Week XV: ISM, Durables, PCE, CPI, Confidence, Private Credit (no confidence), and Cori Close

The Results of the First Week of Q2, aka Week XV.

• The ISM – Institute of Supply Management – Services index came out at 54.0%, down from 56.1% but remember, anything over 50% is growth mode.

  • So, it’s expanding but at a slower pace.  But that’s not the whole story.

  • Inside the survey, input prices rose to 70.7, up from 63.0 the month before.  Ouch.  Fuel, materials, and shipping increased.  And hiring is down.

  • This is a survey of banks, retailers, and restaurants - the service industry, which makes up 70% of the economy.

• Durable goods orders were down 1.4% after being down 0.5% last month.  Two consecutive negative months.

  • However… when you take out automotive, durable goods were up 0.8% from 0.3% growth the month before.

  • Car sales are dragging that number down.

• Double witching hour this week:  both PCE and CPI came out this week.

  • The PCE – Personal Consumption Expenditures index - was first and it was… right where everyone expected it to be.

  • Year over year, it was 2.8%, same as last month, and the core PCE (no food and no energy costs) was 3.0%, down ever so slightly from last month’s 3.1%.

• Q4 GDP was revised down to 0.5% growth from the 0.7% revision, which was down from the 1.5% growth originally reported.  Ouch.

• Personal spending and personal income also came out.

  • The CPI – the Consumer Price Index – came out and drumroll… inflation is up – big shocker.

  • The full CPI came in at 3.3% up from 2.4% in February.  But what if you take out food and energy?

    • Then it comes in at 2.6%.  What a difference a Strait can make.

    • So, regular items, excluding food and gas, went up 2.6%.

    • Gas, on its own, was up 18.9% with total energy costs up 12.5%. 

• Finally, consumer sentiment came out on Friday.  It was the lowest on record, at 47.6 down from 53.3 in March.  And when I say on record, that means 70 years of records by the University of Michigan.

  • Yeah, they must have just filled up their tank before they took the survey.

  • Perhaps if they did the survey on a Friday, people would be in a better mood?

• Let’s put the kibosh on this segment for now. 

Private Credit & Your 401k

• Yes, folks, Charles Ponzi is alive and well.

  • Well, maybe not alive, but his ideas are always hovering near a sewer pipe somewhere.

• A few weeks ago, I mentioned that Wall Street folks were getting into a tizzy about private credit funds.

  • These are funds that think they can lend to commercial businesses and provide an above-average return to their investors.

  • Folks, most banks can barely provide an average return to their own shareholders, so I’m not sure how these private funds think they make the numbers pencil out. 

    • Sorry, that was a banker’s rant.  At any rate…

• There has been a rush for investors of these funds to pull their money out, hence the tizzy.  Some funds have been able to accommodate that, and some funds, not so much.

  • Once a fund burns through its cash, there is not a way for them pay out their investors unless a loan gets paid back, or they sell it or… new investors come in to ‘invest’.  In some cases, that incoming money is going right out the back door to the investors who want out.

    • Or the fund draws down on its line of credit that is provided by… a bank.

      • Which leads us to another problem, but hold that thought.

  • Selling a loan is tricky because that means it is assigned a value, and that value may not be what the fund or its investors think it is, and then the entire portfolio may have to be written down to the aforementioned ‘value’.

    • Banks assess the strength of each loan in their own portfolio at least annually, and many quarterly, so they know, as do the regulators, how strong their loan portfolio is, unlike many of the private credit funds.

• I mention all of this because there has been a push for some time for regulators to allow these types of funds into employers' 401(k) plans under the guise of letting the average Joe have access to the funds that institutional investors have access to.

  • Hmm.  You have to wonder why all of a sudden, the big money cares about the little money.  Another thought to hold…

  • In my opinion, some institutional investors should be in an institution and not allowed to invest.  Witness the PERS pension system for California.  I digress yet again, so back to the topic…

  • Do NOT kid yourself.  All this will do is enable more funds to access cash that will allow the funds to continue putting money into the private credit market or reimburse the investors that want out. 

    • And if the smart money wants out, why would you want in? Inquiring minds want to know.

    • Particularly the banks that have loans out to those funds. 

Who is Cori Close?

• Short answer:  the basketball coach of the UCLA women’s team and recent winner of the NCAA championship game last weekend.

• But this isn’t about the destination, it’s about the journey.  It’s cliché, but it happens to be true.

  • By learning.  From her players, alumni, and Coach.

    • For those that aren’t boomers, when you hear Coach, and you are in California, that means John Wooden.

• As a rookie assistant coach at UCLA, she sought out retired Coach Wooden, then 80 years old, forged a connection and picked his brain for the next 19 years.

  • The biggest takeaways, among many:  Coach urged Ms. Close to see her teams as human beings first, not X’s and O’s.  You could succeed without berating players, he told her.  If you listen to your players, they will listen to you.

    • Not quite the Bobby Knight paradigm, yes?

• A year after Coach died in 2010 at the age of 99, she became the head coach of the UCLA women.  She not only listened to her players, she listened to team Alumni, asking them what they wished UCLA had done for them that it didn’t do:  mental health, financial literacy, and alumni access were top of the list.

• 15 years later, her team has a banner that joins the 10 national championship banners won by Wooden teams.

• The lessons here:

  • Talk to the people who have been where you want to be.  And listen.

  • Listen to the people who will help get you there.

  • Learn from the people who were there before you on how you can improve the organization. 

Wrapping it Up

Many of my readers are business owners, middle management, line managers, and account officers.   In my opinion, the best managers I have had took an interest in not only my development but in the development of all of their employees, and it’s something I have tried to pass forward.  If you are buying a business, talk to the previous owners and employees and listen.  No “yeah, but” comments; just listen.  Talk to former customers and ask why they are former customers, and listen.  The hardest part will be NOT getting defensive by saying “yes, but now…”.  Talk to your best customers, ask what they like most about your company, then ask what they like least, and thank them.  

Success will not be overnight.  It took Cori Close 15 years after she became a head coach.  Oh, and by the way, Coach Wooden was head coach for 16 years before he won his first NCAA Championship.  And then he won 10 of the next 12. 

And that’s how you start a legacy.  Now go listen.