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Inflationary Thursday – Chip Prices Rise 20%, Electronics will have to Follow

Taiwan Semiconductor (TSM)'s stock is up over 4% this morning as they raise the price of chips 10-20%.

TSM is the World's largest chip-maker and inflation is a party for big corporations who stay ahead of the curve and TSM is winning the race now.  IPhones use TSM chips as does pretty much all the advanced electronics we buy so inflation will certainly be kicked up another notch as chips kick off a new wave of price increases which are NOT going to be "transitory."  

The price increases have a twofold purpose for TSMC as it addresses the shortage. In the short term, higher prices push down demand and preserve supply for customers who have no other choice. Over the longer term, the higher income will help TSMC invest aggressively in new capacity.  That's what Capitalism is supposed to do BUT when the demand they are forced to build for is artificially stimulated – then the price increase is unnecessary and the new factories are a mis-use of funds and the whole thing collapses (recession) when demand goes back to normal after the stimulus is removed.  

That's right – basic economics that everyone seems to have forgotten – ESPECIALLY our policy-makers.  WHY is there a chip shortage?  People have been forced to stay home, working from home and buying more computers and printers.  HPQ has raised PC prices by 8% this year and printer prices are up 20% and contract pricing for computer memory, which is in very short supply, has gone up 34% since the beginning of last year – 34%!  

TSM is going to spend $100Bn over the next 3 years building plants and foundries but what if things are back to normal by them and people are not working at home?  Then they will have increased production by 34% for no reason, leaving TSM with 34% excess capacity – and the bill for $100Bn worth of production increases still to pay.  

This is how artificial stimulus can cause damage to an economy far into the future.  Prices for computers and other electronics rose at a 2.5% annual rate in May, according to U.S. government data, the biggest increase in over a decade. Prices broadly jumped 5% in May, driven by a sharp rise in energy prices.   Car makers have had to curtail production because they lack chips. With less inventory, new vehicles are costing more.

That's why today's reiteration of Q2s 6.6% rise in GDP is not at all impressive.  In fact, it's kind of unimpressive if prices are rising 10% and the GDP is only rising 6.6% – that means we're losing 3.4% somewhere, aren't we?   If the Fed is wrong (we'd have to call it completely full of crap, at this point) about inflation being "transitory", then our economy is in big trouble as we're not even growing it fast enough to keep up with the very real 7% collapse in our Dollar since the beginning of last year.  

If the GDP is up 6.6% but the Dollar is down 7%, then isn't the economy down net 0.4%?   This is just math, folks – you don't need a fancy degree to see a stagnant economy with rising prices, which is what they used to call Stagflation.  That's a very bad thing.  And it's an even worse thing when you have Stagflation AFTER you put $10Tn worth of stimulus measures in place on a $20Tn economy – that is very much like shocking a patient with 3,000 volts and their heart-beat looks like the chart above – he's not going to make it….

Tomorrow we get the PCE Report for July as well as Personal Income & Spending for July along with Michigan's Consumer Sentiment for August so we'll get a good picture of how higher prices are affecting consumer behavior and confidence.  And, don't forget, Powell speaks at 10am as well.

 


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  1. Good morning!


  2. Good morning 


  3. Phil,

    When time permits, would like your thoughts on DG which just reported 2Q numbers  which were slightly less than last year but above consensus forecast. Comparison with 2Q20 were tough because of 2020 pandemic boost but it appears that we are heading into another lockdown so the remainder of 2021 should exceed current estimates. Stock dropped 8% (19 pts) this AM and has rallied back 5.  They are more expensive than DLTR (P/E, P/S, ROE) and have higher D/E (198% vs 138) but seem to be a much better operation. Thinking about selling some 1/22 195 puts @ 3.80 or more cowardly 1/23 175s @8.20. 

