Join Tematica Research's Chief Macro Strategist, Lenore Hawkins, and Chief Investment Officer, Chris Versace, as they discuss and debate what's driving the market and the economy this week.
Markets last week
This week’s theme… fade the cover story. WSJ cover story, Inflation at 13-year high
Markets were unconcerned by the slightly hotter than expected inflation numbers.
- Last Thursday, after the hotter-than-expected CPI data came in, the S&P 500 rose 0.5% to close at a new all-time high
- The Nasdaq Composite rose 0.8% and the Nasdaq 100 gained 1.1%,
- In a testament to 2021 word of the year, “Transitory,” in the hours after the CPI data came out, the 10-year Treasury yield dropped 5 basis points
Over the prior 5 days ending Thursday’s close
- TLT up 3.3% - LT BONDS STRONGEST PERFORMERS
- Nasdaq staging a comeback with Nasdaq 100 up 3.2% and Composite up 3.0%
- Russell 2000 - up 1.8%
- S&P 500 up 1.1%
- DJIA down -0.3%
- VIX down more than 10%
- Bitcoin down 4%
Key Economic Data and Related Events LAST WEEK
Consumer Credit in the US rose by $18.6 billion in April after a downwardly revised $18.6 billion gain in March, well below expectations for a $22 billion increase. Revolving credit fell by $2.0 billion while non-revolving rose by $20.7 million.
Mortgage applications in the US declined 3.1% during the week ended June 4. This was the third consecutive weekly decline with refinancing down 5.1%, pushing the index to its lowest level since February 2020 while purchases rose 0.3%.
Economic Data to Watch THIS WEEK
Tuesday, June 15:
- May Retail Sales - We’ve talked before
- Homeowners pulled out $49 billion in equity in Q1
- That’s the highest level since 2007 (up nearly 80% YoY
- That was A LOT of cashflow support in Q1. Now for Q2, no more stimulus and will HELOCs or refis continue at this pace for cash outs?
- May Producer Price Index
- Likely to be hot
- May Industrial Production & Capacity Utilization
- How is capacity - we suspect given supply challenges, it won’t be heating up much
- June Empire State Manufacturing Index
- June NAHB Housing Market Index - any cooling?
- April Business Inventories -
Wednesday, June 16:
- Weekly MBA Mortgage Applications Index
- Last week mortgage applications came out for the June 4th week and fell 3.1% on top of a 4.0% turndown the prior week and slipping now in five of the past seven weeks. Over this interval, they have plunged 11% and are down at an annual rate of 41% year-to-date. And the level? Dialed all the way back to where it was when the pandemic broke back on February 14th, 2020.
- May Housing Starts & Building Permits
- May Import-Export Prices
- June FOMC Rate Decision
Thursday, June 17:
- Weekly and Continuing Jobless Claims
- June Philly Fed Index
Earnings of NOTE THIS WEEK
Tuesday, June 15
- Oracle (ORCL) - Barometer of enterprise spending and we’ll see if the cloud capacity constraints it discussed in March have abated or persisted amid unprescedented demand
Wednesday, June 16
- Lennar (LEN) - housing demand, pricepoints, comments on whether pricing is boxing potential buyers out; lumber and other pricing comments
Thursday, June 17
- Kroger (KR) - trends during the quarter as well as its guidance will tell us to what degree consumers are still focused on eating at home vs. dining out; we’ll also want an update on its private label business that has been pivoting more and more with our Cleaner Living investing theme
- Adobe (ADBE) - With companies adopting a digital first mind set, which productivity tools have benefitted and which ones does the company see gaining momentum in the back half of 2021? One area of interest for us will be electronic signatures…
- Smith & Wesson Brands (SWBI) - FBI NICS Firearm background checks are up 17% YoY for the 3-months ending in May; while firearm stocks may not be everyone’s cup of tea, the company is likely to put up a good quarter.
Advisorpedia's Week Ahead ... Powered by Tematica Research.
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Lenore Hawkins, Chris Versace
Chris Versace 00:04
This is the week ahead brought to you by Advisorpedia and powered by Tematica Research. I'm Chris Versace. . .
Lenore Hawkins 00:39
Totally ignored. It was basically a big feeling.
Chris Versace 00:46
But it was a weak phone because he cuz even Apple had their big worldwide developer conference. And I distinctly remember watching it and being like, well, that's nice. That's interesting. But again, it wasn't a week in which we were bowled over by much.
