Chickens don’t really fly, but their prices do

Stocks closed out last week in a bumpy session, first elated by a soft employment number, ultimately soured by the earlier-in-the-week Fitch downgrade. A tepid employment number may mean that the Fed will hold off on further cuts while waiting for some clear signs -either way- from economic numbers.

Come on, it’s just math. I try not to hit you with mathematics too early in the weekly report cycle, but I feel compelled, given last week’s economic and earnings releases, and the ones we expect to get in the week ahead, to post one of my “It’s Just Math, Stupid” reminders. Today I am going to REMIND YOU (because I have written about this several times in the past) about the base effect.

In simple terms, think about a scenario where you were there and now you are here. There might have been when you were driving on a superhighway at, say 65 miles per hour (~104 Kilometers per hour). Here might be after you exited the freeway and are now driving on a local road at, say, 25 MPH (~40 KPH). If you were driving to your mother-in-law's house for Sunday dinner, you may feel like your progress has been hindered because Now you are moving at a slower pace than you were Before. That is the basis for the base effect.

Now, let’s apply the same logic to, say Apple… the stock, because, after all, this is a daily market note . Do you remember 2020 and 2021? Sure, you do. You were stuck at home for a good chunk of time. You couldn’t travel easily, and you relied HEAVILY on technology to connect you to the outside world. Those connections allowed you to work remotely, shop online, communicate with loved ones, order your food, exercise, and even to take in new forms of entertainment. You probably purchased a new smartphone, tablet, or laptop during that time. It wasn’t easy, because supply chains made supply short and the surge in demand further pressured inventories. This scenario of high demand was a boon for Apple and many other consumer electronics companies who all experienced record sales growth. I feel like I have to show you a chart for you to see exactly what analysts were expecting in iPhone sales revenue from 2018 onward to get an idea of what that looks like (I use analyst estimates, because the company does not report handset sales, but the estimates are close enough to illustrate). Check it out and keep reading.

I am sure this does not surprise you, given the scenario I described. Clearly there were other factors than just pandemic demand, but the demand surge was a primary factor, and it effected so many of Apple’s competitors as well. You can see how by late 2022, iPhone sales were speeding on the superhighway. Year over year growth for 2021 was +34% by the end of last year, that growth had slowed to +0.8%, and ultimately declined through the first 2 quarters of this year. Apple just announced its earnings last week, and the numbers were not encouraging . It was clear that Apple had exited the superhighway and slowed its speed. HOWEVER, as you can see by the chart, Apple is still traveling quite a bit faster than it was in 2020 and prior to the pandemic. This is the base effect. When you look at things through this lens , the situation may not be so dire, especially considering that analysts are expecting iPhone revenues to start to speed up again with an annual increase of +2.43% this year and +7% next year. Clearly, +34% was better, but +7% is not too bad, however, the base effect makes it feel, um… not so good.

That is a case where the base effect may make a solid growth appear weaker. The same concept can be applied to inflation. I won’t get too far into it, but similar drivers for Apple’s success in 2020-2022 caused inflation to hit multi-decade highs. If you think about where inflation was this time last year versus where it is now, you will feel like runaway price increases have left the superhighway and now travel on local, slower roads. HOWEVER, prices remain high, and prices DO continue to climb, albeit at a slower pace. The base effect, where we were versus where we are, makes inflation seem more tenable.

Later this week, when we receive the Consumer Price Index / CPI, a +3.3% expected print may feel nice compared to the +9% CPI we had last June, but you know that the good feeling you are experiencing is only the base effect, and that we are still far from exiting the woods. Inflation already began to slow in the final 2 quarters of 2022, so comparing inflation to those quarters in the quarters ahead… may not feel so good . It’s just the base effect. It’s just math.

WHAT’S HAPPENING IN THE PREMARKET?

Tyson Foods Inc (TSN) shares are lower by -5.42% in the premarket after it announced that it missed EPS estimates by -3.67%. The company also tempered its full-year guidance below analysts’ expectations. The silver lining in Tyson’s slimmer margin forecasts, is that the company expects prices of protein to be cheaper by the year’s end. Dividend yield: 3.4%. Potential average analyst target upside: +4.3%.

Berkshire Hathaway (BRK.A / BRK.B) shares are higher by +1.63% in the premarket after it announced, on Saturday, that its revenues exceeded estimates resulting from strong performance in its insurance holdings. The conglomerate has risen by +13.3% year to date, and is just below its all-time high. Potential average analyst target upside: +8.6%.

Also, this morning, Clear Channel Outdoor Holdings, Elanco Animal Health, KKR, and Viatris all beat on EPS and Revenues.

FRIDAY’S MARKETS

NEXT UP

• No economic releases today.
• Today’s Fed speakers: Bostic and Bowman.
• Later this week: we will get lots of earnings, significant treasury auctions, along with Consumer Price Index / CPI, Producer Price Index / PPI, and University of Michigan Sentiment. Check out the attached calendars for times and details.