    Thanks


  4. Phil – I'm curious about your thoughts on JWN. They have been beaten down pretty hard on recent earnings. 


  5. Hi Phil, what is your take on NG?, time to short Oct @ 4.15? Thx.


  6. Powell’s big Jackson Hole moment





  7. America’s Big Oil Problem


  8. Good morning!

    Pretty crazy down/up action this morning.  Good thing we don't care.  

    No change in jobless claims or unemployment so it doesn't seem like next week's NFP will be a winner.  

    Rising unfilled orders into Christmas is also not good:

    Why it matters: There are a lot of businesses across the economy with empty shelves as they wait for manufacturers to ship the goods. This has been crimping sales while also driving inflation.

    • Order backlogs offer a snapshot of how much stuff manufacturers have yet to deliver.

    By the numbers: Unfilled orders — the backlog — of manufactured goods grew 0.3% month over month to $1.23 trillion in July, according to Census Bureau data released Wednesday.

    • This was the sixth consecutive month of gains.
    • The backlog of core capital goods orders climbed to a record-high $230.9 billion.

    What they’re saying: “Huge order backlogs will keep manufacturers busy,” ING chief international economist James Knightley says. “With customer inventories at all-time lows, manufacturers are also gaining pricing power and this can already be seen in numerous surveys of prices received.”

    • “Backlogs in the manufacturing sector are expected to take well into 2022 to clear,” Grant Thornton chief economist Diane Swonk says.

    Between the lines: While this may sound good from a demand perspective, the pressure is high for manufacturers to compete.

    • “When it comes to unfilled orders for manufacturers, it’s like being a bartender on a super busy night,” Tim Quinlan, Wells Fargo senior economist, tells Axios. “It’s good in the sense that you are three deep at the bar.”
    • “But it can be bad if you’re out of lime wedges, you're running out of booze and your other bartender called in to tell you he just took another job. You’re slammed, but your customers are gonna find another place for a drink if you can’t pick up the pace."

    Zoom out: UBS U.S. economist Sam Coffin notes that while unfilled orders have been on the rise, shipments of goods have risen even faster.

    • “The ratio of unfilled orders to shipments surged during the pandemic amid supply constraints,” he tells Axios. “It has fallen back to a more normal ratio and does not look particularly high or low, in aggregate, now.”
    • In fact, shipments climbed 2.2% month over month to a record-high $257.8 billion in July.

    The bottom line: The good news for manufacturers is they have a lot of stuff to make. The good news for their customers is that this stuff is getting manufactured and shipped at an increasing rate.

    DG/8800 – $221 is $55Bn and they make $2.5Bn so p/e 22 is not terrible but there's very little growth for these guys and they are generic with other dollar stores – so no moat.  Nothing bad, nothing good to me but the $221 price tag means it can be dangerous to play options, since they can easily move 10% in a month and then consider that inflation will certainly hit their margins (especially shipping costs from China) and what are they going to do about it, become "Dollar Ten General"?  It's just not something I would play unless they got a whole lot cheaper.

    JWN/Willsons – Great earnings but they got killed for them.  The CEO said he wasn't happy with the pace of growth and JPM pushed them to underweight and that's their shopping and stockholding base.  

    • The firm calls the current backdrop potentially as good as it gets for both JWN's core +$100K income customer – considering the mid-teens personal savings rate, debt service ratio at 40-year lows and U.S. household wealth creation of over $12T in 2020.
    • Looking at the pricing/promotional front, JWN’s absolute and relative performance is called underwhelming with full price revenues ~900bps below department store peers, Rack comps ~2,500bps below off-price peers and management forecasting full year operating margins below peers.
    • JPMorgan assigns a December 2022 price target of $34 to JWN.

    $29 is still $5Bn and they are generally a $500M income-generator but -$700M last year and $223 projected next year – not very interesting to sit here and wait for a turnaround.  

    Even at $22.50, M is only $7.4Bn and they make over $1Bn a year (lost $4Bn last year but mostly write-offs which mean they won't ever pay taxes again).  So M is still a better price but I like them at $5 as a no-brainer – not so much now either.  Certainly better than JWN, though!  

