Walmart’s red-light specials

Stocks had a mixed close yesterday after a wacky, bumpy day of trading ahead to the start of the FOMC meeting. Investors are growing concerned over downbeat guidance amidst upbeat earnings.

Driving crazy. It’s not like much of us have a choice. If you live in a suburb or exurb, you simply need a car to get around. We drive to complete errands, to shop, for entertainment, and to get to work. Most suburbanites even drive to train stations or bus depots to get onto mass transit. SO, how can you avoid pain at the pump? Well, getting to work is, for most of us, non-negotiable. You show up or…well, you know. You have to buy groceries for your family to eat, which usually involves driving. You can have your groceries delivered, however, in case you haven’t noticed, stores are now charging delivery fees…to cover rising costs of transportation. Are we just stuck under the thumb of inflation, then?

A new survey from AAA (it used to stand for something, but now it’s just AAA, the auto club) shows that US drivers are changing their driving habits in response to the sky-high prices of gasoline. To be more specific, 64% of respondents modified their habits, and of those, 88% drove less, while 74% admitted to combining errands to economize. Here is the big one: more than half said that they cut back on shopping or restaurant visits. Go ahead, read it again for effect. Well, there is good news and bad news to report here. I will start with the good news because I am an optimist.

Economics really works…you just have to be patient. If you own a gas station and less customers are showing up, or customers who once asserted “fill it up, please” now ask for “$50 regular unleaded…please,” you may find yourself in a bit of a jam. You have committed to buying many truckloads of gasoline from your distributor at a set price. You have committed to a minimum draw to guarantee that you have enough gasoline to meet the strong demand which usually peaks in the summer. You are happy to do this when prices are going up because you are selling more gas… at higher prices…you have been more profitable. With less customers pumping less gas, you now have more supply than you can handle, and you notice that crude oil prices have been a bit softer in recent weeks. You have no choice but to lower prices. We see that happening already as gasoline prices have dropped almost -10% from their recent high in mid-June. Before you go out and celebrate, prices are still higher by some +44% from a year ago. The good news to which I referred to above is that demand shifts have and will possibly continue to bring prices down.

There is more. Did you notice that the AAA survey talked about respondents foregoing trips to shopping and restaurants? That could mean that consumers are beginning to spend less. That will ultimately put pressure on those merchants to lower their prices as well. We have already heard from mass merchants like Target and Walmart that inventories are swelling which will have to be discounted to make way for fresh deliveries. Discounted means lower prices…you knew that. In fact, Walmart just yesterday cut its profit outlook for the year citing this very challenge, among other things.

Now, over to the bad news. All this reduction in demand for fuel, merchandise, and dining, while it may help bring inflation down, also means LOWER CONSUMPTION. I know that I harp on this a lot, but it is important to highlight it. Consumption makes up the bulk of GDP, so less consumption can bring the US economy closer to a recession. Is there some sort of equilibrium where consumers spend less by just enough to bring inflation into control but, not too much as to cause the economy to contract? Theoretically yes, but extremely tricky to achieve in practice. That is what everyone is referring to as the elusive “soft landing.”

There is some more bad news. The Federal Reserve, whose job it is to fight inflation – to speed up the natural process of supply and demand – is hard at work doing just that. They are fighting inflation. They are doing it by not only threatening to raise rates, but they are also raising them, with vigor. What that amounts to for consumers and companies is additive pain. Higher prices smart, for sure, but higher borrowing costs make already expensive things even more expensive. I don’t suggest it, but if you fill up your car using a credit card, you are not only paying ~+44% more per gallon than a year ago, but your credit card company is also charging you more to carry that balance.

The FOMC will start its 2-day confab today which will result in a policy announcement tomorrow afternoon. Based on Fed Funds futures the odds are in favor of a +75 basis-point hike which will bring Fed Funds to around 2.25%. Those same futures also predict that Fed Funds will end up at around 3.25% by year end. That is about twice as much as the current level. That means that the pain may only get worse for consumers and companies that rely on credit. Let’s hope that those natural economic forces kick in before the Fed has to go that far. While you are waiting, you may want to take a relaxing drive and blast your favorite toons on the radio. Better yet, you may want to dust off your old bike…it will be far cheaper.

WHAT’S SHAKIN’

Walmart Inc (WMT) shares are lower by -9.60% after it cut its profit outlook for the year. The company cited demand shift as the reason for the paring. According to the company, consumers are purchasing less non-food items in order to afford the rising costs of food. Food is a lower margin offering for Walmart and the company expects the shift to impair its earnings in the second half of the year. This is a similar admission to one made by Target weeks back. The company will deliver its Q2 earnings on August 16^th. Dividend yield: 1.69%. Potential average analyst target upside: +9.5%.

Archer-Daniels-Midland Co (ADM) shares are trading higher by +3.5% in the premarket after it announced that it beat EPS and Revenue estimates by +25.24% and +9.27% respectively. The company expects continued success in the second half of the year and announced that it will accelerate its share repurchase plan. Dividend yield: 2.11%. Potential average analyst target upside: +26.4%.

ALSO, this morning: United Parcel Service (UPS), Centene (CNC), General Electric (GE), 3M (MMM), Coca-Cola (KO), and Ares Capital Corp (ARCC) all beat on both EPS and Revenues. General Motors (GM) missed its EPS mark while Polaris (PII), PulteGroup (PHM), Raytheon (RTX), TransUnion (TRU), McDonald’s (MCD), Moody’s (MCO), and Corning (GLW) fell short in Sales.

YESTERDAY’S MARKETS

Stocks ended with a mixed close after traders tackled their inflation fears, economic slowdown, and Fed hikes. The S&P500 rose by +0.13%, the Dow Jones Industrial Average gained +0.28%, the Nasdaq Composite Index slipped by -0.43%, and the Russell 2000 Index advanced by +0.60%. Bonds fell and 10-year Treasury Note yields gained +4 basis points to 2.79%. Cryptos fell by -3.11% and Bitcoin declined by -2.43%.

NXT UP

• FHFA House Price Index (May) is expected to have climbed by +1.5% after gaining +1.6% in the prior month.
• Conference Board Consumer Confidence (July) may have slipped to 97.0 from 98.7.
• New Home Sales (June) is expected to show a -5.4% monthly decline after a +10.7% gain in May.
• After the closing bell earnings: Stryker, Mondelez, Chipotle, Enphase Energy, CoStar Group, Texas Instruments, Visa, Alphabet, Tenable, Boston Properties, and Microsoft.