Tuesday, October 19, 2021

Morning Note: So Far So Good

One of our concerns heading into this earnings season was the extent to which rising input costs would do a number on corporate bottom lines and forward guidance, and, thus, on stock prices.

Well, if the broad market is any indication -- although we're early in said season -- so far so good.

Indeed, per below, company execs are voicing their concerns, but save of course for a few specific company hits here and there, again, the market's holding up just fine, so far...

Here's economist Peter Boockvar pointing a few out in his morning note:

"Danone who expects cost inflation of 8% in 2021 said it will be 9% in 2022. “We expect 2022 at least at the same level as 2021, and maybe even higher. We need to get prepared for more supply chain disruptions and challenges,” said the CFO. He went on to say “Managing the full supply of packaging at the moment is not a walk in the park.”

Proctor & Gamble in its earnings report said “Net earnings declined as the increase in net sales was more than offset by a reduction in operating margin due to higher commodity and freight costs as anticipated…The decrease in gross margin was driven by 350 basis points of commodity cost increases, 80 basis points of unfavorable mix (primarily due to product and pack-size mix), 50 basis points of higher transportation costs and 60 basis points of product and packaging investments and other impacts.” They got back 50 basis points on higher productivity and 50 basis points of “pricing benefits.” They are forecasting for fiscal 2022 that they will take a $2.3b after tax cost hit from higher commodity costs ($2.1b) and freight costs of $200mm. They did not say in the release how much more in pricing they will take to recover this.

The CEO of Arm Holdings said yesterday “There is no quick fix” to the chip shortage and thinks it will be better in about a year. Stating what we all know, “What we’re seeing from our licensees is that they could all be selling more, if only…there was more capacity to go around. Everyone is seeing huge demand.” He admitted though at some point we’ll see a hangover where “there’ll be some oversupply at some point in the future” but when is the question."

On the data front, homebuilder sentiment, released yesterday, improved:

Although this morning's single-family housing starts disappointed:


As did U.S. Industrial Production, released yesterday:


We'll of course wade deeper into the macro weeds in our end-of-week update...


Asian equities leaned green overnight, with 12 of the 16 markets we track closing higher.

Europe's struggling a bit this morning, with 11 of the 19 bourses we follow trading lower, as I type.

US stocks (save for small caps) are catching a bid early in the session. Dow up 131 points (0.37%), SP500 up 0.53%, SP500 Equal Weight up 0.30%, Nasdaq 100 up 0.43%, Nasdaq Comp up 0.39%, Russell 2000 down 0.03%.

The VIX sits at 16.02, down 1.59%.

Oil futures are down 0.21%, gold's up 0.46%, silver's up 3.21%, copper futures are down 0.18% and the ag complex is down 0.14%.

The 10-year treasury is down (yield up) and the dollar is down 0.32%.

Led by solar stocks, silver, wind stocks, MP (rare earth miner), healthcare stocks and utilities stocks -- but dragged by KRBN (carbon credits), metals miners, oil services stocks, Latin American stocks and base metals futures -- our core portfolio is up 0.30% to start the day.


While we here at PWA like to think of ourselves as folks who see the world as it is, and act accordingly, well, let's just say that seeing the world "as it is" ain't that easy. Humility, open-mindedness and relentless effort in exploring where our assertion(s) may be wrong is utterly critical as we navigate today's crazy markets:
"To genuinely consider yourself a “realistic” person is intensely arrogant and na├»ve. If you do so, you claim that you are capable of understanding reality. And, is there a more silly and arrogant person than the one who claims such an impermissible thing?"

--Vizi Andrei 


Have a great day!
Marty






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