Market rebounds after selloff…longer term EPS growth estimates are the key
- Y/Y eps growth estimates set to decline sequentially going forward from easy Covid compares
- We think sustainable growth returns to 2%-ish, even with accommodative Fed into 2022
- Biden administration policies are more of a hamper than help on future growth estimates
- ROW struggling with Covid/delta variant = rebounding dollar and flight to quality in US FI market
- Inflation largely a factor of supply dislocations that linger on from Covid…are resolving
- Yes, monetary policy is a tailwind but much of stimulus is in excess reserves vs. economy
- Opportunistic trades – Covid recovery plays in equity market, long Treasury trade played out
Supply dislocations continue to result in higher input prices – A special report from TPCM summer interns!
- Supply dislocations across the economy a function of shuttered operations, canceled orders and now surging demand post Covid-19
- Supply chains are recovering but prices in many key industries remain elevated – shortages have been key drivers of inflation metrics
- Well known shortage is labor – service industries are struggling to find people, as are other industries
- Wage/salary levels now above pre-Covid levels, starting to show in official figures
- $300/week Federal supplemental unemployment insurance will expire nationally Sept 6th; 23 states have opted out starting in mid June
- Industries most impacted: Autos (chip supply); Restaurants (labor, chicken wings); Guns/Ammo; Home Builders (lumber, steel, copper);
- Used Car prices elevated due to lower new build levels…have you tried to rent a car lately??!
- Food prices continue to escalate due to supply dislocations and bad weather; CMG prices up 4%
- Shortages impacting inventory levels at retailers resulting in record low inventory:sales ratio
- Port congestion has been a real issue, now handling record volumes in LA – total US bound container shipments up 18.3% from May, 2019 – this is a positive!
Sample of Company Headlines/Comments:
- Vista Outdoor: “Federal has made more hunting ammo this year than in past 99 years of company”
- Wingstop: “Wholesale price of wings a year ago was 98 cents per pound…Today, it’s $3.22.”
- China car sales down 5% in June to 1.58 mln, largely a result of supply shortages
- BMW will produce 30K less vehicles in 2021 vs. budget – “shortage of chips will impact upcoming two quarters of sales.”
- NXP Semi: “Our current expectation is we will fact tight supply environment for at least the remainder of 2021.”
- CEO, National Ass’n of Home Builders: “While the recent drop in lumber prices is a positive development, the lumber crisis is far from over.”
Bottom line: Dislocations are real but will be resolved
- Supply of workers should be on the rise post Labor Day
- Profit motive will drive industry to find work arounds in all areas for workers and inputs
- Substitution effect is real – chicken wings now becoming chicken thighs
- Relentless technology innovation replacing human labor in service and manufacturing industries
- Double ordering likely real - will we see order cancellations in the Fall as supply normalizes? We think so.
- Price normalization will be a function of time for supply chains to stabilize – stay tuned for more on this as it is already and will continue to happen!