Get Out of the Way, Uncle Sam

The bulls are mostly winning this week's game... Good reports from the magnificent... More insight on the box business... This may be the story of 2023... No sign of a landing yet... Get out of the way, Uncle Sam...

The 'game' is going well...

I (Corey McLaughlin) wrote on Monday that this week was shaping up like a Super Bowl of financial activity. More than 150 companies from the S&P 500 Index were reporting earnings... central banks were meeting... and other widely followed economic data were afoot.

Well, so far, if you think of the Bulls playing the Bears in this particular big game, the Bulls have been mostly winning lately, even with a slight down day for the U.S. indexes today.

Popular tech names like Microsoft (MSFT), Alphabet (GOOGL), and Meta Platforms (META) have impressed enough investors with their latest quarterly financials... The Federal Reserve raised rates by the expected amount yesterday... And Fed Chair Jerome Powell spoke with what to me was a less-hawkish tone than over the past year, with no huge surprises.

Then this morning, one of Uncle Sam's economic agencies said that U.S. gross domestic product ("GDP") likely grew 2.4% in the second quarter of 2023. That's a bit higher than both Wall Street expectations and the 2% pace from the first quarter.

In the Commerce Department's first crack at estimating second-quarter GDP, it said increases in consumer spending, commercial investment, and government spending powered the growth, while exports and residential investments were down.

Notably, this GDP report also included a substantial update on inflation...

Estimates showed the core personal consumption expenditures ("PCE") index for domestic purchases in the second quarter increased by 3.8%. That's still high, but well below the first quarter's 4.9% year-over-year bump. If the pace of inflation continues decreasing, the Fed might not see much reason to keep raising interest rates anymore.

(One quick necessary disclaimer: We are always skeptical of "official" government data, but remember, I'm bringing up these numbers primarily because it's what a lot of other investors care about. It's not that we blindly believe it all, but we know it can move Mr. Market.)

Tomorrow brings the latest monthly update on PCE, which is worth noting as well.

In the meantime, stocks are still trending up...

If we're right and the "animal spirits" have recently returned to the market, they haven't shown too much fear this week overall, though today some earnings misses, like from conglomerate Honeywell (HON), dampened the mood and snapped the Dow Jones Industrial Average's 13-day win streak.

The three of the "Magnificent Seven" that reported earnings earlier this week offered no major disappointments. As Stansberry Research senior analyst Matt McCall wrote in his free Daily Insight letter yesterday about tech giants Microsoft and Alphabet, which reported Tuesday...

Microsoft saw sales of $56.2 billion, which was about 1.3% above analysts' expectations of $55.5 billion. Earnings also topped forecasts – coming in at $2.69 per share versus consensus estimates of $2.55.

Overall, it was a solid quarter for Microsoft.

The one knock on Microsoft, which caused the stock to dip 3% initially after its earnings announcement, was that the firm noted that it has increased its spending on artificial-intelligence infrastructure. That expense will likely pressure profit margins in the short term.

"But I think that's an overreaction," Matt said, because the capital investment in a new and potentially huge growth area could pay off with far greater returns. Then he continued about the other tech giant that reported its financials...

Meanwhile, Alphabet reported sales of $74.6 billion in the quarter – topping analysts' expectations of $72.8 billion. Profits came in nearly 8% above estimates at $1.44 per share. Wall Street had forecast $1.34 per share.

These are strong results. And the company noted growth in most of its individual business segments...

Last night, Meta Platforms reported an earnings beat, too. Revenue rose 11% year over year, above analyst estimates, and the company forecast higher revenue than previously expected for the third quarter.

Notably, online advertising on Meta's Facebook and Instagram platforms has rebounded, the company said... Its $31.5 billion in ad revenue was more than $1 billion more than Wall Street expected, with higher volumes of ads more than offsetting lower prices. And it appears all the layoffs and cost-cutting the company did last year have also helped the bottom and top lines. (The same could be said for Microsoft and Alphabet.)

In response, Meta shares jumped about 5% today to close near a price they last traded at in February 2022... before most people (though not us) were talking about a bear market. The stock is now up more than 250% since a low last October.

But it's not just the big names moving, either...

I wrote to you on Tuesday about the U.S. cardboard-box company, Packaging Corporation of America (PKG), whose shares jumped 10% in a day after beating earnings expectations because of cost-cutting, mainly. These shares were up another 1% today.

I want to get back to the observations about this boring cardboard-box business – for two reasons...

First, I received a terrific note from a subscriber after publishing our report on PKG. He has great knowledge about the box and packaging industry and does a lot of business with PKG in particular. (I told you we have subscribers involved in everything.)

And second, what he tells us aligns with what we saw out of the popular tech companies that reported their financials this week, and may tell what might end up being the story of the year for 2023...

What's happening in America...

Steve, who owns a small packaging-design studio, told us...

What I share for your readers today is many manufacturing facilities including [PKG] have started to reduce their plant footprint for manufacturing the same gross dollar amount (revenue) as in the past.

