Time seems to have frozen
But the mind can be fooled
As the days pass I discover
Destiny just can't be ruled
Oh hard times
For the prize, yes the prize
I thought I knew
Oh it's the price we gotta pay
And all the games we gotta play
Makes me wonder if it's worth it to carry on
'Cause it's a game we gotta lose
Though it's a life we gotta choose
And the price is our own life until it's done
- "The Price" Dee Snider, 1984 (Twisted Sister)
Environments evolve. So must the creatures that find it necessary to either dwell in or traverse through any ecosystem, whether or not there is intent to remain in place. Or move on. On Tuesday, both Home Depot (HD) and Walmart (WMT) reported their third quarter financial performance. Intraday equity performance aside, both firms impressed. What the two retail giants shared specifically was same stores sales numbers that blew the doors off of what had been the consensus view.
A short while later, the Census Bureau reported U.S. October Retail Sales. Again, the numbers reported were jaw dropping. Month over month growth of 1.7% at both the headline and the core. Year over year growth of 16.3% at the headline, an incredible 17.6% at the core. Despite the truly awful pace of consumer level inflation, there remains an ongoing appetite for goods, far more than for services. Estimates are that the month over month 1.7% increase in retail sales would be more like 0.8% if the Census Bureau adjusted for inflation, which it does not.
That's still quite healthy. I think. Given that according to the University of Michigan, it has been a decade since U.S. consumer sentiment has been this miserable. The proof is in the pudding however. Sales, in dollar terms of gasoline, and building materials, as well as at both non-store retailers (e-commerce) and department stores grew above trend in October. Overlooked are the facts that sales of furniture grew well below trend (despite a housing boom), and sales of food services were flat in October from September. Sales at apparel sellers and at health/personal care stores actually fell into outright contraction. This growth is lumpy, and as velocity, an ingredient most essential to any sustained increase in consumer level pricing remains subdued, inflation, as painful as it is, remains as erratic as is total demand.
St. Louis Fed President James Bullard, who will be a voting member of the FOMC in 2022, appeared in the media on Tuesday morning. On the forward looking trajectory of monetary policy, Bullard said that "Tracking hawkishly now could pay great dividends for the committee in the year ahead." Bullard also mentioned the ideas of ending the tapering of the Fed's monthly balance sheet expansion program by March, and allowing a runoff of the balance sheet once that purchase program is unwound instead of waiting to make that decision. As if that were not enough, Bullard also brought up the idea of raising short-term interest rate targets prior to the end of such purchases as a means of taking inflation head on in the near-term.
While you all know that I think that monthly purchases of mortgage backed securities should have been halted in January 2021 (10 months ago), that I also had no problem with the pace of Treasury security purchases made over the past year, as I do believe that this at least served the twin purposes of maintaining a reduced cost of credit while funding the needs of the federal government through a crisis. While I am fully on board with tapering these purchases, I can not even fathom raising rates until the program has wound down to zero.
Quite obviously, the US Dollar Index, "The Dixie", ran to 16 month highs on the comments as yields for the US 10 Year Note and US 30 Year Bond kissed the 1.65% and 2.04% levels, respectively. Not to mention, emerging market currencies did a swan dive off of the high board in response as well. The Turkish Lira hit a record low in U.S. dollar terms. The South African Rand hit its lowest mark in eight months.
Elsewhere, Treasury Secretary Janet Yellen wrote to Congress. One must understand that in the aftermath of the bipartisan infrastructure bill now signed into law, the U.S. Treasury must transfer $118B to the Highway Trust Fund on Dec. 15. Yellen writes... "While I have a high degree of confidence that Treasury will be able to finance the U.S. government through December 15th and complete the Highway Trust Fund investment, there are scenarios in which Treasury would be left with insufficient remaining resources to continue to finance the operations of the U.S. government beyond this date."
In plain English, Janet Yellen thinks that without action taken to increase the debt limit, the jig is up either on, or very shortly after Dec. 15. Happy Holidays. We all know that a stronger dollar makes for a tougher environment for large multinational corporations, while easing conditions for international travel. Well, not too many folks travel abroad these days, so that's not much of a help. A stronger dollar would also act as a deflationary force upon the economy, while attracting foreign investment. Unless, we're not paying our bills. What then? This needs to be a legislative priority. Like yesterday.
