Stocks had a mixed close yesterday as tech shares held down larger gains with investors erring on the side of caution. Producer prices grew at a slower pace than expected leaving investors wondering if peak inflation has happened.
Who’s crying now? I have been meaning to write about this for some time but was unable to find the right time, but a series of articles that I have read in the past couple of days left me no choice but to share it with you…and it’s Friday. One article was about the rising price of mayonnaise and how it has caused mayhem for struggling restauranteurs, already struggling with higher labor costs. Not so noteworthy on the surface and it was added to the “yeah, we know” folder. However, the article became the source of a local political tiff. We don’t do politics in this note, but we are very much into policy, especially if it affects the economy, the markets, and our wealth. That said, a politician from one party blamed the president from the other party for the pain suffered by the mayo-addicted restaurant. All joking aside, the price of mayo has indeed increased by quite a bit. Get ready because it gets a bit interesting here.
The Consumer Price Index / CPI which came out on Wednesday showed that consumer price growth (aka annual inflation) came in lower than the prior month, and the market celebrated the potential for peak inflation. Great. When we look at the specifics, we note that one of the major culprits for the last years price gains, Energy, had pulled back significantly. That was good news, but we probably already knew that as gasoline prices have been easing. Ok, so that its then? No, the plot thickens. Of all the major groups tracked in the CPI, Food at Home stands as an outlier which grew by +10.9% since last year. Not only that, but unlike energy, it has not been slowly falling, but rather increasing. If we dig further into the food group, we get to the sub-category Fats and Oils, wherein resides mayonnaise. That group has risen by +20.8% since last July, while overall CPI grew by +8.5% over the last year. Ok, so we have corroborated the fact that yes, indeed, mayonnaise costs more this year, by a lot.
Unilever is the maker of perhaps one of the most famous mayo brands, and if you didn’t know, it is mostly they who control the price. So why then would they raise the price so much? Well, if you asked the company, it would tell you that its costs have skyrocketed, labor shortages, and supply chain stuff. We have heard that quite a bit in this earnings season. Ok, so we know that companies are under pressure to keep prices low when their costs are rising. Speaking of that, what actually goes into mayonnaise anyway? If you make it at home (and I have), you need eggs, oil, and lemon juice. If you mass produce it, according to that out-of-date jar in my fridge, you need soybean oil and eggs, amongst many other things which I care not to mention. Now the price of eggs has been on the climb for the past year, something which I have highlighted many times in my note. According to this week’s numbers the price of eggs has increased by +38.0% since last July. Soybeans have also had a rocky ride in the past year. The beans are used for a variety of things including food biproducts, food itself, livestock feed, and… oil. The price of soybeans is affected by crop conditions (supply) and, of course, global demand. In the past year, soybeans have gone up in price by some +17% and +64% over the past 2 years. A big driver of the increase has been strong demand from China as it rebuilds its hog inventories in the wake of a horrible African Swine Flu which devastated pork production. Soy makes up a big part of hog feed, which you need lots of when trying to grow your hog inventory. While we are on the topic of animals, bird flu was the cause for the oversized increase in egg prices in the US. I am sure that I don’t have to tell you that you need chickens to get eggs…or is it the other way around? In any case the skyrocketing price of mayo can be traced back on not one, but two livestock pandemics, so we humans are not alone in our struggles.
Finally, that brings us to Unilever, who has surely struggled to deal with 2 animal pandemics and 1 human pandemic. You would imagine that it would be struggling to maintain its margins in such an environment. Yesterday, we got the Producer Price Index / PPP number which details costs borne by producers, as its name implies. That number came in lower than expected and far lower than the prior month, adding to the growing thesis that inflation has peaked. That is where another article, whose headline caught my eye, comes in. It read something like ”Producer price hikes calming but still growing faster than consumer prices, so companies struggle to be profitable.” Ah, that brings us back to the mayonnaise. It is true that PPI grew at +9.8% and CPI grew at +8.5%, but does that mean that companies are struggling to maintain margins? A quick look at Unilever’s financials reveals that its last reported net income margin of 11.53% is very much in line with the prior 10 years, in fact it is on the higher end of the range. Ok, so that is just one company. What about all the other companies in, say the S&P500? The average profit margin for the S&P500 stands at 11.88%...right below the highest it has been in the past 10 years! In fact, it is right below the highest it has been in nearly 3 decades. Check out the chart below if you don’t believe me. Struggling, indeed.
YESTERDAY’S MARKETS
Stocks closed mixed after giving up earlier gains. The S&P500 slipped by -0.07%, the Dow Jones Industrial Average gained +0.08%, the Nasdaq Composite fell by -0.58%, and the Russell 2000 Index gained +0.31%. Bonds slipped and 10-year Treasury Note Yields gained +10 basis points to 2.88%. Cryptos advanced by +2.81% and Bitcoin fell by -2.85%.
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