been sharing. So if you haven't already, we urge you to check it out right here.

New 52-week highs (as of 12/10/24): AutoZone (AZO), Alpha Architect 1-3 Month Box Fund (BOXX), Costco Wholesale (COST), United States Commodity Index Fund (USCI), and Westlake Chemical Partners (WLKP).

A quiet mailbag today... As always, send your comments and questions to feedback@stansberryresearch.com.

All the best,

Corey McLaughlin and Nick Koziol
Baltimore, Maryland
December 11, 2024

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