Tesla (TSLA Stock) beats on earnings

Hawkish Fed

The US Fed's chairman, Jerome Powell, made surprisingly hawkish comments yesterday, leading investors to think the Fed may raise overnight rates faster than previously thought. Stocks, which were enjoying a good day, retreated immediately as interest rates shot up several basis points across the board. As the evening progressed, sovereign interest rates across the globe rose and stocks fell as the prospect of less accommodative central banks was digested.

Then this morning, the Commerce Dept reported a torrid 6.9% 4th quarter growth rate, and everything swung to the green. The economy grew at 5.7% in 2021, the best results since 1984. The 3.4% drop in 2020 was the biggest fall in 74 years. Current forecasts are for 2022 growth of 3.5% or better, still above the long-term trend line.

While the Fed's intention of getting tougher on inflation will likely result in interest rates creeping up, the reopening of the US and global economies post-pandemic should result in upside growth surprises. Already Covid hospitalization rates have peaked and are falling and health restrictions are being lifted in many locations. The impact of the spike in inflation and higher interest rates has already hit growth stocks very hard and taken down valuation multiples across the board leaving more attractive entry points for quality companies that have been available for several quarters.

The recent volatility may continue to play out as the Fed officially takes away the punch bowl of monetary support, but growth should continue to offset inflation and interest rate increases, and stocks should be added opportunistically. 

February shock

Now, Fed Chairman Powell admitted that inflation is worse than he expected. I want to prepare you for a shock that's going to come in February. Natural gas demand is way up which is going to show up in the January inflation numbers. That means when the CPI and the PPI come out in February, they're going to be bad. Jerome Powell basically hinted at that in his press conference.

Obviously, the Fed will be raising rates in March after they wind down their quantitative easing. But even more important is that he made it very clear that the Fed can only do so much because of rates around the world. The dollar has been soaring for the last few days and it's been soaring since late June because we're raising our rates and the rest of the world is still flat to negative, such as the Euro and Japanese yen.

The foreign buying pressure is just literally unbelievable for our Treasuries which is why the Fed can withdraw their quantitative easing. If you look at the treasury auctions, the bid to cover ratios from overseas buyers is relentless. They are 70% of the buying pressure right now which is a good sign. This means that when the Fed starts to raise rates, the yield curve will start to flatten a bit because the longer-term rates aren't going to be able to go up as much. And they're going to have to stop because they never want to invert the curve. If you invert the yield curve, you kill the financials. So I thought Jerome Powell's press conference was very interesting yesterday. There were some adverse reactions to the market, but the market wanted to pull back anyway.

Tesla leads

Speaking of the market, we're getting what we want. We had Microsoft Corporation (NASDAQ:MSFT) and Tesla Inc (NASDAQ:TSLA) beat. We are hoping Apple Inc (NASDAQ:AAPL) will beat after the close today. But there seems to be some concern over Tesla and there shouldn't be. Basically, Tesla just admitted they have some supply chain issues. They got two new plants to open up. But again, Tesla's success is they're using iron phosphate batteries from CATL in China. Those batteries are not as efficient as lithium-ion batteries, but they're cheaper. That allows Tesla to sell cheaper versions of the Model Three in China and Europe.

In fact, Mr. Musk came out and said there's going to be no $25,000 car out. Instead of making a cheaper EV, they're just going to use iron phosphate batteries. And they have to because there are only so many lithium-ion batteries out there. And that's why it's taking GM and Ford and Volkswagen, all the competitors, so long to gear up because they can't get the batteries. Tesla's supply chain woes became evident yesterday but Tesla will still be a leader because they're building iron phosphate batteries. And Volkswagen says they're going to be doing that too when the patent on CATL's batteries expires this year.

I want to remind everybody that when you have the violent capitulation days and reversals like we had on Monday, you can still see the markets oscillating quite a bit. It's no different than an earthquake. We're going to have aftershocks. It may take another two or three months of this before we settle down and refocus but in the meantime, we have the good earnings to celebrate.

In the meantime, if you have money to deploy now, the dividend growth stocks are great. You've got to be really careful in the small-cap arena. It is hit and miss. I own a lot of these stocks.

I want you to know that I feel very good that most of the risk has been rung out and the only problem we're going to have is some more oscillations and then we are going to have a shocking inflation number in February that could be another excuse for the markets to correct. You're on a roller coaster, so make sure your seatbelt is fastened.

Coffee beans

A $7 wood and wicker chair purchased from a thrift store in Britain was auctioned for more than $21,000 when it was identified as the work of an early 20th-century artist, Koloman Moser. Moser, a teacher at the Vienna School of Applied Arts, designed the chair as a modern reinterpretation of a traditional 18th-century ladder-back chair.