THE DAILY EDGE: 27 AUGUST 2021

Personal Income and Outlays, July 2021

Just out this morning:

• Wages keep accelerating. YtD: +6.4% a.r.; last 3 months: +10.4% a.r.; last 2 months: +11.3%; July: +12.7% a.r..
• Total Compensation of Employees: last 3 months: +10.0% a.r.; July: +11.4% a.r..

• Real expenditures remain stable at high level, +2.7% above their pre-pandemic level.
• Real spending on durables has declined since the March peak but are still 20.8% above Feb. 2020.
• Real services are slowly climbing back.

• PCE inflation eased from +0.55% monthly between March and June to +0.41% in July, still high at +5.0% a.r..
• Core PCE inflation was “only” 0.3% in July (+3.6% YoY); +5.8% a.r. in the last 5 months, +5.7% in the last 3months. The expected “transition” has yet to begin…
• Durable Goods PCE inflation was “only” 0.3% MoM in July (+7.0% YoY).

Retail company conf. calls suggest that August sales were quite good:

• “our traffic patterns, I think, represent that, as we see this consistent flow of traffic into our stores. So a very resilient consumer, and we’re seeing that as we start the third quarter, that traffic pattern and that resilience is continuing.” – Target (TGT) CEO Brian Cornell
• “In terms of the third quarter, we are very pleased that overall open-only comp-store sales trends are up very strongly to start the quarter at the mid-teens level. This is despite what we believe is a negative sales impact from the Delta variant that we’ve seen since the last week of July.” – TJX (TJX) CFO Scott Goldenberg

But cost and selling price inflation is still very much present from many conf. call participants:

• “As we look ahead, wage inflation is expected to remain at headwinds. The employment market remains very tight.” – Kohl’s (KSS) CFO Jill Timm
• “…labor is our number one challenge. (…)labor is our single biggest issue we face (…). We’ve increased wages and created flexible shifts and childcare onsite clinics.
• “We’re seeing general inflation price increases. We were seeing general inflation everywhere. It is very real because there’s underlying cost increases around labor and materials. And one of the things I’ve always said is, this is affecting this entire industry. It’s not affecting Samsonite and so we will be adjusting prices and the whole industry will be adjusting prices.” – Samsonite International (SMSOF) CEO Kyle Gendreau
• “…we’re seeing a less promotional environment and rising inflation, as well as stronger sales in our apparel categories.” – TJX (TJX) CFO Scott Goldenberg
• Historically, the typical spike above $900 has lasted two to six months. We’re now seven months into the current cycle. We were somewhat insulated from higher steel prices in the first half of 2021 due to advanced contracts, which were negotiated late last year. However, in the second half of the year, we are experiencing significant headwinds from higher steel prices.” – Lear (LEA) SVP & CFO Jason Cardew.

From recent Fed surveys:

• K.C. Fed: The new orders index increased to a near-record 34 this month after rising to 26 in July. Supplier delivery times rose to 41 and matched the record, indicating very slow delivery speeds. On the inflation front, the prices received index for finished products strengthened to a new record 61 in August from 52 in July.

• Philly Fed: On the pricing front, the index of prices paid strengthened to 71.2 from 69.7, but remained below the June high of 80.7 which was the highest reading since 1979. Seventy-four percent of respondents reported paying higher prices versus 72.1% in July while a steady 2.6% reported paying less. The index of prices received strengthened to a near-record 53.9 from 46.8 in July.
• NY Fed: The prices paid index fell to 76.1 from 76.8 in July, and stood below the record 83.5 in May. Seventy-seven percent of respondents indicated higher prices while only 0.9% paid less. The prices received measure surged to a record high of 46.0.
• Richmond Fed: Survey contacts also noted that lead times continued to increase and inventories remained low. Survey results suggested that many firms increased employment and wages in August, as the wage index hit a record high. Firms struggled to find workers with the necessary skills, and they expected these trends to continue in the coming months.

  

• Canada Sees Supply of Main Crops Dropping 26% on Drought Impact

(…) Erratic weather globally is helping push prices of staple crops including wheat to multiyear highs. The outlook for the sharp drop in Canadian supplies also comes with a forecast for the nation’s grain prices to remain high at a time that food inflation is already being felt in consumers’ wallets.  (…)

Total supply in principal field crops is expected to fall sharply “due to the low level of carry in stocks combined with lower production.”

