RIDING THE TIGER - Lumbard & Kellner, LLC
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ST R AT EGI E S , T R EN DS A N D N EWS FOR TODAY’S I N V E STOR S JA N UA R Y 2022
S&P 500 4,766.18 * Dow Jones Industrials 36,338.30 * 30 year U.S. Treasury Bond 1.91%
RIDING THE TIGER
It’s said that you should only buy are now paying dividends of
Chinese stocks when you’re sure just 1.3%, but that cash payout
that the Chinese government is only about a third of their
wants the stock market to go earnings. The other two-thirds
up. When you think about it, generally come back to investors
the U.S. stock market has been one way or another.
rising because our government
pushed it higher, intentionally, We’re looking more and more at
with outlandishly-powerful “fiscal drag” on the economy stocks that pay good dividends,
fiscal and monetary policy. of 2022. and at companies that provide
We’ve been on a Halloween essential goods or services that
Sugar High, and the Fed is still Still, the choice to stay in the will continue to be in demand
forcing the stock market higher stock market is made easier in a weaker economy. The hot
by blasting a firehose of money by several things. Bonds are stocks of the last few years
into Wall Street. The fire hose a terrible investment, because might suffer in an environment
isn’t as powerful as it was a they will decline as interest of rising interest rates. If you
couple of months ago, but it’s rates rise. Bond prices have have a taxable account with us
still a fire hose. We’ll ride this been declining for 17 months, you’ll have another big capital-
tiger as long as there’s any sort from all-time-high price levels, gains tax bill in 2022, but it’s
of river, stream, or babbling because yields were at all-time better to lock in good profits
brook of cash flowing into Wall lows. Cash is still at 0%; the than to watch them melt away.
Street and into the pockets of yield on a 3-month U.S Treasury
investors. But the party can’t bill is six one-hundredths of 1%,
go on forever, and neither can even though inflation has been Did you notice higher prices
these mixed metaphors. at the highest levels of the last in your supermarket last year?
40 years. More are coming. The company
Of course, this isn’t all the Fed’s that makes Oreos and Triscuits
fault. When Congress mailed 40 years ago the yield on a 10- says it will raise prices 6 to 7%.
$1400 checks to 80% of the year U.S. Treasury bond was Kraft Heinz will raise prices an
voters—including people who 14%! average of 5%, with some items
were very, very comfortable up 20%. Kraft claims that the
and working from home—they The dividend yield on stocks cost of producing Grey Poupon,
caused a bulge of spending that has been sliding as their prices the mustard that is frequently
sparked inflation and shortages. have gone up, but they still pay passed from one limousine to
That bulge will subside in the more than “cash”. And stock another, is up 22%; but they’re
months ahead. On page 3 Paul dividends are just the tip of a only going to raise the price of
Wright explains the effect of beautiful iceberg. Companies a jar by “6% to 13%”.(800) LUMBARD www.Lumbard.com (800) LUMBARD www.Lumbard.com (800) LUMBARD
OTHER STUFF Novemdecupled
Some i nst it ut ions have been Our Benchmark account now stands
investing in bitcoins as a means at $1,922,181, up from $1,590,597
of diversification. Investments at the beginning of 2021; and more
in Beanie Babies and cans of than 8 times its $217,974 valuation on
Billy Beer are also a form of December 31, 1999, just before the
diversification. But if they’re great millennial tech-stock bubble
selling bitcoins in gas stations, burst. It’s an actual fee-paying
the bubble might have reached just client account, holding cash and
about everybody. If “everybody” bonds as well as common stocks,
is in, then there won’t be enough whose performance is not distorted
buyers to absorb the coins offered by additions or withdrawals. For
by those who want to sell. further information please see our
website, www.Lumbard.com.
