Stocks celebrate weaker CPI growth, predict Fed rate cut next week, says Peter Boockvar

Key Concepts

• Valuation Multiples: A ratio used to compare a company's stock price to its earnings or book value, indicating how expensive or cheap a stock is.
• Capital Intensive Businesses: Companies that require significant investment in physical assets (like hardware) to operate.
• Asset Light vs. Asset Heavy: "Asset light" refers to businesses with minimal physical assets, often service-based. "Asset heavy" businesses require substantial investment in tangible assets.
• Capital Expenditures (CapEx): Funds used by a company to acquire, upgrade, and maintain physical assets like property, buildings, and equipment.
• Consumer Staples: Companies that produce everyday necessities like food, beverages, and household products, which tend to be less sensitive to economic downturns.
• Consumer Price Index (CPI): A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
• Sanctions: Penalties or restrictions imposed by one country on another for political or economic reasons.
• US Shale: Refers to oil and gas extracted from shale rock formations in the United States.
• OPEC: The Organization of the Petroleum Exporting Countries, a cartel of oil-producing nations.
• Gold Bull: An investor who believes the price of gold will increase.
• Treasury Market: The market where government debt securities (like bonds) are traded.
• Yields: The income return on an investment, typically expressed as an annual percentage.
• Central Bank Buying: The practice of central banks purchasing assets, such as gold, to manage their reserves and monetary policy.
• Consolidation Phase: A period in financial markets where prices trade within a narrow range after a significant move, indicating a pause before the next trend.

Market Valuation and Earnings Season

Peter Bookbar, Chief Investment Officer at OnePoint BFG Wealth Partners, discusses current market valuations, noting that the market is trading at 25 times 2025 earnings estimates. He expresses caution, stating that while valuations "don't matter until they do," he is uncertain about when this will occur.

Key Points:

• The market is currently valued at 25 times 2025 earnings estimates.
• There's a disconnect between how companies are now valued and their operational shifts. Many large companies have become "highly capital intensive businesses" with "much higher debt levels" and "much less cash flow."
• Despite this shift to being "asset heavy" due to significant spending on hardware and CapEx, the market is still valuing them at similar multiples as when they were "asset light and very cash generative."
• Investors are advised to pay close attention to CapEx levels relative to revenue in upcoming earnings reports, as these are at "extraordinary levels."

Investment Opportunities

Bookbar identifies two key areas where he sees value: energy and consumer staples.

1. Energy Sector:

• Argument: Oil prices are considered "dirt cheap" at around $60 per barrel.
• Catalysts:
  • Sanctions on Rosneft and Lukoil, coupled with India and China reducing oil purchases due to sanctions, are seen as major catalysts.
  • US shale production is no longer a significant contributor to global oil supply.
  • OPEC production is not meeting quotas.
  • There is a prevailing bearish sentiment on oil, with widespread belief that the world is "swimming in it."
• Outlook: Bookbar anticipates a rally in oil prices.

2. Consumer Staples Stocks:

• Argument: These stocks have been overlooked this year and are now trading like bonds, offering attractive dividend yields of 4-5%.
• Valuation: They are described as having "cheap valuations."
• Outlook: If the economy continues to slow, consumer staples are seen as a "port of safety for investors."

Gold Market and Inflation

The discussion shifts to the gold market and the impact of recent CPI data.

Key Points:

• CPI Data: The CPI remained around 3%, and the Treasury market, after an initial rally and dip in yields, closed near pre-CPI levels. This suggests inflation is "stuck at around this 3% level."
• Gold's Pullback: Gold experienced an "extraordinary pullback" and was "due for a rest" and a "consolidation phase" after a rapid ascent.
• Gold Drivers:
  • The primary driver of gold is "central bank buying," which is "price agnostic."
  • This has been followed by retail and institutional buying.
• Outlook: As long as central bank buying persists, Bookbar believes the risks point towards "much higher gold prices" and "silver prices" after the current consolidation period.

Conclusion

Peter Bookbar's analysis suggests a market with elevated valuations, particularly for capital-intensive tech companies that have shifted their business models. He identifies energy as a potentially undervalued sector with significant catalysts for a rally, and consumer staples as a defensive play in a slowing economy. Despite recent volatility, he remains bullish on gold, citing persistent central bank demand as a key supporting factor for future price appreciation. The current inflation environment is seen as relatively stable, with gold's recent pullback viewed as a healthy consolidation rather than a fundamental shift in its upward trajectory.