Canada is forecast to harvest 71.8 million metric tons of all principal field crops this year, down 27% from 2020-21. Total supplies will tumble to 85.4 million tons while inventories at the end of the year are pegged at 6.7 million tons, down 36%.

Canola production is seen at 15 million tons, down 20% from last year, while Canadian farmers are expected to harvest 20.2 million tons of wheat, down 43%.

• Poor Monsoon May Hurt India Oilseed and Cotton Output, NCML Says

HP, Dell See Swelling Backlogs Amid Hot Demand for Computers HP and Dell are experiencing demand for computers that is outpacing their ability to satisfy customer orders as shortages and supply-chain issues hold back sales growth.

(…) International Data Corp., one of the leading research firms that tracks device sales, this week cut its projected 2021 PC shipments growth to 14.2%, from 18%, citing shortages and logistical issues. It added that PC demand should persist, though, particularly from the business and education sectors.

“We are selling everything that we build,” HP Chief Executive Enrique Lores said Thursday. “Demand continues to be strong and the backlog continues to grow,” he said in an interview, adding that the amount of orders taken in and yet to be fulfilled was the equivalent of a full quarter’s business.

Mr. Lores said HP was seeing mostly shortages in low-cost components that are used across industries and said he expected those to stretch possibly into early 2022.

Intel Corp. INTC -1.26% Chief Executive Pat Gelsinger has said he expects the semiconductor shortage that has driven up prices for consumer gadgets to potentially stretch into 2023. (…)

• Best Buy Bolsters Inventories Ahead of the Holidays Retailer says stocks are strong despite supply-chain disruptions, product shortages

(…) Merchandise inventories of $6.4 billion at the end of the fiscal quarter ended July 31 were 55% higher than the same point a year ago, and 23% above the level two years ago, Best Buy said in releasing quarterly earnings Tuesday. Executives said the retailer has pulled forward orders for goods earlier than normal and added to its transportation purchasing to rebuild inventories that were depleted over the past year by pandemic-related disruptions.

Company executives are “very confident that we are going to have inventory to meet and support the demand of our customers,” Chief Financial Officer Matthew Bilunas said during a Tuesday earnings call. (…)

• Who’s really feeling the shipping cost squeeze? The bulk of the burden is falling on smaller customers as shipping freight rates decommoditise. “Being big is really a massive competitive edge in this market,” says Patrik Berglund, CEO of Xeneta. “If this [tightness in the market] lasts, the bigger firms could snatch even more of the advantage.”
• “We do not expect freight rates to stabilize in the near term,” according to Karsten Michaelis, head of ocean freight at DHL Global Forwarding Asia Pacific. “The combination of a year of disruption, lack of containers, port congestions and a shortage of vessels in the right positions is creating a situation where cargo demand far exceeds available capacity.” (Bloomberg)

• “Our average freight rates increased by 59% in the quarter, driven by demand surges across all regions and by a combination of higher long- and short-term freight rates. On East-West, the average freight rate increased by 67.5%, driven by the bottlenecks seen across the supply chains on both China, U.S. and China, Europe. As you can see from the table, also the North-South trades have contributed positively to the performance with a strong rebound in volume growth and a 54% increase in freight rates” – A.P. Møller – Mærsk (AMKAF) CFO Patrick Jany
• “We’re getting access to that inventory, and our stores are at this point ready for the school season, the college season … and we’ll be ready for the holidays. We have a lot of inventory flowing our way right now…Our consumers are excited about the holiday season. They’ll be cautious, but they want to get together with friends and family.” – Target (TGT) CEO Brian Cornell
• “We’ve chartered vessels, as Brett said, we’ve secured capacity for the Third and Fourth Quarter and feel good about the inventory positioning particularly compared to last year with inventory up 20% across the segments. So I think we’re in good shape going into the fourth quarter — third and fourth quarter” – Walmart (WMT) President and CEO of Walmart U.S John Furner

Manufacturing new orders remain very, very strong, significantly exceeding their pre-pandemic level (+18%) and previous cyclical highs:

Amid this strong demand, inventories are exceedingly low:

(Bloomberg)

So, however strong input inflation is, this is a “price takers” economy, globally:

Also inflating per Axios:

• While BofA maintained its bearish year-end S&P price target of 3,800, Wells Fargo made waves on Tuesday cranking up its target to 4,825 from its prior target of 3,850.
• This implies another 8% gain in the market by the end of the year from Thursday’s close.
• “Strong returns beget higher prices,” Wells Fargo strategist Chris Harvey said. “Over the last 31 years, there have been nine instances where the S&P 500 had a price return of 10%+ in the first eight months of the year; over the next four months, the index averaged another +8.4%.”

