Todd Sullivan's ValuePlays

Historical Context for Current Events

Davidson — Thu, 10 Sep 2026 15:05:03 +0000

My opinion of current events are very positive across all aspects of the US economy. The US is in a significant change under the current administration. It began a little in Trump’s first term but in reclaiming the Presidency in 2024, he has entered with a forceful series of policies that are likely to have a very long-term positive impact on US economics and politics for decades to come if we are able to learn from it. First some history.

Much of the hand-wringing we hear today is based on patterns established since WWII under the Marshall Plan which in effect never stopped. The Marshall Plan was designed to rebuild countries whose domestic industries had been destroyed but then we never stopped it. It morphed into a global distribution of US control; “distributing Democracy” is what it was called. What this did in effect was use the innovation of the US that was responsible for supporting out consumption economy but export part of its value creation by building foreign manufacturing sites and hiring their labor to rebuild their societies for our consumption. The 70yr+ concept has been the “value” is in the initial innovation, not in the conversion of that innovation to improvement in our standard of living. This perception has been fostered by the mathematics of our financial decisions, by those who have never created things with their own hands. We relied on our business efficiency experts who have been trained in universities without any practical experience in operating manufacturing operations till they had been hired as corporate consultants and management experts. They saw cheaper labor cost in foreign lands and the choice was made. That we accepted tariffs on our exports to these countries to keep out our competitive products also became accepted practice. The US meanwhile had very low or non-existent tariffs on products imported against our own producers. Again, we were seeking the low-cost option for goods available. We, in essence, built up less successful countries by exporting our best ideas. But, there was another side to this entire saga.

Also, post-WWII was William Edwards Deming (October 14, 1900 – December 20, 1993) was an American business theorist, composer, economist, industrial engineer, management consultant, statistician, and writer. Educated initially as an electrical engineer and later specializing in mathematical physics, he helped develop the sampling techniques still used by the United States Census Bureau and the Bureau of Labor Statistics. He is also known as the father of the quality movement, known as “Lean Manufacturing” today, and was hugely influential in post-WWII Japan, credited with revolutionizing Japan’s industry and making it one of the most dominant economies in the world. He is best known for his theories of management.

It was while working under Gen. Douglas MacArthur as a census consultant to the Japanese government, he was asked to teach a short seminar on statistical process control methods to members of the Radio Corps, at the invitation of Homer Sarasohn. During this visit, he was contacted by the Union of Japanese Scientists and Engineers to talk directly to Japanese business leaders about his theories of management, returning to Japan for many years to consult. He met the Toyoda family. Its vehicle business post-WWII had access to limited markets and parts suppliers yet needed to make smaller lots of several models profitably to be a competitive company and rebuild the family’s assets. Guided by Deming’s lectures, leaders like Shoichiro Toyoda and Eiji Toyoda embedded Total Quality Control deeply into Toyota’s operations during the early 1960s. Toyota history: https://www.tundras.com/threads/brief-history-of-toyota-motor-co-and-museum.46865/. Having limited factory space and assembly lines, they manufactured multiple vehicles on the same lines and needed to develop not only impressive quality control but just-in-time-delivery supply chains. Deming became a primary consultant. The Toyota Production System(TPS) was born. The Deming Prize: Toyota adopted these principles so effectively that they became the first automaker to win the prestigious Deming Application Prize in 1965. Toyota has become the #2 Brand in the US Light Weight Vehicle market. Toyota’s quality is well known and even today has high brand loyalty in a flat market such that buyers will wait 2-3mos for the desired vehicle rather than go to competitors which are over-supplied.

Toyota was very effective in penetrating the US market because its TPS helped it weather economic downturns. The company garnered nearly all the value associated with manufacturing including production efficiencies by tapping its workforce innovations who were rewarded in turn and in proportion to the impact to Toyota’s profitability. While US manufacturers were heavily unionized and routinely experienced strikes, Toyota relied on management/employee loyalty seeing less disruption.

US business schools do not teach “Lean Manufacturing” and my experience indicates the concept is nearly unknown but for very few in the academic world. However, the success of Danaher(DHR), Wabtec(WAB), Heico(HEI) and others clearly demonstrate its prowess in manufacturing delivering for shareholders. “Lean” to be successful requires well-lubricated communications between manufacturing floors and end-customer experiences such that every individual knows their impact on the ‘value proposition’ that leads to corporate profitability year over year. The net/net is that not only has value been extracted from innovation occurring in the US, but full value was also extracted during the manufacturing process domestically. This is opposed to sending that portion of value overseas and then paying foreign manufactures for it to get the innovation back again.

