Stocks rallied yesterday on continued momentum from CPI and a super-soft PPI. A better-than-expected Retail Sales number reminded investors that consumers are still buying stuff, but maybe a bit less.
I am making no money on this! How many times have you heard that line from someone trying to sell you something? I know, I certainly have, and in the past 2-3 years, it has only gotten more frequent. I hear it everywhere! I have even heard people tell me that they are losing money on something they are selling to me 😕. Now, of course, if my microeconomics professor heard that, he would likely look at me over his bifocals and say “impossible, producers would simply not sell if they were losing money!” He is correct in the abstracted world that economics lives in, which assumes that companies are rational. Whether it is true in theory or not I think we can agree that no one likes to lose money and that when a person selling you a car says that they are losing money at the price they are offering, it is more than likely a sales tactic. Though it insults me, it probably works for most buyers… BUT I DIGRESS.
In most cases, I think we can agree that when costs go up for retailers, they generally raise their prices. I say “generally,” because there are many factors that go into how retailers price their goods, but let’s just say that the cost of goods is the most important factor. We all know that wholesale prices, that is the prices paid to producers, rose significantly in the period after the pandemic. Everything from food commodities, lumber, and warehousing, to transportation, trucking, and, of course, even labor, all skyrocketed in the wake of the supply shock caused by global lockdowns. Some of those things bounce up and down frequently due to uncontrollable factors such as… um, nature, which can keep a farmer on her toes with volatile crop yields. Other things like energy costs, which move up and down frequently, based on supply and demand, are also volatile. That said, retailers tend to act slowly, but ultimately, they do come around. If wholesale costs are trending higher, wholesale prices ultimately follow.
Wholesale price increases, which affect you and me, are what drive consumer inflation. You know, that thing that has caused all sorts of havoc on your budget, and ultimately your 401k’s value. Stay with me, I am getting there. Ready to get your mind blown? Yesterday, the Bureau of Labor Statistics announced that the Producer Price Index FELL by -0.4% in October. Economists were expecting it to slow down from the prior month, but not to fall. In fancy business talk, they were expecting disinflation, but they got deflation. When it comes to prices, deflation is better for consumers, because it may mean that someone is paying LESS for something. Yep, PPI, which tracks the prices that producers charge retailers actually FELL in October. It doesn’t happen too often, but it does happen, and it… um, happened to happen right as we are all very concerned about inflation, AND right after we got a lower-than-expected consumer inflation figure (CPI) just a day before.
What does that all mean to us? Well, it is well understood by Wall Street insiders 🧐 that producer prices don’t often diverge for long. That means that we can view PPI as a leading indicator of CPI. In plain English, if retail costs are rising, then consumer prices will rise at some point. The big question is, how quickly will retailers LOWER consumer prices if their costs are going down? You see, in reality, prices are more fluid on the way up and stickier on the way down. What rational company would want to forego making bigger margins by lowering their prices? All of these recent numbers are positive signals that prices are normalizing, though they are not there yet. Regarding that car salesperson from my leading paragraph, yesterday’s Retail Sales figure showed that auto sales declined in September. That is most likely due to the sky-high price points and nosebleed auto loan rates. That is good news if you are looking to buy a car… maybe not so good news for the “money losing” dealer, who may lose even more money ¯\_(ツ)_/¯.
WHAT’S SHAKIN’ IN THE PREMARKET
Cisco Systems Inc (CSCO) shares are lower by 11.24% in the premarket after it announced that it beat EPS and Revenue estimates last quarter. The stock is lower because Cisco provided current quarter guidance that was lower than analyst estimates. It also lowered its full-year Revenue guidance to below analyst targets. The company said that it experienced a sales slowdown as its customers have built up inventory. Dividend yield: 2.92%. Potential average analyst target upside: +6.3%.
Pal Alto Networks Inc (PANW) shares are lower by -4.79% in the premarket after the company announced that it beat EPS and Revenue estimates but missed on Billing targets. The company also lowered its billing guidance for current quarter and full year to below analysts’ estimates. The company blamed “rising cost of capital” for the shortfalls. In the past month, significantly more analysts have raised their price targets than lowered them. Potential average analyst target upside: +10.2%.
- Initial Jobless Claims (Nov 11) is expected to come in at 220k, slightly higher than last week’s 217k.
- Industrial Production (Oct) may have declined by -0.4% after climbing by+0.3% in September.
- NAHB Housing Market Index (Nov) is expected to have remained at 40.
- Fed speakers: Barr, Mester, Williams, Waller, and Cook.
- After the closing bell earnings announcements: Applied Materials, Ross Stores, and The Gap.
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