    /NG/Youri – I loved /NG when it was $2 as my long-term target was $4.50 but now I have about zero interest in it as it's simply bouncing around in it's range.  The more LNG that ships globally the more global prices will stabilize around $4.50.  For the US, that means permanently more expensive as our /NG used to be trapped in country and we had way too much of it.  For the rest of the World, $4.50 is significantly cheaper than they used to pay ($6-8 in Europe, $8-10 in Asia), which is why other countries are far more excited about using LNG to power vehicles than we are – it's just perspective.  

    • The major averages are at their lows of the session as geopolitics shook an already hesitant market.
    • The S&P (SP500) -0.5% and Nasdaq (COMP.IND) -0.5% are down, with the Dow (DJI) -0.3% faring a little better.
    • A suicide bombing at Kabul airport reportedly injured three U.S. troops. And a second explosion happened near a hotel where Americans were gathered, according to NBC.
    • Dallas Federal Reserve President Robert Kaplan said Thursday that he would like the central bank to start cutting back its asset purchases in October "or shortly thereafter."
    • Speaking to CNBC, Kaplan, one of the more hawkish members of the Fed, repeated his view that policymakers should announce a plan at its September meeting to begin removing stimulus by tapering the purchase of Treasury bonds and mortgage-backed securities.
    • Kaplan argued that recent data gathered by the Dallas Fed showed that the economy was "resilient" to the lingering COVID threat.
    • He contended that while growth might come in "fits and starts," consumers and businesses "are becoming more adaptable" about using tools like masks and vaccines to fight the pandemic.
    • As to the pace of tapering, Kaplan asserted that the process should happen gradually, over the course of six to eight months.
    • Kaplan's remarks were part of a stream of Fed commentary that came as the Kansas City Federal Reserve ramps up its closely watched conference centered in Jackson Hole, Wyoming.
    • Earlier in the day, Kansas City Fed President Esther George delivered a similar outlook to Kaplan, saying she would like to see a discussion about tapering "sooner rather than later."
    • Another Fed hawk, St. Louis Fed President James Bullard, called on policymakers to "get going on taper" and said he saw signs of an "incipient bubble" in the housing market.
    • The Jackson Hole Economic Symposium leads up to remarks Friday from Fed Chair Jerome Powell, who is expected to discuss the potential impact of the Delta variant.

    • August Kansas City Fed Composite Index+29 vs. prior +30 in July.
    • Manufacturing Index +22 vs. +41 prior.
    • “Regional factory activity growth remained positive in August,” said Wilkerson. “Manufacturing finished goods prices rose at a record pace. Firms reported solid expectations for future production overall, but 20% of firms reported a recent decrease in activity due to the recent surge in COVID-19 cases.”
    • Burlington Stores (BURL -10.0%) shares slumped despite Q2 net sales rising 34% Y/Y as CEO Michael O’Sullivan showed concerns that the company's margins would be put under significant pressure for the rest of the year as the imbalance in supply and demand in global logistics systems was driving up supply chain expenses.
    • is driving up freight and supply chain expenses and it will put significant pressure on our margins for the balance of the year.”
    • J.M. Smucker (NYSE:SJM) CEO Mark Smucker reported Thursday that inflation and supply chain issues related to the pandemic forced it to lower its EPS forecast as part of the release of its quarterly results.
    • In an interview with CNBC, Smucker said the packaged food maker has already moved pricing "a bit" but plans additional price increases in "the next several months."
    • However, he pointed out that the timing of the higher prices "might be a little later than we realize the cost."
    • Smucker called the fundamentals of its business "very strong" but pointed to "significant inflation and supply chain disruptions" for its poorly received guidance.