Lenore Hawkins 01:00
Nope, no, it really wasn't the I think the theme for the week can be fade the cover story. As of last Friday is Wall Street Journal. The cover was inflation at a 13 year high. So big drama about that. And we're going to get into today why again, we are still in camp transitory. All right, well get us go. Alright, well, so overall markets totally unconcerned by the slightly hotter than expected inflation numbers, which I think we could all kind of see that coming. But what was interesting is last Thursday, after those CPI data numbers came in, the s&p 500 actually rose half a point and close it new all time high, NASDAQ composite rose, almost 1% NASDAQ 100, gained more than 1%. And it's testament to the 20 what we're officially calling the 2021, word of the year, transitory. And then hours after that CPI data came out the 10 year Treasury yield actually fell five basis points.
Chris Versace 02:05
Now that to me, is the most telling point right there. Because if we flash forward, or flashback sorry, you know, a few months, people were all concerned with the Treasury hitting 151 60. Right. And now I believe as we're recording this, it's hovering around 143.
Lenore Hawkins 02:24
Yeah, a month ago, on the cover of Barron's magazine was said vi word high inflation back there, and the yield on the 10. year was at 1.64. And consensus was saying we were on our way to like to somewhere even arguing two and a half. Today, we're now less than 1.5. And if you look at what kind of support levels are technical analysis, The next stop is going to be down to about the 200 day trend line. And that's about 1.16. So despite all this talk about inflation, 10 year break, even yields are actually today at six month close nominal 10 year yields have barely moved in the past few months. And something that no one's talking about is it China's inflation data came in actually below expectations at at 1.3%. year over year in May versus expectations for 1.6. Same thing with for Norway, which is a very fuel intensive economy, right? That came in at 1.5% for core and that's the lowest since July of 2018 versus expectations for 2%. So across the board, I feel like that's really kind of how we can summarize this ...
Chris Versace 03:32
Right it's fascinating to me how though the perception is like it changed or accepted it so so quickly because you were right just a week ago there were there were Chicken Little The sky is gonna fall and now all of a sudden it's just like, Yeah, whatever.
Lenore Hawkins 03:48
Yeah, we're not so worried right? We actually had over the past five days, ending with Thursday's close from last week. The strongest performer how to look at it the major players, the long term ETF the 20 plus year ETF ticker TLT Rose 3.3%. Now compare that to the NASDAQ with NASDAQ 100 was up 3.2%. So the NASDAQ 100 was less than TLT NASDAQ composite was up 3% screw small cap Russell 2000 up 1.8 for like almost half the s&p 500 up 1.1. So a third of the performance of TLT. The Dow is actually down point three while the VIX is fall at about 10% and bitcoins dropped about 4%. So the big winner was long term treasuries.
Chris Versace 04:40
That's that's that's simply unbelievable. As we look to kind of put that into context let's let's break down the economic data above and beyond the the all important much focused yet disappointing. Not really meeting much. CPI report what what else were you watching last week.
Lenore Hawkins 04:58
So this is all kind of tied in To this, this inflation story, right part of the inflation fear is this, you know, money printing when we've been saying this for I've been one of them that saying like all this money that the Fed has been thrown into the economy, oh, it's gonna lead to inflation. Well, not really seeing that, because we've talked about this before the velocity of money, what that just means is like, it's really tough to get inflation when if the Fed dumps cash into the system, and that, that cash is going into people's mattresses. That's not really in the system. Right. What we saw last week is consumer credit in the US rose by 18. Point 6 billion in April. But then after a downwardly revised at 2.6 billion gain in March, but that's way below the expectations for 22 billion increase and revolving credit fell by 2 billion, that's credit cards, and non revolving rows by 20. Point 7 billion. Those are pretty much mortgages.
Chris Versace 05:53
Now, what do you make of that, where consumer credit was less than expected. But when we look back on the retail sales report, and we digest the comments that we're getting out of the earning season, where, you know, retail facing companies are putting up, you know, double digit numbers, not year over year to 2020. But compared to 2019, as this, you know, we can only describe as unbelievable pent up demand following being locked away, for so long is happening with how does the math stack to thing,
Lenore Hawkins 06:24
Stimulus checks, and people back to using their homes as an ATM, right, we had the biggest expansion in home based credit. So borrowing against your home occurred in the first quarter that we've seen since 2007. I remember back then that was that was when we started off as home as the ATM. So those two things really jacked up people's ability to spend plus, like you said, that whole pent up, I gotta get out and buy something.
