Looking for Value and Finding Reality
More trouble for a major American retailer... A look at the 'real America'... What won't cure higher prices... Closing a gas reserve... A drop in the bucket... Another dose of reality...
Trouble in the food aisles...
Today, we can add major retailer Target (TGT) to the list of consumer-facing businesses – like McDonald's (MCD) and Starbucks (SBUX) – that have reported "disappointing" earnings lately... and whose leaders are saying that inflation is the biggest reason why.
Target shares fell around 8% today after the company posted quarterly results that missed Wall Street analyst estimates. Target also cut its outlook for the current quarter. As CEO Brian Cornell said, higher prices are putting a "strain on the consumer wallet."
Target's same-store sales declined by nearly 5% year over year, and net sales were down 3%. Cornell pointed out that the cost of "food and household essentials" is the biggest concern that Target is hearing about from customers.
This is similar to what leadership at McDonald's and Starbucks has said recently. Inflation is impacting people's spending decisions today more than in the past year or two. And that's affecting the bottom line...
For example, Starbucks' foot traffic was down 6% last quarter, its net income dropped 15%, and sales projections were cut for the second time this year. The stock fell nearly 16% in a day after its earnings report came out a few weeks ago. Meanwhile, McDonald's missed earnings expectations for the first time since the fourth quarter of 2021.
The real America...
When you add inflation to higher borrowing costs and current interest rates on things like credit cards (which more and more people are using to buy food), there's reason to believe in a weakening economy now or in the future.
Here's one observation from Arie Kotler – the CEO of Arko (ARKO), which operates thousands of convenience stores and fuel stops under names like E-Z Mart and 1-Stop in small towns across America. He told global news service Reuters yesterday...
You not only have inflation pressure now but also higher interest rates and fuel prices at $3.59 on average nationally. People are going to drive less and spend less as they have less money in their pockets.
Kotler described his customers as representing the "real America," and that they're making fewer trips to stores.
Today, many consumers are struggling just to put food on the table. Recent research from the Urban Institute found that last year, nearly 1 in 5 adults reported paying for groceries with savings that they didn't intend to use for routine expenses.
You won't find many market analysts or CEOs talking about the "resilient" American consumer anymore. Instead, the buzzwords are "picky" or "choosy."
I even heard one – likely highly paid – analyst on Bloomberg Radio the other day describe his first-ever trip to a Walmart (WMT). He spoke about how he was amazed by how many items it had, including food next to items like home goods. Oh, the amazement!
He was looking for value and found the reality for most people in America.
Walmart, by the way, performed better than its competition in the first quarter, reporting a nearly 4% gain in comparable sales compared with a year ago. Customers clearly see it as the best big retail/grocery place to go for value deals. Its foot traffic was up 4%.
Target is playing catch-up, announcing plans on Monday to cut prices on 5,000 items, such as milk, meat, and bread. It doesn't want to miss earnings expectations forever.
The short-term fix everyone is banking on...
We could be optimistic and say that this scenario is why the folks at the Federal Reserve maintain they're going to cut rates later this year – and that it doesn't have anything to do with potential strain in the banking system, the cost of financing Uncle Sam's debt, or politics.
At least some Fed members have noted that consumers are hurting. This afternoon, the central bank published the minutes from its April meeting, which included a report where meeting participants "noted signs that the finances of low- and moderate-income households were increasingly coming under pressure" and saw this as "a downside risk to the outlook for consumption." They also "pointed to increased usage of credit cards and buy-now-pay-later services, as well as increased delinquency rates for some types of consumer loans."
But cutting rates would only be a short-term fix for a spending slowdown, and lowering borrowing costs with the pace of inflation running above 4% annualized (using January to March data of the Fed's preferred "core" personal consumption expenditures measure) will likely erode the value of dollars even more over the longer run.
Granted, cutting rates could still be precisely what the Fed does to "save" the economy – and end up causing more problems. As we've said before, the central bank is the undisputed king of "fighting the last war."
What else won't be a cure for higher prices...
Yesterday, the Biden administration said it plans to sell nearly 1 million barrels of gasoline from a government-managed stockpile in the Northeast between Memorial Day and July Fourth to ensure "sufficient supply flows... at a time hardworking Americans need it the most."
This may be true... but the move is more for political points than anything else. U.S. refiners can produce millions of barrels per day of gasoline... so selling off this stockpile is literally a drop in the bucket for supply.
Of note – and because we've seen this point glossed over elsewhere – this isn't oil from the Strategic Petroleum Reserve, which is an oil stockpile stored at different sites in Texas and Louisiana.
