The week started with political proposals that will lead to production cuts and a reduced food supply. In the middle of the week, DKI released its new health care stock idea. Subscribers are already up around 20% in the name. The week ended with uranium production cuts and Fed Chairman, Powell, indicating the expected September rate cut is on the way. In other news, the jobs “data” was revised down by over 800k jobs. Unsurprisingly, government employment was revised upwards. It was “just” the private market jobs that were cut. Finally, we got some strange analysis on Target earnings where revenue guidance was reduced, and somehow, prices were “cut” despite a higher gross margin. Revenue is still below 2022 levels.
This week, we’ll address the following topics:
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The world’s largest uranium producer makes production cuts into increasing demand. Anyone want to guess what has to adjust to make this work? Price!
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Jobs revised down by over 800k. We’ve been warning about unreliable data and a weak private market economy all year.
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Politicians are suggesting price controls leading to shortages and asset confiscation designed as unrealized capital gains taxes for the ultra-wealthy. Want to bet that they don’t stick with just the ultra-wealthy if they implement this?
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The Fed is going to cut. Inflation is not defeated. Predictably, gold hits a new dollar price record.
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Target TGT beats revenue estimates. The story is somehow lower prices despite gross margin gains. Future growth guidance is quietly lowered.
I spent the week focused on releasing DKI’s report on our new health care idea. We think it’s better than Shockwave Medical, where subscribers made more than 70% in 3 ½ months. As usual, Interns Andrew Brown and Alex Petrou came through with their typical smart suggestions for 5 Things topics and insightful analysis. Well done!
Ready for another week of government “data” revisions? Let’s dive in:
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The World’s Largest Uranium Producer Cuts Production:
Kazatomprom, the world's largest uranium producer, reported its first half earnings last Friday. The key takeaway from the press release was the announcement of a reduction in planned uranium production from 30,500 - 31,500 to 25,000 - 26,500 metric tons. This decision follows challenges the company has faced in developing some of its new operations. Additionally, Kazatomprom is struggling to maintain a steady supply of sulfuric acid, which is crucial for the uranium extraction process. As the world gradually transitions to nuclear energy, Kazatomprom's supply shortage will significantly impact the uranium market.
Big supply shortfall into stable & growing demand. Graph from World Nuclear Association.
DKI Takeaway: To fully analyze this situation, let’s look back a few years. In 2022, Kazatomprom announced a significant supply increase, and in 2023, they increased those projections. However, the expected supply increase never materialized. Today, we are seeing a decrease in supply due to the challenges in operating and developing mining operations. DKI has been very bullish on uranium for years; however, we consistently advise that we prefer owning physical uranium to the miners due to the operational and supply chain difficulties associated with such investments. With the upcoming supply cuts, and continued increases in demand for new nuclear plants, basic economics suggest that uranium prices should rise.
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DKI Warned About Jobs Revisions – They’re Huge:
The U.S. economy (and government reporting on the economy) has been rocked by a dramatic revelation: employment additions were revised down by a staggering 818,000 as of March 2024. This adjustment marks the most significant downward revision since the global financial crisis. The professional and business services sector were hit the hardest, losing an astonishing 358,000 jobs, while the leisure and hospitality sector saw a brutal reduction of 150,000 jobs. Manufacturing and construction weren’t spared either, with job cuts of 115,000 and 45,000, respectively.
Source: Bureau of Labor Statistics
DKI Takeaway: Amidst this dismal picture, government jobs were revised up, standing in stark contrast to the private sector's downward spiral. These massive revisions cast a shadow over the labor market's perceived strength and raise urgent questions about the true state of the U.S. economy. DKI has warned all year that the employment “data” was so unreliable, it’s useless. Again, we see growth in government and a weaker private economy. Your regular conclusion: rate cut coming next month. DKI thinks 25bp. Many think larger.