Chris Versace 06:54
Hey, we were talking about it during the week makeup sales, killing it.
Lenore Hawkins 06:59
Yeah, well, pretty soon, you're gonna be able to actually start seeing people's lips again. So that's pretty exciting. So if we're looking at those codes,
Chris Versace 07:13
Sorry, sorry, sorry, sorry, I got to deal with this every day, believe me. open mouth insert foot.
Lenore Hawkins 07:19
I don't know what it is you I cannot understate it's like, it's like, if I can't see your lips, I somehow go deaf. What is this we get with a mask and people say something to you. And you're going to a and I've I've turned into some sort of hearing impaired person. So I'm really looking forward to the whole lip thing. Like, stop, like,
Chris Versace 07:37
Let's move along and talk to me about mortgage applications.
Lenore Hawkins 07:40
Okay, mortgage. We've mentioned this last week, but mortgage applications again, the client for the weekend in June 4, this was the third consecutive weekly decline refinancings down 5.1%. So like we just said q1 thought a lot of taking cash out the most we've seen since 2007. It's not something that's gonna feel to continue to happen. The index for mortgage applications is at the lowest level since February of 2020. So that was not a great time for do you think?
Chris Versace 08:12
Do you think that with the 10 year retreating like we were talking about, that this might spur some incremental activity that maybe weren't maybe we bottomed out in the short term on this refinancing?
Lenore Hawkins 08:27
I think I think what we're, I think what we're seeing in housing, it's very difficult to say something profound about the economy overall from housing. Because what we're dealing with is such small numbers, right, the supply of housing available for sale has been really low. What we are seeing is the amount of time that homes are being on the market continues to increase. Right. So it used to be you put your home up, and boom, it's gone. And now that's starting to expand.
Chris Versace 08:59
Right, I was just I was getting at with the fall in the 10 year view that we might see more people start to refinance and continue to use ...
Lenore Hawkins 09:07
Oh, sorry the 10 year. I mean, that certainly doesn't hurt. But if you've already pulled out money out of your home, just because the 10 year has calmed down a bit isn't gonna ...
Chris Versace 09:19
No, no, I know, I know. But I remember back in 2007 2008, he would talk to people who refinance their home not one time, not two times, but three times.
Lenore Hawkins 09:30
So, based on those that was based on the skyrocketing house prices, right, because if your home price is going up like 20% a year, then boom, suddenly you've got more equity in it.
Chris Versace 09:40
Right? Right, which is something we've seen, you know, a surge in housing prices,
Lenore Hawkins 09:43
You need the two of them, right? You need both falling interest rates and you need skyrocketing home prices. But I think we've also got where the lenders are a little bit wiser that we don't want to go down you know, we've been down that road. Answer well for anyone know No. Okay, let's move on. So one of the things that is kind of interesting is looking at wholesale inventories. They came last week rose in line with expectations a little under 1% month of month over month over month, on a year over year basis up about 5.2%. But what's really interesting is that if we look at the average monthly level from q4 of 2019, versus this past month and exclude energy, wholesaler sales are up 2.1%, which means if we just take because energy has been so volatile, right, take energy out of the equation, we're seeing an expansion at the wholesale level. Now, that's a good sign for the economy. What's also interesting is that inventory levels relative to sales are also super low by historical standards. So that means, you know, given the level of sales that wholesalers are seeing, you would expect to see them have more inventory. In fact, x energy, they're at the lowest level since December of 2013. Durable goods inventory to sales ratio is at the lowest level since February of 2012. And is in the 11th percentile of all time going back to 1992. So what are the things that's going on? There is problems with the supply chain continue? Trust me. I know all about that, right? Yeah, exactly. Good, Chris. So for our listeners, Chris's and I, oddly enough, both of us have had are in the market to get you online in the online in the market.
Chris Versace 11:24
I got one. I got one. But I couldn't get the model.
Lenore Hawkins 11:30
I wanted to settle.
Chris Versace 11:31
Yeah, yeah. So I was trading from an old Viking dishwasher that arguably never worked well, to what I wanted to get was a Bosch 800 series. And I had to settle for a 500 series which is modestly lower, I can't really complain. But when they were installing it, I was talking with the installer, and he said that that 800 series sold out four to six months across the country. Bosch cannot make them The reason being chips and connectors that go to the motherboard. They can't get them. And you know, here we go. And this, this ties with some of the stuff that we've been hearing, not not just across the auto industry. But also this past week, Flextronics came out and said that they don't see this shortage abating until 2022.
