QUANDARY: Bull and Bear, I’ve called you here for some advice because we’re heading into a new year with lots of uncertainty and I don’t know what to do.
BULL: Quandary, there is always a wall of worry, but we don’t have as much uncertainty as you might think. Look at consumer spending over Christmas. It was strong. Look at the efficiencies that companies have learned and implemented. Strong consumer spending combined with greater efficiencies means one thing – growing profitability. And higher profits mean higher stock prices.
BEAR: No uncertainty? What Covid-free planet are you on? Let me spell it out to you in one word: O-M-I-C-R-O-N.
BULL: Bear, I’m not worried about Omicron. It might be the best thing to happen. A highly contagious and mild illness. It will sweep through in a matter of weeks. Everyone will have been exposed or gotten it and we can then move on and end this Variant of the Month Club hysteria.
At worst, we’ll get our annual vaccine, pop pills when needed and just learn to live with it like the flu.
BEAR: I’ll agree with you on one point, Bull. There is a certainty in the economy. Let me spell this one out for you, too: I-N-F-L-A-T-I-O-N.
QUANDARY: But I don’t know about inflation. How much is pandemic related? Everyone expects the Fed to raise interest rates starting next year and yet the 10-year treasury note is acting like we’re heading back to 2 percent inflation.
BEAR: The pandemic might have started inflation, but it’s got a life of its own now with fuel and commodity and other input prices up, which is and will push up costs for everything from candy to cars. And we have wage inflation. Higher wages mean permanent higher costs. Let’s see if casino operators maintain their newly loved ultra-margins in this environment.
BULL: Inflation can also present opportunities. What’s a good hedge in this environment – tangible assets like real estate and solid dividends. The gaming REITs have both. And as Gaming and Leisure Properties is showing with its development deal with Cordish Cos. and as VICI Properties is showing with its financing deal with Hard Rock for Mirage renovations, they have options to grow and diversify income.
And casinos have what you might call stealth pricing power. They can raise table game minimums from $10 to $15 or $25. They can tighten slot paybacks.
BEAR: Well, that’s a nice whistling-past-the-graveyard take on things. Look, inflation means interest rate hikes, which means slowing the economy, which means lower profits, which means stocks get hit.
BULL: Not so fast, Bear. The last time the Fed went through a rate hike cycle ending in 2018 stocks actually rose. You know, one reason for inflation is that the economy is strong. Let’s not be simplistic.
BEAR: And let’s not have selective memory. Remember, stocks tanked at the end of 2018.
QUANDARY: Guys, you’re confusing me even more. How about stock prices? The major indices are hitting record highs. Investors see the same worries and uncertainties but they’re voting with their dollars in staying long on stocks.
BEAR: Quandary, you do know that the indices are distorted by the weight of the mega tech stocks like Apple, Alphabet, Amazon, and so on. The fact is that a great number of stocks are down, and many of them by 30 and 40 and 50 percent.
BULL: Bear, I agree with your analysis, but not your conclusion. The fact that so many stocks are down so much indicates that valuations for most are not too high, and there’s plenty of room to run up in the boom economy I foresee.
BEAR: Valuations matter. Remember the Nifty Fifty? I was just a cub back then in the late 60s and early 70s, but blue chip stocks driven up to the sky were unsustainable and that—along with inflation, as a friendly reminder—led to the horrible 1973-74 market and more than a decade of underperformance after that.
BULL: This isn’t 1973. For one thing, we have so much computing power now and such a wealth of data that markets anticipate better and correct more quickly. You can see that in how fast markets respond today. How long was the great bear market of March 2020? A month? Two?
BEAR: In other words, you believe in the four most dangerous and false words in investing: This time is different.
BULL: Bear, just go off somewhere and hibernate.
QUANDARY: Guys, stop it. You can quarrel but I’m still a Quandary.