What the current administration is doing is, in crucial industries, we want all of the value created by our own innovations including that which occurs in supply chains and during the manufacturing process. This is a total-value recovery concept which leaves us with a healthy and actively trained, intellectually alert manufacturing base that leads automatically to more innovation. With key industries, we do not want to leave anything on the table including the thought processes that lead to our next innovations.

Look at the current administration’s efforts in the light of these concepts and much makes sense.

Is A Rate Hike Certain? Not So Fast….

Davidson — Wed, 09 Sep 2026 14:30:09 +0000

Brian Wesbury is often referenced in my notes for insight not found elsewhere. This note is worth reading end-to-end and more than once just to capture the nuances of his insight.

“However, a rate hike later this month is far from a done deal or a slam dunk. We get two inflation reports later this week, on consumer and producer prices, and if those come in more benign than the consensus expects, that may give Chairman Warsh enough ammunition to keep rates steady.” https://www.ftportfolios.com/Commentary/EconomicResearch/2026/9/8/strong-jobs-report-raise-odds-of-rate-hike

T-Bills are currently priced 3.8%-3.9% depending on the trading day. They have tended to dictate Fed Funds Rates through the pricing of the Discounted T-Bill rate currently sitting at 3.75% with a prior pattern of the Fed following this series in lockstep keeping a rough 0.25% premium. Mid-range of the current Fed Funds rate is 3.63%. Recently this relationship has been closer. In theory, the T-Bill is the risk-free asset. In other words, it should trade at inflation levels providing no return above or below the rate of inflation. The machinations of the prior vs the current administration’s policies have had dramatic inflation swings. More recently the Iran conflict spiked crude oil over $120/BBL. The Fed and T-Bill rates have mostly remained steady awaiting the market’s signal but now a new element enters the picture with the unexpected strong employment numbers stirring rate increase rumblings. The concerns being expressed is the age-old dictate that an “expanding economy is inflationary”. The belief of this risk is baked into the near ~$20Tril of foreign capital entering the US to build manufacturing facilities to avoid tariffs with high labor demand.

In my opinion, during the past 70yrs politicians have pushed expansion/inflation connection to skirt being questioned too heavily by those who saw government spending as the main cause of inflation; not production that was additive to the Private Economy in the form of Standards of Living improvements. The current Administration knows this difference in my opinion as does Fed Chair Warsh. This is where PCE Index ex food/energy matters. While the PCE Index chained is 3.3%, the ex food/energy index is 2.47%. Both are declining!

If the logic holds that the T-Bill should be risk/reward free, then we should see Fed Funds Rate fall ~1% from current levels. Inflation should continue to wane especially with the slowdown in government spending we have seen since Jan 2025. Wesbury provides good insight and is worth reading.

Tariffs Having Positive Effect Employment

Davidson — Wed, 09 Sep 2026 13:32:41 +0000

Household Employment rises 562,000 Establishment Employment rises 162,000. The Job Openings trends indicate that tariff policies are having the desired effect with decent rises in Construction, Manufacturing and even Retail where we have signs of decent insider buying. Government employment has stalled which on a relative basis is also in line with current policy.

Industrial Production Reaches New high

Davidson — Mon, 24 Aug 2026 15:46:03 +0000

The values reported for Industrial Production(IndPro) and Industrial Capacity continue to impress. I expect new highs in these series the next few years tracking current tariff policies.

Rate Fears Overblown

Davidson — Fri, 21 Aug 2026 15:45:22 +0000

Rate fear is rampant but misinterpreted as usual. If one reviews history, 10yr rates always rise with rising investor optimism. That is, rates rise with increasing equity prices. This occurs as investors shift capital from fixed income, viewed as a safe haven, to equities as optimism for economic expansion improves. A more useful indicator, better than the 10yr Treasury rate, is the ‘Yield Curve’ which has been historically defined as the 10yr minus the 3-month Treasury rate.

When one views rates as a measure of market psychology i.e., optimism vs pessimism, and removes rate levels out of the realm of economic impact and into the realm of investor attitudes, interpretation becomes closer to making commonsense rather than seeming to be more of an economist guessing game. Viewing rate changes as capital shifting asset classes is the better route to understanding.

What occurs when the Yield Curve rises is that the investor long-term economic perception is improving. They are shift capital into equity exposed positions to benefit. That is, they sell bonds to buy stocks. However, while doing this, they also continue holding some capital in reserve, safely in T-Bills(3month Treasuries), just in case their perceptions are incorrect. If perceptions of economic expansion are supported, they keep shifting more capital into equity exposures and longer-dated rates continue to rise. In recent cycles, the spread of rates between the 10yr and 3-month has hit 3%-4% such has been investor enthusiasm. Currently the Yield Curve has a spread of 0.70-0.75%.