Lenore Hawkins 12:18
Supply Chain issues are going to continue to be a problem. The other thing that seems to continue to be a problem is finding the right person for the job. So last week, we got the jolts report, which is on job openings in the US. And one more time job openings hit a new record high of I mean, this number is just truly mind boggling to me, about 9.3 billion, that's up almost a million from the month before. Totally shattering expectations for about 8.3 million, so is almost a million more than was expected. Now, unsurprisingly, the areas with the biggest increase in openings were accommodations and food services, not a shocker, right? I'm telling you getting back in new business restaurants are starting to open up interesting that educational services lost 20,000 jobs. What was also really interesting is that the number of hires only rose by 69,000 to 6 million. And what we're hearing across the board is large and small businesses continue to complain about the difficulty in finding workers, despite the broader unemployment level, they use six, which takes into account those who are marginally attached to the workforce. That's a 10.2%. When you look at the the broader labor pool, you look at who's actually really looking vailable, to bring in, you're at point nine, four jobs for every one person looking for a job. And yet we still have this mismatch. So I think that's one of our themes going forward is really this need to retool a good portion of the workforce?
Chris Versace 13:55
I agree with that. But I I also think it's interesting that the data that you just talked about, just I mean, it is the economic equivalent of the commentary that we heard throughout the entire earnings season, supply chain issues, can't find it, pull it and those two is we know can't turn on a dime, which means that we're going to continue right, you're more and more about that, at least through the summer, if not the rest of the year.
Lenore Hawkins 14:17
In the fall, we're talking about that labor pool and the challenges there really, and and what's going on with the economy, the big picture is the change in productivity. So understand what productivity really was all about. In a recession, employers normally slow to cut jobs as sales slump, so they they're slow to cut them, right? You don't, you're not really sure how bad it's going to get you're not most are not super aggressive about getting rid of employees. So that means that you're producing less with almost the same number of employees. That means productivity is going down, right because the demand for your stuff is falling faster than you're getting rid of employees and when the recession is over and sales recover. Employers again because they're a little bit nervous, right? We just went through the recession, they're slower to add jobs. So that means the productivity rebounds demands going up faster, and you're not hiring employees as quickly as the demand goes up. So you just normally see this fluctuation. But the pandemic totally broke what has been something we basically always seen, business output per hour grew in three of the past four months. So we didn't see that cycle of crashing, demand crashing productivity, actually, in the January to March, quarter of this year, it was productivity was up 4.1% from the year prior. That's the fastest pace we've seen in a decade. Now granted, some of this is more of a technical thing than actual productivity gains. Because the jobs that were cut were more like lower productivity. If you're looking at like white collar, just the way this is just the way it's measured by the government, the productivity of like barista versus the productivity of say, like a white collar tech, though, the white collar.
Chris Versace 16:05
There's a lot that I can't do without, that's a bad example.
Lenore Hawkins 16:08
I'm totally with you. I'm just saying that's kind of how it's how its measured by the government. For me, personally, I'll take the breaks. But what happened was that and so when you saw those, like lower productivity getting cut, right, because hospitality, those kinds of things were restaurants, they had to cut labor, where's the lot of the white collar jobs didn't really get cut. So you cut the ones that are given lower productivity measures. So that artificially boosted the appearance of productivity. But way beyond that, we saw companies were pushed by the pandemic to actually change their business models and intensify their use of technology to squeeze more and more sales out of the same workforce. Often that workforce having to remain at that socially distance. industry is accounting for a third of the job losses, since the start of the pandemic have actually increased output, which includes retail information, finance, construction, professional business services, what happened was that companies learned they can actually do more with less and that a lot of those overhead costs before are being seriously questioned. Companies invested in technology that increased productivity per employee, and then are looking at the things that they've before thought, now I really need to spend on it. And maybe I really don't. And that's also really good long term for the economy. Do we really need those fancy offices? Maybe we don't need that big right? We're shifting more and more we just heard this morning from Amazon saying that they're officially going to allow employees to work to their more office space, not the frontline, but an office based employees to work from home two days a week and then up to four weeks, a year, remotely, as long as they're within the US.
Chris Versace 17:46
Well, I mean, we're hearing that from Apple too, and a growing number of listed companies, but But to your point about technology, I mean, I think the jury's still waiting to see to what degree business travel actually comes back. And we know that there's a tremendous ripple effect, not just on, you know, airlines and trains and rental cars, but you know, hotels, restaurants, and to some extent, other events, let's just call it whether they're, you know, in Vegas, or, you know, sporting events and tickets and things like that.
