CONSUMER WATCH
- Both Dollar Tree and Dollar General said on their earnings calls Thursday morning that they are seeing trade-down from customers. Dollar Tree said the majority of new customers are from households with incomes of $80,000 a year or more. Consumers also are continuing to shift their dollars away from discretionary categories to necessities such as food, something that will continue pressuring margins at the dollar stores. Inventory at Dollar General was up 31% last quarter compared with a year earlier, while Dollar Tree carried 48% more merchandise. (WSJ)
- “The macro environment is testing us with simultaneous shifts in consumer behavior and increased cost pressures,” Gap interim Chief Executive Officer Bob Martin said on an earnings call. U.S. apparel chains including Kohl’s (KSS.N) and Abercrombie & Fitch have warned of steeper discounts to offload excess inventory of casual wear, which people donned more during the height of the pandemic.Gap recorded an inventory impairment charge of $58 million and said stocks at the end of the second quarter were 37% higher from last year, although it expects them to fall heading into next year. (Reuters)
OPEC President Is Open to Cutting Oil Production Momentum is building among oil producers behind the idea of cutting crude production to stabilize the market, with OPEC’s president the latest to back Saudi Arabia’s suggestion that the alliance might pump less.
How Extreme Droughts Are Fueling Food Inflation Mexican chili peppers used in Sriracha. Italian risotto rice. American corn that’s used in nearly everything: these crops are vulnerable to high heat, and extreme droughts worldwide are hitting yields, which could mean higher prices for staples this winter. Farmers are feeling the heat as yields are a fraction of normal levels.
- Underwhelming Iowa Corn Crop Sets Stage for More Food Inflation Corn, one of the world’s most-important crops, is used in everything from animal feed to biofuels and sweeteners. A US deficit of the grain would put more pressure on farmers in Brazil to reap a bigger harvest and help replenish global stockpiles.
- The World’s Rivers, Canals and Reservoirs Are Turning to Dust (with many dramatic photos like these two)
The Lake Oroville reservoir in California at the Enterprise Bridge span on July 20, 2011, and on July 6, 2022. Source: California Department of Water Resources via Getty Images; Photographer: David McNew/Getty Images
The Loire River in Varades, France, on Aug. 18. Photographer: Jean-Michel Delage/Hans Lucas/Redux
Mortgage Rates Rise to Two-Month High at 5.55% The average 30-year fixed mortgage rate has nearly doubled from a year ago, the latest challenge for a cooling housing market.
- Blackstone Single-Family Landlord to Halt Home Purchases in 38 Cities Company cites home price growth, market demand, regulations
(…) Home Partners isn’t first large investor to back away from the US housing market, which reached a frenzied state during the first half of the year. Invitation Homes Inc., American Homes 4 Rent, and KKR & Co.’s My Community Homes are among landlords that have slowed purchases during a period of high home prices and rising financing costs. (…)
First, there was a lack of supply. Now, demand is declining.
But Redfin’s latest market update suggests that the cooling of the housing market is cooling:
The housing-market slowdown is starting to slow down. Fewer homeowners are listing their homes due to ebbing homebuyer demand. That’s hampering the recent growth in housing supply that has been forcing sellers to slash their prices. The number of homes for sale during the four weeks ending August 14 fell slightly from the prior four-week period, the first decline since the start of the year, as new listings plummeted 14% from a year earlier—the largest annual drop since June 2020.
With fewer homes hitting the market, the sellers who remain aren’t facing as much competition from other sellers. Consequently, the share of home listings with price reductions—a key gauge of a cooling market—is no longer surging and has leveled off at its record high. The share of listings with price cuts may also be plateauing because sellers are adjusting to the cooler market and pricing more in-line with buyer expectations from the get-go. Following months of declines, the share of homes selling within a week has leveled off at around 25%, another sign that the market slowdown is easing.
“Many homeowners have been reluctant to put their houses up for sale during a market slowdown, which is now holding back inventory growth,” said Deputy Chief Economist Taylor Marr. “That means buyers have fewer homes to choose from and may lose some of their newfound bargaining power, which allows sellers to maintain their list prices instead of having to cut them.”
But affordability remains very problematic:
Dell fans slowdown fears with weak revenue forecast
(…) Industry majors from Intel Corp to Lenovo Group (0992.HK) have warned of a slump in the personal computer market after a two-year boom during the pandemic, with research firm Gartner estimating shipments would drop 9.5% in 2022. (…)
“There’s caution around future hiring, trade-offs within their IT budgets given the macroeconomic uncertainty, customers reducing the size of orders and buying for only immediate requirements,” co-Chief Operating Officer Chuck Whitten said on a post-earnings call.
The company expects third-quarter revenue between $23.8 billion and $25 billion, [-5.1% to -9.6%] below the $26.34 billion estimated by analysts, according to Refinitiv data. (…)
Software demand is also slowing. Salesforce yesterday said that it is seeing “stretched sales cycles, additional deal approval layers and deal compression”.
Royal Mail postal workers launch ‘biggest strike of the summer’ Royal Mail said it offered its postal workers a 5.5 per cent pay increase — below the UK’s 10.1 per cent rate of inflation.
- UK energy regulator increases price cap by 80% A typical household gas and electricity bill will rise to £3,549 a year from £1,971
BETTER LATE THAN … EARLY
From Richard Bernstein Advisors:
Many investors insist on buying early so that they “can be there at the bottom.” Yet history suggests that it’s better to be late than early. (…) we analyzed the returns for the full 18-month period encompassing the six months before and the 12-months after each market bottom. We then compared the hypothetical returns of an investor who owned 100% stocks for the entire period (“6 months early”) with one who held 100% cash until six months after the market bottom, then shifted to 100% stocks (“6 months late”).
In seven of the last ten bear markets, it has been better to be late than early. Not only does this tend to improve returns while drastically reducing downside potential, but this approach also gives one more time to assess incoming fundamental data. Because if it’s not based on fundamentals, it’s just guessing.
As an aside, the only instances in the past 70 years where it has been better to be early were in 1982, 1990 and 2020. But in each of those instances, the Fed had already been cutting interest rates. Given the high likelihood that the Fed will continue to tighten into already slowing earnings growth, it seems premature to be significantly increasing equity exposure today.
INFLATION OR THE ECONOMY?
“That’s easy to say!”
(Bloomberg)
1 thought on “THE DAILY EDGE: 26 AUGUST 2022”
As the risk of US and EU economic recessions are becoming high, inflation pressures could ease sharply and quickly. So the Fed may not need to increase interest rates further once the 10 year T bill rises to about 3.5% in coming months. A prolonged series of Fed rate increases look unlikely under threat of recessions.
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