    • Bitcoin (BTC-USD) slips 2.8% to $47.1K in the past 24 hours, retreating from $50K resistance level.
    • Some chart patterns show the the cryptocurrency's rally since mid-July is at risk.
    • John Bollinger, inventor of Bollinger bands, said it may be time to "take some profits or hedge a bit," in a tweet on Wednesday. "Aggressive traders can think about putting out some shorts."
    • Bloomberg's Akshay Chinchalkar notes that narrowing Bollinger bands indicate that the Bitcoin rally is fading and Bitcoin faces a $50K-$51K zone of resistance, with a $46.7K a key threshold to watch.
    • Katie Stockton at Fairlead Strategies says DeMark market-timing indicators point to about two weeks of "sideways-to-lower" prices, Bloomberg reports.
    • CoinDesk's Omkar Godbole says the Bitcoin turbulence comes ahead of monthly options expiration. A total of 42.5K option contract worth ~$2B are set to expire on Friday, according to Skew data.
    • "Data since January show bitcoin tends to move toward the “max pain” point in the lead up to the expiration and sees a solid directional move in days after settlement," Godbole writes. The max pain point for Friday's monthly expiration is $44K,  according to data from crypto options exchange Derbit.
    • Adopting a longer-term bullish view, billionaire Simon Nixon's family office, Seek Capital, is looking to increase its "allocation to crypto as we feel it is an important area of the future," said Adam Proctor, one of the firm's managing director, in a statement. As such, the company is seeking to hire an analyst to focus on the sector, Bloomberg reports.
    • A recent Goldman Sachs survey found that almost half of family offices it does business with want to add digital currencies to their investments, Bloomberg said.
    • TrueCar (TRUE) forecasts a 4% Y/Y decline in auto sales, marking a fourth consecutive month of lower sales. Revenues are expected to be up slightly by 1% compared to July.
    • "The chip shortage continues to be the driving force behind vehicle availability, creating the lowest average incentive spending since 2013," said TrueCar analyst Nick Woolard. Demand is still strong as roughly a third of vehicles are selling within a week of arriving on the lot, up from 18% last year, and used vehicle sales are expected to increase 6% Y/Y.
    • Executives pointed to Toyota (TM -0.7%) as one car brand that is selling exceptionally well.
    • The average interest rate on new vehicles is 4.6% and the average interest rate on used vehicles is 7.4%, with an average loan term of 70 months.
    • Interested tickers: Carvana (CVNA +0.6%), Sonic Automotive (SAH -0.8%), AutoNation (AN -2.0%), Group 1 Automotive (GPI -1.3%), Asbury Automotive (ABG -1.8%), Penske Automotive (PAG -0.4%), CarMax (KMX +0.1%), Lithia Motors (LAD -1.1%), America's Car-Mart (CRMT +0.3%)
    • TrueCar slumped post-earnings earlier in the month after declining to issue formal guidance.

  9. Phil

    Thanks for your perspective and cautionary note on DG.


    • James Bullard, president of the Federal Reserve Bank of St. Louis, said Thursday that the economy has "a lot of inflation" and he thinks it's time to "get going on taper."
    • Speaking to CNBC, Bullard also argued that the central bank's asset purchase program could be contributing to an "incipient housing bubble in the U.S."
    • On the pace of price increases, the St. Louis Fed president said he was "skeptical" that inflation would moderate in 2022.
    • Instead, he predicted inflation of at least 2.5% in 2022 and he noted that that forecast includes "some risk to the upside."
    • Bullard contended that the Federal Reserve should finish its taper by the end of Q1 next year.
    • "There is some worry that we are doing more damage than helping with the asset purchases," he said, pointing to higher home prices as an example of the potential harm the Fed was doing.
    • "I don't think we're in trouble today but if we kept going for another year or two, we might get into bigger trouble on housing," he added.
    • On the lingering threat of COVID to the economy, Bullard said consumers and companies have "learned to adapt to the pandemic."
    • Bullard's comments came as a highly publicized Fed conference ramped up in Jackson Hole, Wyoming.
    • Earlier on Thursday, Kansas City Fed President Esther George said she was ready to talk about tapering "sooner rather than later."
    • Federal Reserve Chair Jerome Powell is also scheduled to speak at the conference. His remarks on Friday are expected to focus on the impact of the Delta variant.

