There are two ways to react when the market goes against you for a few days. First, is to write columns for a widely-read financial publication, in which you call government lackeys "idiots" and Wall Street stock-pushers "con artists." Or, you can take the other side of the trade. Can you guess my route?
Remember that those who are telling you now that "inflation is peaking" are doing so based on an outdated government report. These people were so wrong, and so off-base with their "transitory" call that, by all means, you should listen to them. Not.
Inflation will only begin to decrease in the real world, the one inhabited by Target (TGT) CEO Brian Cornell, not Fed Chief Jerome Powell and Co., when at least one of the three legs of its painful stool is knocked away:
1) Higher energy costs
2) Higher labor costs
3) De-bottlenecking supply chains
Well, let's look at today's data, not last month's government data, or three-week old Fed minutes.
Let's start with No. 1. For energy prices, I use the excellent site, oilprice.com. Down slightly today on WTI/Brent and natural gas at the Henry Hub, but look at the prices of $113 per barrel to $117 per barrel and $8.50 per million British Thermal Unit (BTU). If you think WTI/Brent/Henry Hub are not inflated vs. recent norms then ... you are delusional.
Now, No. 2, labor. Apple (AAPL) just announced that it would increase minimum hourly pay for its staff to $22/hour, a 10% increase on last year's pay. Also, Bank of America (BAC) , will reportedly up its minimum wage to $22 an hour by the end of next month -- and to $25 an hour by 2025. In 2017, that amount was $15.
BAC will also, bizarrely, give employees a $4,000 credit toward the purchase of an electric vehicle. Where do people think this money comes from? Pluto? Fairy dust? No, it comes from corporate profit margins, which, as I noted in yesterday's column. are myopically forecast by The Street to be essentially flat in 2022 with 2021.
Finally, No. 3. Check out this graphic from the New York Fed, based on a recently-introduced data series. Of course the Fed should have been publishing data all along, but it is progress in transparency. With supply chain pressures as measured by the Fed running at three standard deviations from average value, that is incremental cost to companies. And those have to be passed through to the end consumer.
Inflation!
So, what makes the market think that inflation is peaking? A stale data point and some useless banter from clueless Washington apparatchiks? I trust the CEOs and what they are telling us: The second quarter is going to be awful. From Target's Cornell to Snap's (SNAP) Evan Spiegel, the public discussions are rife with profit warnings. But, remember that there are also private discussions. I was a sell-side auto analyst for a decade, and I know that mid-quarter is when corporate IR departments start calling around to analysts to fine-tune estimates, for example, lower them.
That is exactly what is happening now with Tesla (TSLA) . Dan Ives from Wedbush, who seems to me a big Musk fan, actually cut -- cut -- his Tesla estimates last week. Then, voila!, I read today that CS's Dan Levy cut his TSLA second-quarter delivery estimates to 240,000-250,000 units from a prior estimate that was nearly flat with the first quarter reported figure of 310,000 units.
You have to pay attention. Companies are telling you that the U.S. economy is getting worse, just as Wall Street is telling you the worst is over. Who you gonna believe?
There are some independent voices out there. Yesterday I quoted Ed Yardeni and today I quote John Butters from FactSet. These gentlemen are not making earnings per share estimates, merely compiling Wall Street estimates into usable form.
According to FactSet's most recent Earnings Insight: "Looking ahead, analysts expect earnings growth of 4.1% for Q2 2022, 10.1% for Q3 2022, and 9.8% for Q4 2022."
Nope. Apart from Energy, there is no real earnings growth in the U.S. economy. This is especially true especially on a sequential basis, which is how tech companies are judged. According to Butters' figures for consensus, Wall Street expects S&P 500 EPS to increase in 2Q22 to $55.51 from the $53.96 reported in 1Q22 and the $52.80 recorded in 2Q21.
Costs are rising, units are declining, and earnings are going to grow? Fantasy. Fade this rally. Keep rebalancing your portfolio away from tech and towards energy.
