What to watch for in the earnings parade

Stocks slumped for a third straight day as inflating commodities prices continue to shake investor confidence. Investors were biding time ahead of today’s start to Q3 earnings season.

N O T E W O R T H Y

In the margins.  Have you heard that we are experiencing a bit of inflation?  If you haven’t heard it here or elsewhere, you have certainly experienced it at the pump, the grocery store… or just about everywhere.  Sharply rising prices can be a problem for the economy.  Namely for consumption, which comprises roughly 2/3 of GDP.  If prices rise too high too fast, consumption is likely to drop off and drag the economy down with it.  That would be a problem for all parties involved.  The good news is that consumers are still flush with cash and have not heretofore shown any signs of letting up on their voracious appetite for new homes, autos, luxury goods, food, etc.  In other words, demand remains strong.  Have you heard that the world is experiencing some supply chain logjams?  If you haven’t heard that here or elsewhere, you have certainly experienced it at YouNameIt retail store, the auto dealership, the consumer electronics store (computers / televisions / all things shiny), etc.  It turns out that not only are manufacturers experiencing stock outages in chips and parts, but they are also unable to get finished goods to market.  Parts manufacturers are struggling to meet the surge in demand as they struggled with COVID-led factory shutdowns and poor planning. Manufacturers are shutting down production lines as they await critical parts.  Completed products are sitting on docs awaiting ships and empty shipping containers, which are piled up on the wrong side of the world.  Containers that do arrive, get filled and shipped, only to lie anchored offshore at their destination as port congestion prevents docking and unloading. Once the containers are unloaded they may sit dockside, awaiting a truck to transport them to trans-shipment warehouses, where they will be unpacked and loaded onto another truck, which will take the goods to their final destination… a store near you.  A big problem with all of those last few links of the supply chain is a lack of trucks, or more specifically truck drivers.  Yes, trucking companies are struggling to hire drivers, offering all sorts of financial incentives to get their fleets on the roads.  Oh, and those trucks run on fuel, which has gone up some +117% (diesel) in the past 12 months, making the cost of road transport higher.  Sounds like a mess?  Well, it is a mess.  Think about these challenges not only to manufacturers, but also to retailers who struggle to keep shelves assorted properly… as we enter the busiest quarter for retail. So… yes, you are likely to have experienced an empty shelf, or the feared “Temporarily Unavailable” words on your favorite e-tailer website.  Beyond that, think about the extra costs being borne by manufacturers, shippers, and retailers who must spend more to get products to customers. That could certainly eat into margins.  We already know that retail prices are going higher as some of those increased costs are passed on to the consumer.  In times of high demand, companies throughout the supply chain enjoy what economists call pricing power, and high retail demand is driving that power all the way up the supply chain.  Some companies are better at navigating those challenges than others.  Efficient supply chain management, strong business strategies, proper balance sheet management, and robust leadership are all required for companies to continue to not just grow sales, but also to maintain healthy margins and strong earnings.  

Companies will all be put to the test in the days ahead as we get to see just how well they have managed these numerous challenges.  Banks will start the earnings procession today, and we will be looking for loan growth in a challenging environment with low interest rates and a flat yield curve.  For investment banks, last year’s surge in trading volumes was a lifeline along with increased fees for restructuring and capital raising.  Investors will be looking to see if those dynamics have changed in the past 12 months. Beyond financial stocks, investors will be looking closely at margins, as mentioned above.  Earnings and sales growth will be closely watched, especially given last quarter’s record levels.  Corporate narratives on how they are weathering the tight labor mark, supply chain disruptions, and rising materials costs will be closely scrutinized.  Strong forward guidance is always a key item for investors, but it will take on a higher level of importance in this earnings season, given the recent slowdown in growth.  We are bound to experience some volatility in the days ahead as buys separate themselves from the holds and sells.  A few strong cups of coffee will be required. Hopefully, your favorite brand will not be stuck in a shipping container docked outside the port.

THE MARKETS

Stock indexes shed some value yesterday as on-edge investors awaited earnings season while monitoring rising oil and lumber prices.  The S&P500 fell by -0.24%, the Dow Jones Industrial Average gave up -0.34%, the Nasdaq Composite Index slipped by -0.14%, the Russell 2000 Index rose by +0.61%, and the S&P500 ESG Index traded down by -0.28%.  Bonds gained and 10-year Treasury yields were unchanged at 1.61%.  Cryptos fell by -2.62% and Bitcoin added +3.44%.

NXT UP

– Consumer Price Index (September) may have grown by +0.3% for the month for a second straight month.

– FOMC Meeting Minutes (September 22) will be released this afternoon.  The minutes will have the potential to inject a bit of volatility into the markets as we get to peer into the Bank’s deliberations over interest rate hikes and taper timing.

– This morning, JPMorgan Chase, BlackRock, and Delta Airlines beat on both EPS and sales.

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