    They are floating balloons in (virtually) Jackson Hole.

    • Lululemon Athletica (LULU +0.6%) is raising the minimum base pay for the majority of its stores to $15 or $17, depending on the employee's role and location.
    • In addition, employees are eligible for lululemon’s team-based bonus program, which provides employees an extra $3 per hour, on average, based on store performance.
    • The extra pay will help the athletic apparel retailer with its plan to hire 8,000 team members over the holiday season amid a tight labor market.
    • “At lululemon, continuing to support and invest in our people is our top priority," said Celeste Burgoyne, President of the Americas & Global Guest Innovation.
    • Lululemon recently signed an agreement with biotech company Genomatica to bring bio-based materials into their products.
    • Apple (NASDAQ:AAPL) could raise the prices for its upcoming iPhone 13 lineup as chip manufacturing partner TSMC (NYSE:TSM) moves to raise its costs amid the ongoing global semiconductor shortage.
    • DigiTimes, a publication with a strong record with news from industry sources, reports that TSMC could raise Apple's prices by 3% to 5%, costs that Apple might pass on to consumers.
    • TSMC is reportedly raising overall prices from 10% to 20% but is offering a discount to its largest client. Apple accounts for over 20% of the foundry's total wafer revenue.
    • The iPhone 12 lineup debuted last year with four core models, two base and two Pro edition handsets. The prices ranged from $799 for the standard iPhone 12 to $1,099 for the iPhone 12 Max with 128GB of storage. 
    • Apple will unveil its newest family of handsets as early as next month and the prices will be announced at the launch event. Reports have suggested the so-called iPhone 13 lineup will include four models with the same sizes as the iPhone 12 family, faster A15 Bionic processors and larger batteries. The two Pro models are expected to feature an improved ultrawide camera lens. 
    • Like most other banks, Canadian Imperial Bank of Commerce (NYSE:CM), or CIBC, latest results continue to reflect the improving credit outlook as the economy in Canada continues to recover from the pandemic.
    • Its wealth management unit results were bolstered by market appreciation, mutual fund sales, and increased client activity.
    • Q3 adjusted EPS of C$3.93 jumps from C$2.71 in the prior quarter and C$3.59 in the year-ago quarter.
    • Adjusted return on equity for the quarter ended July 31, 2021, was 17.9% increases, up from 12.9% in Q2 and 17.3% in Q3 2020.
    • Provision for credit losses was a reversal of C$99M compared with a provision of C$32M in Q2 and C$525M in Q3 2020.
    • Adjusted non-interest expenses of C$2.81B increased from C$2.74B in Q2 and $2.61B in Q3 2020.
    • Canadian Personal and Business Banking net income of C$642M rose 40% Y/Y, mainly on lower provisions for credit losses and higher revenue, partly offset by higher expenses. Adjusted preprovision, pretax earnings increased 12% Y/Y with higher revenue driven by volume growth and higher fee income, partly offset by higher expenses.
    • Canadian Commercial Banking and Wealth Management net income of C$470M increased 47% Y/Y due to higher revenue and a reversal of loan loss provisions, partly offset by higher expenses. Adjusted preprovision, pretax earnings rose 19% Y/Y on higher fee revenue and volume growth in commercial banking, while wealth management revenue benefited from growth in asset balances driven by market appreciation, record mutual fund sales, and an increased level of investment activity by clients.
    • Earlier, Canadian Imperial Bank EPS beats by C$0.54, beats on revenue

    I like these guys.  We'll see if they break out but $120 is not too expensive at $54Bn when they are making $6Bn a year.  Nice $4.64 dividend (3.86%) should increase too but CM has poor options (only go to March) with poor premiums, so we don't play them.

      


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    What inflation?

    Gilead Sciences wins reversal of $1.2 bln award in patent case with Bristol Myers reut.rs/3zn2qy7

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    What inflation?


  12. Here is the link to the replay of this week's webinar.

    https://youtu.be/3ar8rJ0NmA0