Drew D. Kellner, CFA
“Stocks could remain under pressure The economy will slow down in
as the end of the year [2021] 2022, but there should be enough
approaches, owing to institutional inf lation to help along some
portfolio rebalancing, according producers of food and commodities.
to Maxwell Grinacoff, equity The real problem for stocks will be
derivatives strategist at BNP Paribas. the powerful headwind of rising
Given the S&P’s outperformance, interest rates.
relative to bonds, he estimates that $1
trillion to $1.4 trillion will be shifted We do like dividends. Kinder
out of equities into fixed income.” Morgan (KMI - $16) pays 6.8%;
ARC Resources (AETUF - $9) pays
— Barron’s, in early December. 3.5%; generic-drug manufacturer
An institution might have a goal Viatris (VTRS – $13.50) pays 3.2%;
of keeping 60% of its investments and we think that AT&T’s reduced
in common stocks, with 25% in Sign in the window of a gas station dividend will still be above 4.5%
bonds and the remaining 15% in in Portsmouth. after it spins off WarnerMedia (T -
cash and “Other Stuff”. If stocks $25). Lockheed (LMT - $355) pays
perform much better than bonds, But Wait. You’re going to need 3.2%, and Prudential (PRU - $108)
the managers will sell stocks and bitcoins to buy a house lot on gives you 4.2%. Tyson (TSN -$87)
buy bonds to “stay safe”. Lately Crypto Island in Fiji. It’s a crypto was pushing all these buttons until
they’ve been losing money in those utopia! To contact a real estate the stock, dammit, went up. That
bonds, which means that they’ll keep agent go to https://cryptoland.is/. caused the dividend yield to slip to
buying more of them; and then lose Be sure to watch the animated 2.1%. That’s still better than the
even more money. video! market average, and WAY better
than cash, bonds, bitcoins, meme
The Fed has been keeping the bond stocks, or lottery tickets
market from declining by purchasing
trillions of dollars’ worth of bonds, “When even one American - who has done nothing wrong - is forced
but it will soon stop. The result will by fear to shut his mind and close his mouth - then all Americans are
be carnage in the bond market. in peril.”
— Harry S. Truman
-2-(800) LUMBARD www.Lumbard.com (800) LUMBARD www.Lumbard.com (800) LUMBARD
THE KINGS AND QUEENS
OF FISCAL DRAG
of this windfall, but inflation and
spending are slowly emptying their
pockets.
Fiscal drag is not an outfit worn by a
nightclub entertainer! It’s much less
I n f lat ion af fe ct s ea ch of u s fun. In 2021 Congress lifted GDP
differently. If the cost of your with trillions of dollars in gifts, to
purchases and expenses has been the vast majority of voters. Now the
rising at 5%, the value of the money economy has to deflate by a similar
in your 0% checking account has amount, unless Congress finds a Paul K. Wright, CFA
been declining at a 5% rate. It’s way to inflate it again. GDP will
a negative 5% return. That’s one eventually rise on its own (because be difficult to make money in the
reason that consumers have been growth is the normal state of our stock market in 2022. Especially if
spending like drunken sailors. They economy), but growth in 2022 will inflation is at the higher end of that
can also borrow at the lowest rates be retarded by this “fiscal drag”. 3% to 4% range. Rising interest
ever for homes, boats, or cars. And rates are a strong head wind, and
they still have a few dollars saved In the near term that fiscal drag we’ve just enjoyed a remarkable
from the government checks they will be offset by great consumer bull market.
received in the last 13 months. wealth from stocks, housing, and
middle class banking accounts. In
In the 12 months through November, the second half of 2022 a stagnant Socialism is a theory of how to
the CPI rose at a 6.8% rate for an economy is li kely. A nd t hat run a government and an economy.
entire year! Wages have been rising stagnation might be better described Communism, similarly, is a theory.
at the fastest pace in 20 years, but as stagflation, because this cotton- Capitalism isn’t a theory. It’s what
the Federal Reserve still maintains candy Fed has no stomach for happens, naturally, when buyers
that inflation, the way they like to the pain that would accompany a and sellers are allowed to interact
measure it, will rise just 2.7% in serious effort to tame inflation. freely. It’s freedom.
2022. Just 2.3% in 2023. We find it
hard to imagine that price increases, We believe that inflation will fall
by any measure, will be lower than somewhere in the 3% to 4% range in
3% unless the Fed raises interest 2022. If GDP is at zero but inflation
rates sharply, and soon. is at 4%, then nominal GDP (GDP U. S . C O 2 E m i s s i o n s H ave
not adjusted for inflation) will be at Declined Since 2007, while GDP
And we don’t believe they will. 4%. That means corporate revenues grew ~50%
There’s a lot of magical thinking will rise 4%, and some commodity
in the air these days. It is true prices will rise, helped along by Primarily due to converting coal
that the overheated economy will solid economic growth in the rest power generation to natural gas
slow sharply in the months ahead, of the world. generation
because last year’s Congressional
spending spree ended with the Rising corporate revenues might — From a presentation by
last child “tax credit” checks in sound promising, especially for gas provider Kinder Morgan.