The most startling takeaway from Tuesday, I don't think came from our financial markets. The Baltic Exchange Dry Index fell more than 6% on Tuesday, and has fallen like a sinking rock in a wade pool since peaking in early October. Obviously all of our screaming banshees who like to appear in the financial media and go on and on about how the current surge in consumer level inflation is not transitory in nature don't pay much attention to facts that stand in conflict to that narrative. This index, which provides a benchmark for the price of moving major raw materials by sea... now stands at its lowest level since early June.
While I, in no way claim that "we" are out of the woods on inflation, and while I do not see "us" going back to sub 2% inflation any time soon, I think that the performance of this index going into the holiday season along with still in decline metrics for velocity as a percentage of money supply clearly illustrate an environment where the pace of acceleration in consumer pricing can not be sustained for more than a few months into the new year.
There will be a number of supportive factors that will prevent the disinflationary forces of technological progress and cheapened globalized labor force from fully reasserting themselves for sure. Paying a living wage to a more organized labor force will be a byproduct of shortened supply lines. This evolution will take up to a decade, I believe to reach maturity, and will force higher user-end pricing to a degree. Then there is ESG style investment and the transition to cleaner energy. This cycle is in its very early innings and will remain far from reaching maturity even long after I have breathed my last breath and thought my last thought. Though resultant in support for inflation at a level, perhaps 3%+, are not these last two forces worthy? If they result in a more sustainably livable planet and broaden the prospects of the middle to lower classes? Just a kid and his ideas. 86 days til pitchers and catchers. Unless there's a strike/lockout. Don't even think it.
By the Way...
You may have noticed that market breadth wasn't so hot on Tuesday. While all of our major equity indices appeared to shade green for the session led by the Nasdaq Composite and Nasdaq 100, six of 11 S&P sector select SPDR ETFs closed in the red, led lower by Communication Services (XLC) and Consumer Staples XLP. Consumer Discretionaries XLY led performance to the upside as Home Improvement retailers and electric vehicle manufacturers went on yet another daily rampage.
Losers did beat winners at both of New York's primary equity exchanges. Aggregate trading volume expanded for names domiciled at both exchanges, with advancing volume comprising just 39.1% of that composite for NYSE listed names, but 55% of the composite for their Nasdaq listed counterparts.
- Readers probably noticed Sarge fave Lucid Group (LCID) surpass Sarge fave Ford Motor (F) in market cap on Tuesday. I did take a little something off of my long position in Lucid. I don't love the name any less, and I still think CEO Peter Rawlinson is pretty darned cool. That said, I love, love, love when a name offers up a chance to play with only house money so darned quickly. That's where I am trying to get with this one. No, I haven't sold any Ford recently.
- I gave thought to selling some rising quantum computing leader IonQ Inc (IONQ) that took off on earnings news Tuesday. I had been in and out of this name for weeks, as this name has been an excellent vehicle for short-term trading. The company still lost money on little revenue, but did increase guidance for TCV (total contract value) bookings. It does appear that Wall Street is finally starting to catch on to this one.
- Redwire Corporation (RDW) appeared to respond in lackluster fashion to news that the firm would provide navigation components and roll out solar array technology to NASA for the world's first planetary defense test mission. How cool is that? This is a name that on every dip close to and below the $10 level, I have been adding to, and has become my tenth largest holding.
- As advertised in this column. Walmart sold off on very nice earnings. Also as advertised in this space, I added to the name from $145 down to $142. My pivot remains $152, my target... $180, and my panic point... $140.
- I wrote to you on Tuesday to tell you that I would not be chasing Home Depot. I did one better than that. I shorted the equity later in the day ($393 to $394), and made a little lunch money on the name. I did save a small portion of the cover for this morning.
Economics (All Times Eastern)
08:30 - Housing Starts (Oct): Expecting 1.582M, Last 1.555M SAAR.
08:30 - Building Permits (Oct): Expecting 1.63M, Last 1.586M SAAR.
10:30 - Oil Inventories (Weekly): Last +1.001M.
10:30 - Gasoline Stocks (Weekly): Last -1.555M.
13:00 - Twenty Year Bond Auction: Last $23B.
The Fed (All Times Eastern)
09:10 - Speaker: New York Fed Pres. John Williams.
11:00 - Speaker: Reserve Board Gov. Michele Bowman.
12:40 - Speaker: Cleveland Fed Pres. Loretta Mester.
12:40 - Speaker: San Francisco Fed Pres. Mary Daly.
12:40 - Speaker: Reserve Board Gov. Christopher Waller.
16:10 - Speaker: Atlanta Fed Pres. Raphael Bostic.
17:05 - Speaker: Chicago Fed Pres. Charles Evans.