U.S. core CPI rises 2.4%

Key Concepts

• CPI (Consumer Price Index): A measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
• Core CPI: CPI excluding food and energy prices, providing a clearer picture of underlying inflation.
• Federal Reserve (The Fed): The central banking system of the United States, responsible for monetary policy.
• Rate Cuts: Reductions in interest rates by the Federal Reserve to stimulate economic activity.
• K-Shaped Economy: An economic recovery where different segments of the population experience vastly different outcomes, with high-income earners benefiting significantly while low-income earners struggle.
• Fiscal Spending: Government spending on goods and services, or transfer payments.
• All-in Costs (Mining): The total cost of producing one ounce of gold, including operating expenses, capital expenditures, and other costs.
• Forward Cash Flow: A valuation metric based on a company’s expected future cash flow.
• AI (Artificial Intelligence): The simulation of human intelligence processes by computer systems.

Market Analysis & Economic Outlook Following January CPI & Earnings Reports

The discussion centers around the implications of the January US CPI report and recent corporate earnings releases for the economy and Federal Reserve policy. John Zeer, Chairman and Founder of Jay Zuckner Associates, provides his analysis.

CPI Report & Federal Reserve Policy

The January CPI rose 2.4% year-over-year, slightly below estimates. While the headline figure was marginally lower, the core CPI remained “sticky” around 2.5%. Zeer characterizes the economic data as “mixed,” creating a challenging situation for the Federal Reserve. He believes the Fed is likely to “stay the course” with current interest rates, having already cut rates by 75 basis points, in the absence of clear signals about the economy’s direction.

He notes that incoming Fed Governor Kevin Worsh may attempt to push for lower rates, but this will be difficult given the conflicting economic signals. The surprisingly strong employment report, despite weaker ADP, Challenger job numbers, and Jolts data, complicates the picture. Zeer suggests a potential political motivation for the administration, stating, “Trump really wants to run this economy a little bit hotter and I think he thinks that’s going to help his chances in the midterms and he wants to get the Fed on side to cutting rates to do that.”

Zeer doesn’t anticipate a significant change in the expected number of rate cuts this year, with some analysts predicting two or three, and others suggesting none.

Fiscal Policy & Inflationary Pressures

A significant factor influencing the economic outlook is substantial fiscal spending, with the deficit-to-GDP ratio exceeding 6%. Zeer describes this as “pedal to the metal” in terms of economic stimulus. He argues that this level of spending makes substantial interest rate cuts less justifiable.

He points to the “one big beautiful bill” (likely referring to tax cuts) stimulating consumer spending, particularly among higher-income earners, creating a “K-shaped economy.” While “old economy” retail sales are softer, the higher-end consumer continues to spend, as evidenced by airline numbers.

Zeer believes the gold market reflects concerns about these inflationary risks and potential excessive growth, with long bonds still trading around 5%. He states, “I think that’s what the gold market is telling you. They’re worried about that risk.”

Corporate Earnings Analysis – Key Companies

The discussion then shifts to specific corporate earnings reports:

1. Camo (Cameco): Camo’s earnings beat was driven by higher uranium prices, not production or the Westinghouse side of the business. However, Zeer has reduced his firm’s position in Camo due to valuation concerns, noting it trades at 35 times forward cash flow. He suggests playing the uranium market through the Sprott Physical Uranium Trust (U in Toronto) as a cheaper alternative. He states, “If I was going to play I’m positive on uranium longer term I’d rather play it do it a cheaper way which play the uh spat uh physical uranium trust the u in Toronto so I play it directly.”

2. Agniko: Agniko’s earnings were particularly noteworthy as they surpassed Barrick as one of the largest gold producers globally. Zeer highlights the company’s low all-in costs – around $1,100 cash cost and $1,500 all-in – making it highly profitable at current gold prices. He explains that with production already in place, increased gold prices translate directly into higher profits and free cash flow, enabling stock buybacks and potential corporate activity. He emphasizes, “They’ve got the production in place. They don’t, you know, that it doesn't cost them any more to, you know, to maintain that production. So, it's all free cash.”

3. CE Industries: CE Industries’ earnings beat was tempered by weakness in the civil sector, related to reduced aircraft building and training. The company is restructuring to focus on defense.

4. Shopify: Zeer highlights Shopify’s earnings as particularly striking, with the stock initially surging 15% pre-market before closing down 12% on Wednesday. He interprets this volatility as indicative of broader market instability and overownership.

Market Volatility & Investment Strategy

Zeer observes a growing concern about the disruptive potential of AI, which is shifting from a positive tailwind to a destabilizing threat. He points to the rapid emergence of apps challenging established financial and logistics companies. He believes the market has been overowned and that unwinding of positions will likely lead to overshooting on both the upside and downside, creating potential buying opportunities.

He suggests that names like Microsoft and Shopify are looking attractive, but cautions against buying too early, referencing the 2001 experience where stocks dropped 70-80% before bottoming out. He states, “I saw this in 2001 and made the mistake of buying too early on the dip. And man, these things dropped 70 80% before they finally bottled bottomed out.”

Gold Mining Sector Discipline

Zeer notes a positive shift in discipline within the gold mining sector, contrasting it with past cycles of overspending and ill-advised acquisitions. He believes companies are now prioritizing production optimization, cost control, and returning capital to shareholders through dividends and buybacks. He states, “They’ve shown a better discipline this time around. And I think that’s why the the stock prices are are are acting better because they’re not going out and and sort of making the crazy acquisitions or or even putting the money drilling into the ground because those costs have gone up dramatically.”

Conclusion

The analysis suggests a complex economic landscape characterized by mixed signals, substantial fiscal stimulus, and evolving technological disruptions. The Federal Reserve faces a challenging balancing act, and market volatility is likely to persist. While specific companies like Agniko are benefiting from favorable conditions (high gold prices), broader market trends and the impact of AI require careful consideration. Zeer’s perspective emphasizes the importance of disciplined investment strategies and recognizing potential buying opportunities amidst market fluctuations.