Lenore Hawkins 18:15
Yeah. So when you when we we look across part of what's going on with how businesses are changing their mindset. banks in the US are now struggling in similar ways that the banks in the European Union have been struggling with for quite some time. bank deposits continued to surge this year, between late March and May 26. They rose over 400 billion to 17.0 9 trillion, according to latest data from federal reserve. That's slower than the pace last spring, but it's still nearly four times what we've typically seen over the past 20 years. US companies are holding on to billions in cash and thanks, frankly, at this point, they just don't know what to do with it. Because when when the coronavirus pandemic hit last year, corporate execs rushed to raise money, right? We saw we saw that corporate, the bonds just coming out at a record pace. But now they're holding on to that cash. And companies are reluctant to go and borrow that the cash is just sitting on banks and banks aren't able to get to lend that out and degenerate cash flow. you're risking CFOs and treasurers. We're still very wary of the impact of the pandemic and we're not really out of the woods yet, whereas in the US maybe we kind of feel like we are a lot of the world isn't this story's not over yet. So there the CFOs and treasurers really are exactly ready for those big expenditures, even if they don't earn a whole lot on their deposits. So well bank deposits are up borrowing is down with total loan at about 61% of all deposits as of May 26. Now that's down from 75% in February of 2020. So that means that the industry is banking in history's net interest margin, which is a key measure of lending profitability, fell to an actual record low in the first quarter. So it's a tough time to be in the lending business. And while we're hearing whispers of tapering around the Fed last week, the ECB said they're kind of moving in the opposite direction. And the most recent policy meeting, they pledged to keep rates at record lows and definitely, and also that they intend to buy bonds at a significantly faster pace. Now, bottom line on that is that it's positive for the US dollar and weaker for the euro. That relationship as far as the US dollar is concerned, maybe borrow money out, we've sort of seen where the the DX y US dollar looks like it's really formed a bottom and it's going to be strengthening from here. So kind of looking at the economy overall final thought, we're seeing global food price inflation, really coming out of this pandemic. And this has been exacerbated by droughts in Brazil and in the US, and by stockpiling in China. And in fact, the UN's key food price increased now for 12 consecutive months with a 4.8% surge in May that push it to the highest level since September of 2011. And if you remember back to September of 2011, that was a period that was fraught by food inspired riots globally. And that was partially responsible for the Arab Spring revolutions. Now, while we still file all this inflation, talking to the transitory file, this is a significant destabilizing factor in the emerging markets in the near term. And if you add this to the already high levels of tension over the pandemic and vaccine rollout, this could also intensify social tensions in the US, as well as the rest of the world. So we're keeping an eye on on this in light of the Goldilocks expectations priced into the markets. When we look at that global recovery story.
Chris Versace 21:51
So let me ask you the question that I'm sure people just digested what you said this last piece, particularly on food prices. Why is it that when we look at something food, that takes 20 to 25% of the average paycheck? Why is that not included in the core inflation rate?
Lenore Hawkins 22:12
So naturally, yeah, food, food, food and energy? Well, okay, so this now they're the argument. To be fair, the argument is that those things can be highly volatile, right? Like it. This is what I think we talked about this last week, that if you get this crazy freeze that hits Florida, in California and wipes out oranges, prices Weren't you said skyrocket, that really inflation now, and you have it with food, right? You have a really tough farm year, and corn crops or wheat crops don't do really well. And they skyrocket coffee, we see things with the coffee bean prices going up. Is it really right to call that inflation when you're talking commodity products that can be subject to supply shocks? And is that is that really part of inflation? Same thing with energy, you can get the supply chocolate that can spike it. So from the feds perspective, when you're you're looking at Wow, that's not really inflation, but from a household. Oh, my God, my bills are going up. Right now. That's feels like inflation.
Chris Versace 23:17
That that's the part that resonates with people, you know, when when you go to the store, and you come back with a bag that's even smaller than it was last time, but the overall receipt is significantly higher. You're like, what is going on here? And I think it's just perhaps you're right, that we we, as people who look at these things need to come up with a new term or terminology for what this actually is.