December. Consumers saved part commodity producers, but it will
-3-(800) LUMBARD www.Lumbard.com (800) LUMBARD www.Lumbard.com (800) LUMBARD
THE 5,000 NIGHTS OF NAPA
Think stocks are expensive? Last “We are never offended, and we
May the Four Seasons Orlando resort are never hysterical.”
sold for $610 million, which works
out to $1,374,000 per room. Four — German Chancellor Olaf
Seasons Napa sold for $2,059,000 Scholz. If every political activist,
per room. If you bought just one right and left, would just repeat
room for $2,059,000, and managed these words 12 times a day…
to rent it at an outlandish rate that than five thousand nights to get
gave you a profit of $400 a night, your money back. That’s 365 nights
you’d still have to rent it for more a year, for 13.7 years!
57 YEARS
“President Biden signed a nearly Hundreds of thousands of children
$770 billion defense bill on The total value of all the shares of entered the United States as migrants
Monday, $24 billion more than Apple is almost at 3 trillion dollars! last year. Nearly all of them, perhaps
he had requested … Lawmakers even the 122,000 who entered as
increased spending in almost every unaccompanied children (according
part of the military, including to CBS News), have a better chance
new funding to counter China’s at success than a child of a single
military expansion, initiatives to parent in our inner cities. The War
bolster the defense of Ukraine and on Poverty has been underway for
billions in cash for the procurement 57 years, and our inner cities are
of advanced aircraft, ships and “Thinking of it in terms of buying still battered and broken.
high-tech hardware.” an entire business is helpful. Would
you rather own the iPhone maker Trillions of dollars have been spent
— The New York Times. or all of McDonald’s, Walmart, on this war, and we will spend
$770 billion looks smaller than it AT&T, Philip Morris, Berkshire trillions more. Ineffectively. Should
used to. This year taxes should Hathaway, Procter & Gamble, JP Washington be focusing on electric
bring in $4,390 billion. The CBO Morgan Chase, Starbucks, Boeing, vehicle subsidies and free child
projects that Medicare will cost Deere, and American Express care for middle class families, or
$904 billion, offset by just $163 combined?” turning its attention to finding better
billion in Medicare taxes. Medicaid — Barron’s answers?
will cost $545 billion plus almost
$700 billion spent by the states.
We have shares of Nor th rop “In 1979 the bot tom f if th of
Gr umman ( NOC - $387) and “The unemployment rate has American earners received means-
Lockheed Martin (LMT - $355). The plummeted dramatically in recent tested transfers worth on average
earnings hold up well in recessions, months. At 3.9 per cent, it now sits 32% of their pre-tax income,
and there’s strong bipartisan at its lowest level since before the according to the Congressional
support for military spending to pandemic.” Budget Office.
counter China’s buildup. There’s
also strong demand for F-35s and — The Financial Times By 2018 the figure was 68%.”
other American military hardware
among the many nations that look — The Economist.
to us for protection.
-4-(800) LUMBARD www.Lumbard.com (800) LUMBARD www.Lumbard.com (800) LUMBARD
CLASSICAL GAS
The price of natural gas in Europe I nve s t o r s t a ke n ot e! S o m e
spiked upward in October, as a long companies in this diverse industry
spell of windless days slashed the should be able to raise prices
power production of wind towers. with inflation, stay ahead of their
By the time cold weather arrived in increasing costs, and pay solid
December, gas storage facilities had dividends from large cash flows that
been nearly emptied. Gas prices grow faster than inflation.
then soared to higher highs despite
the resurrection of old coal plants The demand for Liquified Natural
that were headed for the scrap heap. Gas (LNG) is rising quickly in
India, China, and Europe, which
Developed nations have been needs to import LNG to reduce
moving steadily away from dirty, its dependence on Russian gas Jay Conway, CFA
but “always available” coal power, pipelines. That should bestow
and towards intermittent, unreliable pricing power on Golar LNG expanding its LNG export facilities.
wind and solar. Batteries can (GLNG - $12) which is one of the And ARC Resources (AETUF - $9)
provide power on windless days, lowest cost providers of liquification is a large Canadian natural gas
but Britain might be 50 years away and regasification services. Their producer that expects to generate
from building a battery big enough fleet of LNG tankers should also be free cash flow yields of 18% over
to produce massive amounts of in high demand. the next few years. Management
power for a month. plans to use that cash to pay down
Kinder Morgan (KMI - $16) has debt, buy back stock and increase
Share of U.K. electricity generation the already healthy 3.9% dividend
the largest network of natural gas
from different sources
pipelines in North America and is yield.
