Weekly Market Update: Software is So Back
New all-time highs, Workday acquisition talks, and higher interest rates.
Hello Investors,
This week was fairly quietfor public markets.
There were no major developments with the war in Iran, Software stocks caught a bid after it was reported that private equity investor Silver Lake is in talks to buy Workday, and the big inflation report of the week came and went without much notice.
This is because the inflation reading of 3.4% was expected by forecasters on Wall Street, and since the numbers came in as expected, the market celebrated.
Many outlets even called this a “good” inflation report.
In my view, this is a mistake, which I outlined in the video below:
When thinking about inflation, I come back to this chart.
This shows what inflation has done to consumer prices coming out of the COVID Pandemic, compared to what prices would have been if the Fed were able to hit their 2% target.
The fact of the matter is that prices have risen double what they should have, and merely getting back to 2% will not reduce prices; it will just lock in this difference.
As it stands, we are far from our goal with respect to inflation. However, as I mentioned in the video, the Fed is not the only one with their hands on the wheel. If the Fed continues to stand by and let inflation fester, the bond market will raise rates themselves at the long end of the curve.
As with stocks, prices don’t matter until they do.
On to the update!
-Brian
By the Numbers
Equities
Stocks notched new all-time highs this week after the Consumer Price Index came in as analysts expected. The S&P 500 and Nasdaq rose 0.36% and 0.14%, respectively, while the Dow fell 0.56%.
The big news this week came in the form of reports that private equity firm Silver Lake is in talks to buy Workday ($WDAY).
The stock rose 18% on the news, and sent the rest of the Software sector flying. Here is a chart showing Workday as well as a few other notable Software companies.
Prior to this week, many investors believed Software stocks were left for dead. The rationale is that AI threatens to disrupt, commoditize, or completely replace legacy software. “Why pay for Photoshop when AI can create any image I want?”
Now the biggest baddest software investors like Silver Lake and Thoma Bravo are stepping into the ring to counter this narrative. In fact, these investors are probably looking at the same numbers I am with respect to Software companies and asking, “where is the disruption?”
Here is Workday’s stock price vs. their revenue:
This does not look like a company that is being disrupted by AI, and Silver Lake knows it. While I do not own Workday in the PCCM portfolio, I am long similar Software stocks and short AI-related stocks on a similar thesis.
Interest Rates
Interest rates increased slightly with the 10-Year Treasury Yield at 4.68% compared to 4.65% a week ago
As mentioned in the intro, this past week’s inflation data was framed as relatively benign. Both core and headline inflation came in right at expectations, and the market interpreted this as a sign that the Fed may raise interest rates more slowly than anticipated.
However, the data itself is not promising. The softening of inflation month over month was driven primarily by energy prices. While they did decline slightly in July, the conflict in Iran has continued to drag on and with it, oil prices remain elevated.
Excluding energy, many core components of CPI actually increased month over month, implying that the underlying trend of inflation is getting worse, not better. If you are interested in the full analysis, check out the video here.
With respect to US interest rates and fixed income, I remain of the view that rates and inflation will be higher for longer, leading to restrictive monetary policy, meaning that the Fed would rather raise interest rates than lower them. I continue to believe being overweight fixed income at short durations is prudent in the current environment.
Commodities
Crude Oil increased to $80.44/barrel, up 2.89% from the prior week, and is trading at $82.40 as of this writing on Sunday. This increase in oil prices comes as the US continues to drag on the war with Iran with no end in sight.
I have written about the war in Iran at length.
In general, there is a distinct pattern throughout this conflict:
The Trump Administration and/or third party countries signal there is a deal.
Oil prices go down.
Iran remains silent or completely denies that negotiations are ongoing.
The US and third parties insist there is some kind of deal about to happen.
Oil drops some more.
We learn that there was never in fact a deal.
Oil goes back up.
This has repeated week after week for months, throughout which I have expressed my skepticism that any diplomatic offramp is possible in the current situation. In my words, “the only way out is through.”
However, I also noted last week that Trump is loathe to return to a full-scale conflict, despite repeated threats to “wipe Iran out.” I specifically noted reports that the US is low on missile supplies, which may be a driving factor behind the US now pivoting to a war of attrition over direct combat.
I reiterate my longstanding thesis: I remain bullish on oil with a near-term target price of $100+ and a longer term floor of $65-$70 per barrel, though I do not hold a direct position in oil futures.
Gold and Silver increased 0.47% and 2.35%, respectively, while Copper increased 1.82%. The precious metals remain volatile as they are coming off historic highs and multiple competing pressures drive prices. My view remains unchanged: I believe Gold and Silver remain too volatile to hold exposure to, while Copper remains attractive as a critical metal for supply chains.
PCCM does not hold a position in any of the three metals.
Bitcoin has continued to languish, trading in the $63,000 per coin range. The cryptocurrency is currently down ~28% this year as investors look to other investible assets.
The cryptocurrency scene has been relatively quiet over the past few weeks, but I remain bearish long-term on Bitcoin and crypto-adjacent companies such as Strategy (MSTR) and its preferred stock STRC.
Note: Pine Creek Capital does not currently hold a position in MSTR, STRC, or BTC, and my long-term intrinsic value estimate of Bitcoin is $0.
Earnings & Data
This week retail takes center stage with Walmart, Home Depot, and Target, and the Fed releases minutes from the July meeting.
Earnings
Monday, (8/17):
PM: Fabrinet, XP.
Tuesday, (8/18):
AM: Home Depot, Baidu, Amer Sports, Klarna.
PM: Keysight, Toll Brothers.
Wednesday, (8/19):
AM: Target, Lowe’s, TJX, Estee Lauder, Analog Devices.
PM: Coty, Nordson.
Thursday, (8/20):
AM: Walmart, Alibaba, Deere, NetEase, Futu.
PM: Ross Stores.
Friday, (8/21):
AM: BJ’s Wholesale.
Economic Data
Tuesday (8/18): July housing starts and building permits at 8:30 a.m. ET, industrial production at 9:15 a.m. ET.
Wednesday (8/19): FOMC minutes from the July meeting at 2:00 p.m. ET, the first under Chair Warsh, following a hold with three hawkish dissents.
Thursday (8/20): Initial jobless claims and the Philadelphia Fed index at 8:30 a.m. ET.
Friday (8/21): S&P Global flash PMIs for August at 9:45 a.m. ET.
That’s all I had for you this week, let us know your thoughts by leaving a comment. You can also like this article via Substack to show your support.
Very informative. Thank you!