“the only thing we have to fear is…fear itself”

This is the background to Jackson Hole day. All eyes are on Jerome Powell, with expectations he may deliver a clear outlook for winding down QE—or prove one giant damp squib. Failure to give the nod today may constrain the Fed from starting its taper later this year, without surprising markets, but the delta variant has ramped up uncertainty. The long-awaited speech takes place virtually at 10 a.m. ET. (Bloomberg)

While the Treasury cash balance is back to normal, which means that Treasury borrowings will also get “back to normal”.

Really just FYI:

Skin in the Game: FOMC Style

(…) According to disclosures required by the Orwellian-sounding «Office of Government Ethics» (OGE), FOMC-chair Jerome Powell’s private incentives are for continued inflation of asset prices.

(…) we don’t know Powell’s exact net worth as it stood at the end of 2019, but we do know that it was somewhere between $18m and $55m.

(…) the following chart shows our calculations of the ranges given in the OGE filings for the calendar year 2019. (…)

Powell has been consistent in his communication to the market that the Fed expects the current CPI surge to be «transitory», to use its recently coined watchword. Rest assured, he and other senior policy makers like Treasury Secretary Janet Yellen have repeatedly affirmed, the Fed had the tools to act should its benign view of inflation prove incorrect and will not hesitate to use them should the necessity arise.

Yet in his July 14^th semi-annual report to the Congress, after three consecutive CPI prints in excess of market expectations there was no use of the word «transitory». The emphasis instead was on a quiescent inflation market. Unemployment, meanwhile, had «a long way to go» before meeting the Fed’s full employment goal, and the Fed stood to deliver «powerful support to the economy until the recovery is complete.» (…)

China to Sell 150,000 Tons of Metals From Reserves on Sept. 1

The National Food and Strategic Reserves Administration said Friday it will sell 70,000 tons of aluminum, 50,000 tons of zinc, and 30,000 tons of copper, quantities in line with the two earlier auctions that took place in July.

China skipped selling metals in August because of a spike in coronavirus cases, according to a Shanghai Metal Exchange report. The reserves bureau has so far released a total of 270,000 tons of the three metals as part of Beijing’s wider pledge to rein in markets after this year’s commodities rally stoked concerns over factory inflation. (…)

Not much impact so far:

China Plans to Ban U.S. IPOs for Data-Heavy Tech Firms China plans to propose new rules that would ban companies with large amounts of sensitive consumer data from going public in the U.S., a move that is likely to thwart the ambitions of the country’s tech firms to list abroad.

China Securities Regulatory Commission officials said that companies with less sensitive data, such as those in the pharmaceutical industry, are still likely to receive Chinese regulatory approval for foreign listings, according to the people.

The new rules are likely to help Beijing exert more control over the complex corporate structure that China’s biggest tech companies use to sidestep restrictions on foreign investment. Chinese leaders consider sectors such as the internet, telecommunications and education sensitive because of political or national-security concerns. (…)

The new rules have yet to be finalized. The CSRC plans to implement them around the fourth quarter, and have asked some companies to hold off on overseas IPOs until then, the people said. (…)

In some of the recent meetings with companies and international investors, CSRC officials complained about the U.S. Securities and Exchange Commission’s plan to increase scrutiny of Chinese companies selling shares in the U.S., calling their approach heavy-handed, according to people familiar with the matter. The Chinese officials said some of the SEC actions have deepened the distrust between the two countries.

Chinese officials also complained in the meetings that the SEC didn’t reply to some of their proposals regarding the use of audit documents, the people said. The audit documents have been a centerpiece of the discussion between the two regulators and triggered Didi’s recent data security investigation. (…)

THIS TIME IS DIFFERENT! Really?