In other words, cost-cutting.

Steve told us it all stems back to the pandemic shutdowns...

The long-lasting effects of 2020...

At the outset of COVID-19, fewer people came to work in the manufacturing plants that his studio relies on, for example. Then the cost of raw materials went up "five times over a two-year window," and wages needed to increase to keep workers, too. Remember those stimulus checks and other pandemic benefits – which only recently expired?

At the same time, corrugated boxes were in huge demand for online shipping. Prices went up.

Once the economy began to reopen, demand fell from its pandemic peaks, but higher prices on finished goods (including boxes) remained high. And from Steve's view, PKG and companies like it were able to eke out small profits because of "smaller volumes of goods going out the door, and the consolidation of plants, machinery, and people to do the physical work."

This is still happening today... I mentioned this on Tuesday. PKG – which is vertically integrated, meaning it owns mills, shipping routes, and manufacturing facilities – said idling a mill in Washington state contributed to its earnings beat last quarter.

Remember those "shortages" of everything – that often came in boxes? Well, now the biggest pain point in the industry is high costs. And according to Steve, he sees companies like PKG decreasing costs, along with having a smaller than pre-pandemic workforce.

The savings yielded is dropping directly to the bottom line, increasing net profits. This is happening across America. Companies are cutting fat and waste, and increasing margins to make up for volume sales that are not there.

This may be the story of 2023: less volume in certain industries. These include cardboard-box manufacturing, which (as we wrote Tuesday) touches all parts of the economy...

PKG has thousands of customers, ranging from the likes of Procter & Gamble, Home Depot, and Berkshire Hathaway to smaller regional and local businesses in various industries and locations.

Plus, still-elevated prices (for finished goods and raw materials) have stuck, encouraging or forcing businesses to cut costs. At least the rate of price increases is slowing from 40-year highs.

At the same time, American people, businesses, and government officials still spent enough money on balance that U.S. GDP could expand by more than 2% in the second quarter. Any company that is actually seeing sales growth, with the type of always in-demand products that make for recession-proof businesses, is better off.

Boxes qualify. So, apparently, do online ads. And there are plenty of others.

So, if you are to believe all of this...

It means 40-year-high inflation, and the ensuing highest interest rates the U.S. has seen in 15 years, have either forced or helped nimble companies that sell in-demand products and services to become more efficient. (I'm not going to say the same about the federal government, that's for sure, which contributes a lot to GDP.)

Of course, this doesn't necessarily mean great things for everyone. Cost-cutting can also mean rising unemployment... And the tougher financial conditions get or the longer they last, the harder it becomes for all companies to stay efficient.

The "zombies" are on notice – those that can't even afford to pay the interest on their loans. If interest rates stay where they are for a while, or go up, life can get hard quickly for these businesses.

When is this flight landing?...

Yesterday, in his press conference, Fed Chair Powell noted the unemployment rate is the same as it was in March 2022 "when we lifted off" with interest-rate hikes. He was using the central-banker airline metaphor for a hiking cycle, where a "soft landing" is preferred by these economic string-pullers, though it more often than not doesn't work out that way.

Powell said...

It's not that we're aiming to raise unemployment, but... we have to be honest about the historical record, which does suggest that when central banks go in and slow the economy to bring down inflation, the result tends to be some softening in labor-market conditions.

He described this as the "likely outcome." Still, the Fed's track record of predictions is terrible. So maybe he will be wrong, the bulls will keep winning, and the economy will keep beating expectations, as our colleague Brett Eversole noted today in DailyWealth.

Today, we're not close to either a "soft landing" or a "hard landing" yet.

It's probably most appropriate now to say the flight is taking much longer than expected, and there is no estimated time of arrival for 5%-Plus Interest Rate Airlines at the airport.

At some point, the plane should run out of its trillions of dollars' worth of fuel that the Fed and U.S. government gifted to it since 2020. But it hasn't happened yet.

If the pace of inflation keeps coming down, that's good news... so long as enough companies are able to keep making enough profits to keep paying people what they feel they should be earning for actual work. What a novel idea. Uncle Sam, just get out of the way.

Famed Short Seller Goes Long on This Battery-Maker

You may know famed short seller Marc Cohodes for warning about eventual disasters FTX and Silicon Valley Bank. He likes to find winners, too, and he shares one of his favorites with our editor-at-large Daniela Cambone...

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In today's mailbag, thoughts on the Federal Reserve chair Jerome Powell's latest press conference, which we recapped in yesterday's Digest... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"It is quite simple. These Cro-Magnon economic savages invariably home in on HEADLINE Inflation Numbers rather than the more prescriptive forward-looking CORE Inflation Numbers.

"These scalawags are driven by the insane use of volatility to sell Crisis and Miracles on a meaningless moment-by-moment avalanche of the self-indulgent pretense of intelligence.

"Shame on these Economic caricatures of the slime trail of a common garden slug." – Stansberry Alliance member Bill B.

All the best,

Corey McLaughlin
Baltimore, Maryland
July 27, 2023