This gas stockpile, located at sites in New York Harbor, Boston, and Portland, Maine, was created 10 years ago, after "Superstorm Sandy" left millions of people in the Northeast without fuel.
It turns out, the close of this reserve was included in March's government-funding bill and the proceeds from the sale of gas will go to the U.S. Treasury Department, which certainly needs all the money it can get. Though this, too, will be a drop in the bucket.
The gas will net maybe around $2.5 million at today's future market prices ($2.50 per gallon). Meanwhile, Uncle Sam's fiscal deficit is growing at around $9 billion per day and is on pace for nearly $2 trillion for the year.
So as a practical matter – other than leaving the Northeast without an emergency gasoline reserve – the move makes for a nice headline, but nothing else.
In other news, Ethereum ETFs are nearing launch...
Yesterday, we wrote about the price of Ethereum – the world's second-largest crypto by market cap – jumping 20% in one day on reports that spot Ethereum exchange-traded funds ("ETFs") could be approved by the U.S. Securities and Exchange Commission ("SEC") sometime this week.
Crypto Capital analyst Stephen Wooldridge II wrote to Digest readers back in February about the possibility of Ethereum ETFs hitting the market in May... and acting as a catalyst for Ethereum's price, like the launch of spot bitcoin ETFs earlier this year.
The approval looks like a formality now, with the first listing possibly coming tomorrow. As crypto news outlet Cointelegraph reports...
Amid increasing speculation about the possible approval of a spot Ether ETF in the United States on May 23, global investment manager VanEck's ETF has been listed by the Depository Trust and Clearing Corporation ("DTCC") under the ticker symbol "ETHV."
The DTCC is an American financial market infrastructure provider that offers clearing, settlement and transaction reporting services to financial market players. A listing on DTCC is considered a crucial step before final approval from the U.S. SEC.
In other words, the SEC just needs to hit the "on" switch.
Another dose of reality...
Finally, our colleague Mike Barrett, editor of our Select Value Opportunities service (available to Stansberry Alliance members), wrote today about the dangers of going "all in" on stocks right now...
Mike gave a powerful reminder to consider your investment timeline... while showing that U.S. stocks haven't always bounced back fast from "violent swoons" like they've been known to do in the past decade. That's why he says today's environment is one to be cautious about...
The current state of the market, and the overall economy, is eerily similar to what we saw in late 2021... Evidence continues to mount that the economy is weakening amid persistent inflation.
And investors... are mostly ignoring it, in the hopes that further weakness will force the Federal Reserve to cut interest rates.
But weakness comes with a price. As Mike explained...
If upcoming economic data and earnings results disappoint analysts (which we expect they will), investors will have no choice but to lower their lofty expectations. This will push stock prices much lower, similar to what occurred in late 2021 and 2022.
So while you can enjoy the new all-time highs we've been seeing, don't let your guard down, either. In Select Value Opportunities, Mike said he's letting "winning positions ride the market momentum... but we're maintaining tight stops in order to lock in profits." Wise words.
New 52-week highs (as of 5/21/24): Alamos Gold (AGI), Altius Minerals (ALS.TO), Amedisys (AMED), American Express (AXP), Alpha Architect 1-3 Month Box Fund (BOXX), Colgate-Palmolive (CL), Costco Wholesale (COST), Alphabet (GOOGL), Intuitive Surgical (ISRG), iShares U.S. Aerospace & Defense Fund (ITA), Kinross Gold (KGC), Liberty Energy (LBRT), Eli Lilly (LLY), Altria (MO), Motorola Solutions (MSI), Procter & Gamble (PG), Sprott Physical Silver Trust (PSLV), ProShares Ultra QQQ (QLD), Regeneron Pharmaceuticals (REGN), Royal Gold (RGLD), Sandstorm Gold (SAND), iShares Silver Trust (SLV), ProShares Ultra S&P 500 (SSO), Teradyne (TER), Trane Technologies (TT), Tyler Technologies (TYL), Veralto (VLTO), Vanguard S&P 500 Fund (VOO), Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP), Advanced Drainage Systems (WMS), Wheaton Precious Metals (WPM), and Utilities Select Sector SPDR Fund (XLU).
Another quiet mailbag today... As always, send your comments and questions to feedback@stansberryresearch.com. A reminder about the ground rules: We can't provide individual investment advice or respond publicly to every note, but we do try to read them all.
All the best,
Corey McLaughlin
Baltimore, Maryland
May 22, 2024