Stocks gained yesterday fueled by weaker than expected housing numbers which investors hoped would temper the ill-tempered Fed. The slightly weaker dollar provided additional buoyancy to equity indexes.
You know what they say. So, it has been a while since I opened my book of Wall Street sayings for you, but given yesterday’s news, I feel that now might be the time to break out an old one, and perhaps, add a new one. First, let me just briefly touch on yesterday’s economic news. Home prices fell by -1.32% in August according to the latest Case-Shiller Home Price Index. That marks a second straight month of declines and is the single largest monthly decline since 2011. That shouldn’t be a surprise given the meteoric rise in mortgage rates. It is also proof that the Fed’s inflation-fighting activities are beginning to bite. We also learned yesterday that Consumer Confidence is sinking, according to the latest number from the Conference Board. The lower-than-expected print is another sign that the Fed’s tighter monetary policy is beginning to weigh on consumers. The economic headlines played a hand in yesterday’s decline in Treasury yields giving the “all-clear” to growth equity bulls. Now on to my book of Wall Street adages.
There were some other releases that caught my attention yesterday. Chipotle Mexican Grill (CMG) released its earnings and surprised analysts with greater than expected same-store sales. What caught my eye was the admission by the company that the growth was due to price hikes. The company raised prices by +4% last quarter, but consumers were undaunted. Next came Visa Inc. (V), which announced that it beat EPS and Revenue estimates. The company did relay that it has seen a slowdown in payment volume, though it continues to grow above expectations. Further the CEO claims that the company saw “no evidence of consumers, feeling a pinch, consumers feeling anxious.” We also learned that the company has seen gains in travel-related spending resulting from pent-up demand. It is also likely that US consumers are taking advantage of the strong dollar and traveling abroad. Basic economic theory states that higher prices would lead to less demand, which should ultimately cause prices to ease. These results however appear to be defying those principals. Credit card rates have been on a steep climb, but it hasn’t yet deterred the intrepid consumer… nor has a more expensive burrito. What can we learn from these two data points?
Let’s start with an old Ukrainian saying which I learned from my good friend Peter. “The skinny man will die before the fat man gets skinny.” Go on, read it again, if it didn’t hit you yet. If you follow the economic news and you are a regular reader of my daily note, you would probably be surprised that you still cannot get a reservation at that tony restaurant you have been dying to eat at. The key word here, being tony. I am just now browsing the menu at Chipotle in New York City where a Chicken Burrito will cost you $11.10. While that may not seem like a lot, it actually is… for most people. Chipotle is not known for its bargain meals. If we look at Visa’s earnings commentary, we learn that demand for high-end travel and goods remains strong. The key adjective here is high-end. If we look back to the warnings we received earlier in the year from the likes of Walmart and Target, we learned that indeed there are consumers who are shifting their discretionary spending away from goods in order to afford more expensive food. From this we learn that some consumers are, indeed feeling the pinch of not just inflation, but also higher interest rates. Sadly, the skinny man is withering away. Take note of this. I am scrawling this Ukrainian saying into my notebook as I write.
Now, finally, on to one of my favorite old sayings. “Discriminate if you can.” That is an economic strategy where companies will seek to remove as much as possible from your wallet using all means necessary. In this case, companies, like Chipotle will raise already high prices claiming that inflation is to blame. Before you start to feel sympathy for Chipotle, you might want to check out its latest financials. The company’s trailing twelve-month gross margin is 23%... the highest since 2015! As long as consumers are willing to pay more, companies – rational companies, will continue to raise prices. Inflation is far from defeated. Disclaimer: no fat or skinny men were harmed in the writing of this note.
WHAT’S SHAKIN’
Enphase Energy (ENPH) shares are higher by +5.80% in the premarket after it announced that it beat EPS and Revenue estimates by +13.20 and +2.76% respectively. The company also offered Q4 guidance which beat analyst estimates. Potential average analyst target upside: +13.9%.
The Kraft-Heinz Co (KHC) shares are higher by +3.63% in the premarket after it announced that it beat EOS and Revenue estimates by +12.50% and +3.57% respectively. The company’s CEO also announced that the company is planning to raise its prices in the coming months to offset higher production costs. Who doesn’t love ketchup – discriminate if you can. If you don’t love ketchup, you certainly love dividends. Dividend yield: 4.31%. Potential average analyst target upside: +14.2%.
Microsoft Corp (MSFT) shares are off by -6.57% in the premarket after the company announced that it managed to beat EPS and Revenue estimates by +2.59% and +1.14% respectively. Though the company claims demand for its Azure cloud computing service has held up, investors were still disappointed with its cloud revenue growth, which was the slowest in the past 5 years, and due largely to currency headwinds. Dividend yield: 1.08%. Potential average analyst target upside: +22.4%.
Alphabet Inc (GOOG) shares are lower by -6.4% in the premarket after it announced an earnings miss due to slowing advertising expenditures, the company’s key source of revenue. The company, along with its peers, has experienced currency headwinds, which further crimped results. Alphabet CEO announced that the company was employing cost cutting measures and expects to slow its hiring (are you listening, Fed?). Potential average analyst target upside: +18.4%.
Also, this morning: Thermo Fisher Scientific (TMO), Roper Technologies (ROP), Bunge Ltd (BG), Ryder Systems (R), Boeing (BA), Waste Management (WM), General Dynamics (GD), and Harley-Davidson (HOG) all beat on earnings and sales while Wingstop (WING) and Seagate (STX) came up short.
YESTERDAY’S MARKETS
Stocks rallied yesterday spurred on by lower bond yields resulting from weak economic numbers. The S&P500 rose by +1.63%, the Dow Jones Industrial Average climbed by +1.07%, the Nasdaq Composite Index jumped by +2.25%, and the Russell 2000 Index advanced by +2.73%. Bonds gained and 10-year Treasury Note Yields dropped by -14 basis points to 4.10%. Cryptos exploded higher by +8.17% and Bitcoin climbed by +4.16%.
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