CENTRAL PLANNING
This really happened:
1. The UK aggressively invested in wind power, even as it de-
emphasized natural gas and gas storage.
2. The wind stopped blowing in September.
3. Natural gas prices skyrocketed, as utilities struggled to keep the
lights on.
4. The soaring price of gas caused fertilizer plants shut down, because
Source: Department for Business they could no longer afford to make nitrogen fertilizer from natural
Energy and Industrial Strategy gas
5. A by-product of making fertilizer from natural gas is CO2, which
Nuclear power could be an answer, is captured to make dry ice.
but the number of nuclear plants in 6. Suddenly there was a shortage of dry ice, and the UK realized
service has been declining. That that the frozen food supply chain was about to collapse.
leaves natural gas as the next best 7. Emergency funding was given to fertilizer producers so that they
option. Underground caverns filled could continue to buy natural gas at ridiculous prices so that the
with gas really can provide power country wouldn’t run out of dry ice.
for a month of windless days. 8. It turns out central planning is REALLY hard to do well.
-5 -(800) LUMBARD www.Lumbard.com (800) LUMBARD www.Lumbard.com (800) LUMBARD
CIRCULAR LOGIC
Morningstar says that the average The rest of the story: At the
mutual fund investor gets much peak of the bubble a good part of
worse performance than the mutual the stock market was beaten and
funds that he, or she, invests in, battered, low rather than high. As
because investors switch funds at Big Tech fell these stocks rose,
bad times. Switching from a fund and rose, for years. We had a real
that has recently performed poorly estate investment trust whose yield
to a hot fund might be described as reached 15% simply because the
selling low and buying high. And price fell again and again. When
investors drive their performance the Nasdaq 100 fell 75%, this
down even further by switching stock, Healthcare Realty, went up
money out of stock funds, and into more than 100%.
bond funds, at the wrong times.
The Janus Twenty fund invested
Growth stocks have enjoyed an
unusual dominance. Value stocks
WEALTHY AND
in the 20 hottest big technology probably have further to run. WISE
stocks, which led the Nasdaq
Composite as it rose from 1,400 “What matters a lot more than a big
in 1995 to 7,000 in early 2000. “Of the 47 countries in Europe income is how people spend it. For
Janus Twenty was near the top today, 46 of them currently require instance, giving money away makes
of the Morningstar mutual fund government-issued photo IDs to people a lot happier than lavishing
rankings, so investors flocked to vote …35 of the 47 European it on themselves. And when they do
it. They invested tens of billions countries—including France, Italy, spend money on themselves, people
of dollars in it, and they were very the Netherlands, Norway, and are a lot happier when they use it
sure that this was the right thing to Sweden—don’t allow absentee for experiences like travel than for
do. All their friends agreed. The voting for citizens living in country.” material goods …. And yet we still
fund invested those tens of billions keep on buying material things,
into its favored 20 stocks—which — John R. Lott, because they’re tangible and we
naturally soared. In 1998 the fund an expert on election integrity, in think we can keep on using them.”
rose 73%! Imprimis. Ensuring that it’s easy to
get an I.D. should be a top priority. — The Wall Street Journal.
In March of 2000 the tech stocks Well, that’s NOT what Americans
stopped rising, and began falling. did in the pandemic. No wonder
Janus Twenty declined almost If it seems to good to be true, it’s everybody was so crabby.
70%. A $100,000 investment probably…
shrank to $30,100.
too good to be true. — John Lumbard, CFA
GENERAL DISCLOSURES: Statements in this communication are the opinions of Lumbard & Kellner, LLC and are not to be construed
as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of
this material is intended as a solicitation or offer to purchase or sell a specific investment. Readers should not assume that all recommendations
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