The Social-Media Stars Who Move Markets Young investors are turning to a new generation of stock pickers—many without formal training—for advice. For these would-be Jim Cramers, staying popular means never criticizing a meme stock

A few years ago, Kevin Paffrath, a 29-year-old real-estate broker and father of two who lives in Ventura, Calif., earned most of his income from commissions on home sales, and kept up a side gig recording online videos about home buying.

Today, he’s MeetKevin, a YouTube influencer with 1.7 million subscribers. Most days, he live-streams on the platform for several hours, talking about the stock market and doling out investing advice in a rapid-fire, self-deprecating manner. (…)

Mr. Paffrath says he earned $5 million in the first three months of this year, as page views and demand for his guidance have skyrocketed during the pandemic. (…)

Total users at the six top online brokerages, which are used mainly by individual investors, topped 100 million in 2021. At Robinhood Financial LLC, the investing app popular among younger investors, accounts have grown explosively, from 7.2 million in March of 2020 to 18 million a year later, according to company financial filings.

Along with the rise of commission-free online trading has come demand for advice at the lowest price in the most accessible place: free, and online. Now, a new generation of Jim Cramers has risen up on social media with massive followings as guides to these market newbies.

Many of these influencers have no formal training as financial advisers and no background in professional investing, leading them to pick stocks based on the whims of popular opinion or to dispense money-losing advice. (…)

Cameron Newell, aka CamTheMan, a college dropout from central Washington state, started trading penny stocks full-time about three years ago and says he earned $5 million last year from day trading. He doles out stock tips on TikTok and hosts a chat group on Discord—the social app commonly used by videogame enthusiasts—where followers can track and copy his trades, or follow along with periodic investing challenges where he seeks to turn an initial investment of $1,000 into $1 million.

“Traditional finance is a black box,” said Sarah Petite, a social-media consultant in Los Angeles. “This generation is looking at their parents and saying, ‘The way you thought about money? That isn’t how it works anymore.’ ” (…)

“I have a rule: Don’t pay for something you can get free,” said Rex Wu, a 33-year-old investor from Tampa Bay, Fla., who is a regular viewer of Mr. Paffrath and several other online finance-world personalities. He says he has invested a few hundred thousand dollars based on “things I’ve learned online from guys like Kevin.” So far this year, his portfolio has returned 23%; year-to-date, the S&P 500 has returned 21%.

“If I were to walk into J.P. Morgan tomorrow, they have the bias of trying to earn my business, and they might be trying to oversell me,” Mr. Wu said. “Guys online don’t really have anything they’re trying to sell me.”

Still, the online model is entirely new, with influencers judged on the content they produce, rather than their investing track records; and they often get paid based on numbers of subscribers and viewers, rather on the investment income their advice generates for clients. (…)

“No one my age is watching cable TV anymore,” said Ms. Petite, who is 24. “I don’t know a single person who regularly watches TV financial news. They’re going to these specialized YouTube channels and social media. Giving their money to some guy in a suit on Wall Street, I just don’t think that’s something that would ever even occur to them.”

Building trust is a key part of the YouTube stock-calling business. (…)

“The majority of my audience is young people who are looking for insight into financial markets or looking for ways to be more strategic about the investments they’re making, whether it’s NFTs, or crypto, or a founder’s story, and company culture…. I don’t like to think of myself as an expert.” (…)

Many influencers report that when they hype an investment, they get the page views they crave. When the message is bearish, however, viewers turn away, or worse, attack the messenger with vicious trolling. (…)

“I’ll play the momentum game, but let’s be real: True wealth comes from long-run interest. The trouble is, on YouTube, none of my videos about that kind of thing get any views.”

• Wall Street Is Looking to Reddit for Investment Advice Deep-pocketed banks and hedge funds are now following armies of Main Street traders for signs of where the market is headed next.

Venerable institutions Goldman Sachs Group Inc. and Morgan Stanley are tracking the retail trading frenzy, and hedge funds in New York and London have employees combing through the internet forum of Reddit, Twitter or chat startup Discord in search of trading opportunities. (…)

• Who needs Reddit?  Yesterday, Roundhill Investments filed registration paperwork with the Securities and Exchange Commission unveiling the passively managed Roundhill Meme ETF (MEME on the NYSE Arca). The eponymous ETF will screen stocks based on their social media activity (and naturally, short interest), allocating at least 80% of fund assets into meme stocks and charging an annual management fee of 69 basis points. (ADG)