Corporations are doing AOK on the backs of consumers

Stocks pulled back yesterday as hopes for a peace settlement between Ukraine and Russia were dashed by the facts…Russia is still bombing Kiev. Nobody is paying attention to Tuesday’s yield curve inversion, but everyone IS paying attention and a bit on edge.

Consumer slap in the face.  You know, there is an old but unwritten economics adage that goes “discriminate, if you can.” It can be applied to many different scenarios but, generally, it means that companies should charge as much as possible for goods, even on an individual basis.  Now, companies don’t need permission from economists to do what they do best…make profit.  Companies, also according to abstracted economic theory, are also considered to be “rational”. In other words, they will not pass up an opportunity to make more money. Yet another basic tenet of economics is “more is good.” That applies to not only company profits, but also, more loosely, to consumers (you and me), who will always demand more. Why settle for 2 cannolis when you can get 3? You see where I am going with this?

Funny and abstracted, though these adages may sound, they are all very real, and they are all ingredients in the soup that is our hot-running, inflated prices economy today. Let’s start with companies, otherwise known as firms, in economics. Did you ever wonder why New York City parking lots charge you extra for larger vehicles? I mean, those “larger vehicles” don’t technically take up more floor space. So why is it, that every time I pull into a garage with my Jeep, I am warned, up front, that I am going to be surcharged? Why? BECAUSE THEY CAN. That surcharge is referred to as “demand discrimination.” So, firms are smart, rational, and they are always seeking to make more profit. Why do gas prices go up the second crude oil futures tick higher? Remember that 1 futures contract entitles the holder to buy 1,000 barrels of crude oil at a given price…in the future. Assuming that the holder takes possession of those barrels in the future, they must still be transported, stored, refined into gasoline, stored again, transported again, stored again, and finally transported to your local Wawa gas station. So, in fact, crude oil future prices should not technically affect the gas station owner’s profit today, when the station is probably pumping gas that was derived from crude oil that was pumped 6 months ago…which was purchased as a future 6 months before that. “Why then” you ask? BECAUSE THEY CAN. Now, onto the “rational” component. If you are in the business of processing poultry and you find yourself having to pay your workers more money, your margins will be under pressure. Because you are rational, you have already deployed as much technology as possible to minimize the number of human hands that are needed to turn the birds into frozen nuggets. You, therefore, have no other choice than to pay higher wages in order to keep the nuggets coming. Because you are a rational firm, you will seek to maintain your margins by raising your prices to consumers. In this case, you do it BECAUSE YOU MUST…and BECAUSE YOU CAN.

Until YOU CAN’T! You see, consumers are also rational, and prices DO, in fact matter. Consumers will seek to pay less for goods. They will seek out other firms selling the same goods and ultimately, even seek out substitutes, all before they stop consuming altogether. I can find another garage that perhaps, won’t charge me the extra fee, or one that charges a bit less because it is farther from my destination – substitute. But ultimately, I may even just try to find street parking, or take public transportation. I love me a chicken nugget, but I am not averse to replacing it with piping hot pigs in a blanket (though my doctor will cringe). Indeed, according to the latest Consumer Price Index report, frozen chicken parts are +15% more costly than a year ago, while frankfurters are only +3.5% more costly. I may decide to become a vegetarian (which my doctor would surely endorse). Fresh veggies are only +4.3% more costly than a year ago. I suppose at some point, I may even start eating less (which my wife would surely endorse).

In running through my financial blogs this morning, I learned that, according to data from the Commerce Department, corporate profits jumped by +35% last year. Corporate margins stayed above 13% for all 4 quarters. In the past 70 years, that only occurred 1 other time, for a brief 3-month period. I think that it is safe to say that firms are healthy, despite cost pressures. They remain rational and they are raising prices to keep those margins at record highs. They are doing so BECAUSE THEY CAN. But they cannot do it endlessly. Yesterday, Personal Consumption Growth, was revised downward to +2.5% from +3.1%. It is likely that consumers are starting to react to higher prices. This morning we will get a fresh view of Personal Spending and Personal Income. Both are expected to have grown by +0.5% in February. We are also going to get the PCE Deflator, which is the Fed’s favored inflation metric. That is expected to come in at +6.4%, nearly 3 times larger than the Fed’s +2% inflation target. I generally prefer mustard with my pigs in blankets, but I might just go without it. It has become too expensive.

WHAT’S SHAKIN’

Westinghouse Electric Brake Technologies Corp / Wabtec (WAB) shares are higher by +1.35% in the pre-market after announcing that it had won a large maintenance contract from Indian Railways. Wabtec has a forward P/E of 20.41x which is slightly higher than the median 17.38x of its peers.  Dividend yield: 0.61%.  Potential average analysts target upside: +6.1%.

Advanced Micro Devices Inc (AMD) shares are lower by -2.03% in the pre-market after Barclays cut the stock’s rating to EQUAL-WEIGHT on, what it cites as, end market risk. The stock currently sports a forward PE of 28.6x, which is lower than its 42.3x average over the past 2 years. Potential average analysts target upside: +25.4%.

YESTERDAY’S MARKETS

Stock slipped yesterday as Russia downplayed progress made in peace talks with Ukraine. The S&P500 fell by -0.63%, the Dow Jones Industrial Average gave up -0.19%, the Nasdaq Composite Index traded lower by -1.21%, the Russell 2000 Index dropped by -1.97%, and the S&P500 ESG Index was lower by -0.64%. Bonds climbed and 10-year Treasury Note yields fell by -5 basis points to 2.34%. Cryptos lost -0.42% and Bitcoin slipped by -0.44%.

NXT UP

• PCE Deflator (Feb) is expected to come in at +6.4%, an uptick from last month’s +6.1% inflation reading.
• Initial Jobless Claims (March 26) is expected to print at 196k while last week’s reading came in at 187k.
• MNI Chicago PMI (March) may have climbed to 57.0 from 56.3.