Align Technologies gets crooked with Goldman analyst

Stocks rallied Friday after monthly labor numbers came in just right – strong but not too strong. Consumers remain confident and have lowered their inflation expectations according to University of Michigan’s latest survey.

Balancing the checkbook. Imagine this phone call. “Hello Jay, it’s me Janet.” Jay answers, “oh hey Janet, what’s it like over at Treasury, I hear their cafeteria is much better than ours.” That’s Jay, as in Jerome Powell, Fed Chair; his friends call him Jay. “How is George doing, he must be happy with Treasury rates at these levels, because they are a great vehicle to invest his Nobel Prize winnings!” George Akerlof is Janet Yellen’s prize-winning husband-economist. He won the Nobel in economics in 2001 for his famous 1978 paper on goods quality and how the markets clear them – here is the citation if you dare: Akerlof, G. A. (1978). The market for “lemons”: Quality uncertainty and the market mechanism. In Uncertainty in economics (pp. 235-251). Academic Press.

Janet replies to Jay, “George is doing great, and now that you brought up interest rates, WHEN are you planning to cut them?” To which, Powell responds “Janet, you know that the Fed does not get political, and I know that elections are coming up.” There is a long pause, Janet hesitates, and she finally declares “no Jay, it has nothing to do with elections, these high rates are killing us at the Treasury!”

I know that I have been writing an awful lot about interest rates and the Fed. It is not because I find them interesting, but because they are important for just about everything to do with your portfolio (as you know by now) and your budget (which you likely also know by now), especially if you use any sort of credit. Higher interest rates are like a double tax on consumers who are already taxed with inflated prices. The Fed intentionally adds that “second” tax to get consumers and companies to spend less to ease demand and, ultimately, inflation. But there is someone else in the equation.

Think about the who has the largest debt in the world. If you’re thinking the United States, you are correct, and The US Treasury, not unlike you and me, must pay more to borrow money when rates are high. Did you know that the Treasury often offers bonds and uses the proceeds of the offerings to pay off old debt? Don’t get alarmed, it’s normal, but I had to inform you. So, imagine that the Treasury sold 10-year notes back in 2013. The coupons on those notes were somewhere in the neighborhood of 2.875%, which was the going 10-year yield at the time. The principal on those bonds, which will mature this month, will have to be paid back to borrowers. If the Treasury borrows the owed money by issuing new notes today, it will pay a coupon of around 4.25%, which is the current yield for 10-year maturities. Don’t worry about the math, the important point is that the US Government is paying more. The differential becomes even more stark when you see that the 0 1/8 of 12/15/23 is maturing (a real security). It was issued as a 3-year note… um, 3 years ago. That was when rates were near 0% in midst of the pandemic, and that’s right, the Treasury was only paying 0.125% to borrow from the public. Do you want to give a guess what the Treasury will have to pay if it refinances that debt with a new 3-year note? Well, the current 3-year note is trading with a yield of 4.47%. This time, I will do the math for you. The Treasury will have to pay +4.35% more to refinance old debt. Imagine if you had to do that with your credit. Imagine if your outstanding debt was $33.832.82 trillion. That additional interest payment can add up, ya’ think? Happy Monday, Washington DC!

WHAT’S SHAKIN’ THIS MORNIN’

Align Technology Inc (ALGN) shares are lower by -2.34% in the premarket after being cut to SELL by Goldman Sachs. Goldman’s price target for the stock is -11% below the market. Potential average analyst target upside: +24.7% (obviously, Goldman Sachs doesn’t agree).

The Cigna Group (CI) shares are higher by +13.24% after the company announced that it would end its pursuit of Humana Inc and ramp up its stock repurchase plans. Cigna’s 10.42x forward PE is cheaper than the 14.46x median PE of its peers. Dividend yield: 1.90%. Potential average analyst target upside: +34.0%.

FRIDAY’S MARKETS

NEXT UP

• No economic releases today, but things get hot over the next few days with Consumer Price Index / CPI, Producer Price Index / PPI, Retail Sales, Industrial Production, and flash PMIs from S&P Global. The big market shaker will come on Wednesday when the FOMC will announce policy and Powell holds a press conference. Check out the attached economic calendar for times and details.