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An Economic Plan to Create Venezuela Part Two:
We’re in the political silly-season where candidates can suggest insane policies without explaining how they’ll work in the real world. A recent proposal for a large tax on unrealized capital gains for individuals with a net worth exceeding $100 million represents a significant shift from traditional tax policies. Taxing unrealized gains would discourage long-term investment and create financial instability, as it would require individuals to pay taxes on paper gains without any cash flow. If this sounds like asset seizure, that’s because it is. This policy could force premature asset sales or cause financial strain, disrupting investment strategies and pushing capital investments offshore. There is also talk of price control measures aimed at preventing perceived price gouging. Price controls always interfere with the natural balance of supply and demand and lead to shortages due to reduced incentives for production followed by a robust black market.
Does this look like price gouging to you? (Source: Lyn Alden)
DKI Takeaway: The experiences of Venezuela offer a cautionary tale. To combat hyperinflation and “protect” consumers from rising prices, the Venezuelan government imposed strict price controls. Rather than stabilizing the economy, these controls led to hunger. Producers, unable to cover their costs at the mandated prices, drastically reduced production or stopped altogether, leading to widespread shortages of basic goods like food and medicine. The black market flourished as consumers sought to obtain scarce products, often at much higher prices than before the controls were implemented. This created a vicious cycle of scarcity, inflation, and economic decline, contributing to the country’s ongoing economic crisis. As @LynAldenContact highlighted on X, Kroger’s profit margins over the past two decades have been consistently thin, currently around 1.43%, with revenues closely tracking rising costs. Introducing price controls in such an environment could push these slim margins into negative territory, reducing incentives through the entire supply chain leading to shortages. Given the current administration's assertion that inflation is under control, the rationale for implementing such price controls raises questions…
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Gold Passes $2,500:
On Tuesday, gold closed at a high surpassing the $2,500 benchmark, bringing the value of a 400-ounce gold bar to over $1 million. With the Federal Reserve signaling rate cuts are coming "sooner rather than later," investors are increasingly turning to gold as a hedge against the weakening dollar. Central banks (excluding G7 countries) have been amassing large portions of the metal. Economic uncertainty remains the strongest driver for gold, with job numbers and persistent inflation bolstering its appeal further.
Gold has surged for the past four years. DKI has owned gold since 2020.
DKI Takeaway: With the Fed about to cut interest rates and Congressional overspending not about to stop, we should prepare for higher long-term inflation. Reduced compensation for holding dollars and weakening purchasing power tend to increase the dollar price of gold. Gold has been one of DKI’s favorite long-term hedges against a declining dollar, and has been a reliable economic hedge for centuries. We also think it’s a good idea to have some assets outside the financial system. Gold and Bitcoin (with self-custody) are great options. If you want to learn more about how DKI hedges against the government’s irresponsible fiscal and monetary policy, follow our positions list.
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Target Results Misinterpreted:
Target reported Q2 earnings of $25.5 billion, surpassing the expected $25.2 billion. The media widely interpreted the growth in earnings to price cuts. This quarter saw an increase in both in-store traffic and discretionary sales. However, like Walmart $WMT and Home Depot $HD, Target remains cautious about the remainder of the year, projecting guidance in the range of 0-2%. Does that mean everything is in good shape there?
Steady gross margin increases but prices are falling?
DKI Takeaway: Target's underlying earnings contain several inconsistencies that have not been accurately covered by the media. First, while there were claims of price reductions, company gross margins have been growing and were above the mark from last year. Another significant factor in their revenue growth is Target was involved in a controversial social issue last year, which negatively impacted sales, leading to easier comparisons this year. 2Q revenue remains below 2022 levels. Target's official guidance was 0% - 2%, but the company just offered commentary that they’d be at the lower end of that range meaning 0% - 1% is the real mark. When we compare this barely-positive growth to the current inflation rate of 2.9%, it looks like Target is selling fewer goods for higher prices. Target serves as another example of the bifurcation in the economy, where inflation boosts dollar-denominated earnings rather than genuine economic growth.
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