That the Yield Curve serves as a market sentiment measure is seen in its spread rise and fall in correlation with the SP500. Fear of recession drives the 10yr rate lower faster than the 3month and the spread declines. Declines in the spread are reflected in the SP500 prices. Economic optimism widens the spread and is correlated with higher SP500 pricing. Market tops are characterized by investors being overly optimistic to the point that they no longer wish to hold reserve capital. At this point they shift funds out of T-Bills in preference to own more equity type positions. This drives the spread ever lower during periods of excess speculation. When the spread falls below 0.0% is a typical signal of investor over-commitment, equity market tops and recessions ensue. One can also see market sentiment playing out in Retail Money Funds. Retail Money Funds peak in correlation with the perceptions that recessions have ended. A similar correlation is present with the manufacturing PMI which defines the PMI solidly as a market sentiment rather than an economic measure(not shown here).

In our current environment, the spread is well under past periods of perceived economic expansion. That is, we see 0.70-0.75% spread when historically full-on investor perception of economic growth has spreads in the 3-4% range. Likewise, Retail Money Funds are only now peaking which indicates that retail investors are only now in the early stages of shifting capital into equity exposures. Retail investors hold $2.2+Tril in short term capital. In the past. 30-50% of this capital has shifted into equity exposures with the shift dependent on how long economic expansion occurred and how optimistically the financial media promoted investment.

Current investor sentiment and capital positioning indicate we yet have a few years of positive equity prices ahead. How high, how long this will continue will depend on investor sentiment. How high the rates go will not prove a near term deterrent as we have had much higher rates in the past with periods of healthy economic expansion. At the moment, the consumer is not stretched. When that occurs will be the time of concern.

Rate fear should be ignored. As long as investors(and consumers) can meet obligations and not be caught by financial difficulties, equity markets will continue to rise in response to current government policies.

PMI Rises

Davidson — Tue, 11 Aug 2026 16:33:09 +0000

Manufacturing PMI rises to 55.6. The PMI(Purchasing Managers Index) has a long history of correlations with other market psychology indicators such as the Regional Fed Surveys and the SP500. Other market psychology indicators include interest rates, both short-term and long-term, rise as capital shifts into equities and other investment categories associated with an expanding economy.

Some are concerned with rising 10yr and 30yr Treasury rates. I am not. I am more concerned with consumer delinquency rates, that is the inability to handle debt. This far, these indicators signal financially healthy consumers.

Correlated Market Psychology: PMI and Retail Money Funds

Davidson — Wed, 15 Jul 2026 18:21:02 +0000

The PMI and Retail Money Funds(RMF) are well correlated market psychology indicators. This chart compares monthly data that is dependent on the pace of monthly manufacturing PMI releases. RMF reports weekly and monthly only available through May while the PMI is through June. Just the same, the data display a distinct top formation that is in sync with prior periods when the PMI turned above 50%. Both are distinctly correlated with media perceptions of economic activity. What has been very different this time, since 2015-2016, has been the perception that high tech issues have been able to power through recession periods. Institutions became convinced of this when high tech emerged as growth vehicles during the COVID-lockdown work-from-home period. High tech became a ‘can’t lose investment choice’. Post-COVID, the PMI spurted to mid-60% range quickly on a general recovery but gave way to sub-50% in mid-2022 and remained there for the most part till Jan 2025. The belief of rapid COVID exit for manufacturing quickly met the realities that rejiggered supply chains could not nearly adjust as quickly as market expectations. What held up was high tech which evolved post-COVID. The COVID work-from-home related issues declined but investors transitioned from gaming to cryptocurrency which then transitioned quickly to AI leaving Nvidia(NVDA) and related as the top performers in the SP500 even as the media posted relentless recession forecasts. A few favorite tech issues has dominated the SP500 since. Today 10 issues represent 39.75% o the SP500. However, the investors are rapidly warming to US industrial, transportation and construction issues as it becomes apparent significant growth is occurring with the new tariff agenda.

The markets follow the dominant media narratives. Read the news throughout the day, watch how investors interpret news into equities and know which indicators represent market psychology, and which represent the real economy. Your investment decisions will generally be favorable if you select the better managed companies unless something significant enough occurs to knock your thesis to shreds as in an unexpected COVID lockdown.

It looks like individual investor psychology is turning positive with the PMI as this has historically.