Disney magic

Stocks rose yesterday, led by tech shares as investors swooped in to pick up bargains. Investor indigestion is easing as volatility and bond yields simmered down…for at least a day or two.

Math homework.  Today, the Bureau of Labor Statistics will release its Consumer Price Index, or CPI, and all eyes will be glued to the tape. Why?  Because inflation is a hot button these days, not only because life is costing more, but also because the Fed has locked and loaded a big interest rate hike cannon and is preparing to shoot it right at the heart of the economy. That was a colorful way of saying that the Fed is preparing to hike interest rates. We know this and it appears that the market has accepted that reality, having even defined the range of possibilities. The reason for the interest rate hike is to fight the nasty bit of inflation that has crept up on us…actually “leapt” might be more fitting than “crept”. My regular readers know that there are several ways to measure inflation, but the most popular is through the CPI, so, naturally today’s number will be an important one, at least in the eyes of traders. A big monthly increase will not only support a March hike but might even lend creed to the ultra-hawk case of a +50 basis point increase. Fed Funds futures peg that possibility at around 23%. That same number stood at just 7.3% a month ago. By the way, according to those futures, there is a 0% chance of the Fed doing nothing next month. All that said, of course, the Fed will be watching today’s release carefully, as will traders seeking some clues. Let’s discuss this for a moment. The press likes a bracing headline to catch eyeballs, and despite knowing this intimately, even I get caught by them occasionally. It has been a quiet economic release week, but I have been seeing headlines like “Inflation – set to rise to 1980s levels!” Still, others read “Inflation to rise over 7% in upcoming CPI release.” Finally, “Will the Fed be caught off guard with inflation over 7%?” Yah, those all sound pretty ominous to me. Actually, the CPI is expected to come in at +7.2% after registering +7.0% last month. To the naked eye, this may appear to be doomsday. To be clear, prices are, in fact +7.2% higher than January of last year, if the number comes in as expected. To get a clearer picture of the situation, economists prefer to look beyond absolute change and rather, favor the index’s first order derivative. That is a fancy way of saying rate of change. To do that we need to monitor the month over month increases rather than the year over year difference. By doing that we can see if inflation is accelerating or decelerating, which is what we should really be concerned about. Accelerating inflation implies that things are about to get much worse for us, while decelerating means inflation is peaking and may ease back to a more comfortable and acceptable level. Looking at the 3 prior monthly numbers, we note increases of +0.9%, +0.7%, and +0.6% for October, November, and December, respectively. Notice that those monthly changes are decreasing, meaning inflation is decelerating, or slowing its ascent. Today’s number is expected to come in at +0.4%, which would support the case that inflation may have peaked. There is another interesting anomaly that occurs when looking at absolute annual change, favored by headline writers. If we compare December 2021 to December 2020, we see big changes because inflation had not yet kicked in late in 2020.  Inflation really ascended quickly from March through June of ’21, so even if inflation grew at its current level through summer, the year over year number would fall. A continuation of our recent decelerating monthly trend would only accentuate the fall in annual inflation. That would be bad news for those headline writers, but good news for us consumers. It’s just math.

WHAT’S SHAKIN’

The Walt Disney Co (DIS) shares are higher by +7.19% in the pre-market after the company announced last night that it beat EPS and Revenue estimates by +85.96% and 4.66% respectively. The beat was due to large increases in theme park revenues and better than expected increases on subscribers, which came in at +11.8 million beating analysts’ estimates of +8.17 million.  Potential average analyst price target upside: +29.2%. 

The Coca-Cola Co (KO) shares are trading higher by +1.33% in the pre-market after it announced an EPS and Revenue beat of +0.37% and +6.01% respectively. The company additionally offered forward revenue guidance that was slightly lower than analyst estimates.  Dividend yield: 2.75%.  Potential average analyst price target upside: +4.8%.

Lumen Technologies (LUMN) is trading lower by -10.69% in the pre-market after it announced last night that it missed EPS and Revenue estimates for the 4^th quarter. The company offered 2022 forward EBITDA guidance that was well below analyst estimates. Dividend yield: 7.8%. Potential average analyst price target upside: -8.1%. WHY IS THIS NEGATIVE? Because last night’s close price was above the average analyst 12-month price targets for the stock. This can be interpreted as the stock being overpriced, but it does not mean that the stocks cannot go higher.

ALSO, this morning: Lab Corp (LH), Martin Marietta (MLMM), Global Payment (GPM), PBF Energy (PBF), Zebra Technologies (ZBRA), Philip Morris (PM), and Datadog (DDOG) all beat EPS and Revenue estimates. Duke Energy (DUK) and Blue Apron (APRN) missed on both EPS and Revenues. Moody’s (MCO) missed on EPS while Twitter (TWTR) missed on Revenues.

YESTERDAY’S MARKETS

Stocks were led higher by tech shares yesterday which took solace in treasury yields pulling back slightly. The S&P500 rose by +1.45%, the Dow Jones Industrial Average climbed by +0.86%, the Nasdaq Composite jumped by +2.08%, the Russell 2000 gained +1.86%, and the S&P500 ESG Index added +1.34%. Bonds advanced and 10-year Treasury Note yields slipped by -2 basis points to 1.94%. Cryptos rose by +3.11% and Bitcoin added +0.60%.

NXT UP

• Initial Jobless Claims (Feb 5) is expected to come in at 230k compared to last week’s 238k.
• Consumer Price Index (Jan) may have increased to +7.3% from +7.0%.
• Richmond Fed President Tom Barkin will speak today.
• After market earnings announcements: Freshworks, Zendesk, Mohawk Industries, Confluent, Cloudflare, Upwork, GoDaddy, Dexcom, Monolithic Power Systems, HubSpot, Avalara, Illumina, Zillow Group, and Expedia.