Stocks dipped yesterday as investors decided to take some profits on the last day of a tough quarter. Crude oil pulled back after President Biden announced that he would release some of the country’s strategic oil reserves…stocks did not celebrate as expected.
More silly math tricks. Before we get to the math, I want to underscore a point which I have been hammering on a lot lately. As recently as yesterday, in my daily note, I wrote that firms would continue to raise prices BECAUSE THEY CAN…UNTIL THEY CAN’T. Companies are constrained by the laws of economics just like the rest of us. The Demand Curve is downward sloping with the x-axis representing quantity demanded and the y-axis representing price. Because the curve has a negative slope, as prices go higher, demand diminishes. That makes sense, and it is at the very core of microeconomic theory. The big question is, how much can companies get away with price hiking until consumers demand so little that they must lower prices to attract consumers back? We clearly don’t know the answer to that question and, unfortunately, history shows us that it is usually an economic catastrophe that serves as the ultimate motivator for “more is good,” “discriminate if you can,” “rational” companies. In other words: recession. Well, hopefully not in this case. Yesterday, we had a sign that perhaps economic forces are at work. The Bureau of Economic Analysis released its Personal Spending number, which showed that consumers grew their spending by +0.2% in February, far less than economists’ estimates of a +0.5% growth. What’s more, February’s growth was less than January’s +2.7% upward revised growth. SO, consumers are slowing things down a bit, likely a result of higher prices and declining confidence. Hopefully, firms will act “rationally” in the other direction and tamp down the price hiking to win back customers. That, along with some nudging by the Fed (hopefully, not too much too fast) gives us a chance to gain a so-called “soft landing.” That means escaping runaway inflation without going into a recession. Now, on to the math…
In economics, we have a concept called base effect. It sounds snazzy but it is really just basic math…really basic math. As you might have noticed that when most of us think or talk about inflation, we are referring to an annual number. Let’s go back to poultry from yesterday’s note as an example. I told you that Frozen Chicken Parts will cost you +15% more than a year ago. That is a year over year increase. When we talk about inflation in general, we say things like “inflation is at +7.9%.” That simply means that the actual Consumer Price Index is +7.9% higher than it was on February 28th of last year. Ok, fair enough, but here is where the magic happens. You may recall that, last spring, prices really started to pick up on a month over month basis. Starting last March, the CPI grew by +0.6%, +0.6%, +0.7%, and +0.9% in succession through June. Assuming that monthly CPI growth begins to ebb in the coming months, when compared to spiking levels a year ago, just by plain math alone, the year over year CPI growth rate will begin to fall. The base month, when calculating annual growth, goes up faster than the current one. That is how we come up with base effect, and the Fed is counting on that to help their case not to have to raise rates too quickly and increase the risk of recession. Hmm, interesting math tricks you can do without a calculator. Notice how I employed the word assuming, in my description. It is perhaps a bit early to assume that CPI will start to flatten out going into summer as the recent spike in energy has not yet even been factored into already high gasoline prices…which grew, according to last month's CPI reading by +38.0%...from a year earlier. Try the math and be mystified.
WHAT’S SHAKIN’
Activision Blizzard Inc (ATVI) shares are lower by +0.14% after a group of US Senators pressured the FTC to review Microsoft’s bid to acquire the company. The company is not due to announce earnings until 5/4. In the past month, analysts have increased their EPS targets by +1.61%. Dividend Yield: 0.59%. Potential average analyst target price upside: +17.6%.
GameStop Corp (GME) is trading higher by +15.56% in the pre-market after it announced its intention to get approval for a stock split in the form of a stock dividend. The meme stock is up by +12.26% year to date but has lost around -13.0% from a year earlier. Potential average analyst target price upside: -64.0%. That is not a typo and WHY IS THIS NUMBER NEGATIVE? Because the current share price is higher than the average analyst price target for the stock. While that may be viewed as the stock’s being overvalued, it does not mean that it could not continue to rise.
YESTERDAY’S MARKETS
Stocks declined yesterday pushing lower into the close as investors took profits on the last day of the quarter. The S&P500 fell by -1.57%, the Dow Jones Industrial Average lost -1.56%, the Nasdaq Composite Index gave up -1.54%, the Russell 2000 Index dropped by -1.00%, and the S&P500 ESG Index slipped by -1.66%. Bonds climbed and 10-year Treasury Note yields declined by -1 basis point to 2.33%. Cryptos fell by -2.65% and Bitcoin traded lower by -3.19%.
NXT UP