Lenore Hawkins 23:39
Because people feel I hate the word inflation, because inflation, we use it for everything. And it's not like when the feds looking at it and talking inflation. What they're talking about is changing monetary policy. You really don't want the Fed considering changing monetary policy, or losing babies. Yeah, based on a good year or a bad year record, right. Like that doesn't make any sense. Or I go pet gets itself all wound up again. I mean, you just, you don't you don't want the Fed making those decisions. But when it comes to us, what works you're like, Damn, prices are up.
Chris Versace 24:09
Yeah, exactly. I like like, like I said, I think we need to develop some a new lexicon for what this is. So that was last week. I know the color forward. Compared to the end, we have a much busier week ahead in terms of economic data. What are you watching?
Lenore Hawkins 24:25
So may retail sales come out on Tuesday. And like we just said, we saw homeowners pulling out a bunch of equity in q1, we're still getting the benefits from the stimulus package. Let's see what happens in May. could still be a little bit elevated. But there was an awful lot of cash flow support earlier this year. Let's see what happens. Well, so on Tuesday, get the main producer price index, expect that one to be hot, still going to keep an eye on it. industrial production capacity utilization. still keep an eye on next. Remember, we keep talking about the tend to get too worked up about inflation when you have slack in the system so that capacity utilization is a key one to watch. That will also get the Empire State manufacturing index. How hard is manufacturing still recovering because that's, you know, a bit of a barometer for the economy. And as we were talking about those home prices, June's any HB housing market index comes out on Tuesday, a signs of cooling like we have been seeing, or time on market has been stretching out a little bit. And we'll also get business inventories on Tuesday, Wednesday, the weekly MBA mortgage application index, is that going to be falling again? Will it be a fourth week of decline or fifth week of declines? Mae housing starts and building permits right? That's that's what's going on our are we seeing this still getting hot import export prices, more inflation data, and big thing on Wednesday will be the FOMC rate decision. So last week we heard from the ECB said, we're staying loose as long as we as long as we can see. And in fact, we're probably going to step this up with stimulus. So we'll be hearing from the Fed, we've been hearing paper talk, what are they thinking so that will be one to dissect. And on Thursday, the usual weekly continuing and initial jobless claims, it's been falling, falling, falling, falling, see if that's still going and if only fed index on Thursday as well for June.
Chris Versace 26:24
Okay, so that that's a lot of stuff next week. Unlike you, I will probably have my foot up with an umbrella drink when it comes to corporate earnings over the coming week. But first, let's just touch on a couple ones from this past week. You know, we already mentioned apple and their worldwide developer conference kind of being a net event. I will say though, that there was a continued focus by the company on privacy. And I think that's going to be a differentiating weapon for them. Increasingly across their array of products. We also said Flextronics, which is the third largest contract manufacturer said the chip shortages going to be with us until mid to late 2020 to a couple of years. It's going to be crazy. A couple other key things Sherwin Williams paint and coatings company boosted their guidance for the current quarter continued strength in North America. That's that good old repair, remodel. Business chipolte lay hiking prices, why combination of rising worker wages, we've heard all about that, as well. And food and food input cost inflation Yeah, for them, you're right, this is going to add to food inflation. But again, we knew this was going to have to happen you can't bump your your hourly wage to 15 bucks. Now I'm trying to pass some of this along.
Lenore Hawkins 27:37
Which is also but that's also part of what we did with productivity, right? Because the way the minimum wage boost some companies have responded is by implementing some Automation features.
Chris Versace 27:48
Right, and I think we're gonna see more of more of that. I mean, particularly Chipotle, as they roll out these Chipotle lanes, that's That to me is gonna be quite interesting to watch. These next two I want to mention together so Starbucks grinding their way back to pre pandemic business. They're running short on cups, coffee, syrups, and other essentials, and then chewy, the online ordering portal for you know, pet supplies that my my pups tend to get their monthly allotment from. They put up great numbers for their April quarter. But this was the point that really stuck out to me. The company shared that elevated out of stock levels were a persistent headwind throughout the quarter and reduce their first quarter sales by about 40 million. It's an industry wide headwind, their supply chain driven, and the company expects this to continue in the second half of the year, even as incremental production capacity comes online. So you take the two of those. And it seems to me that we are as this economic engine starts to, you know, go from an idle to a hum to a roar, that we are going to continue to read more and more about the supply chains. I would say it's almost exactly the opposite of what we saw last year. When Yep, right, right at the height of the pandemic, what Couldn't you get toilet paper, paper towels, cleaning supplies, whatever. And that took months for capacity to match demand. I think we're seeing the same thing. We've never seen such a global idling so synchronized Yeah, that we it's going to take time to recover. And I I'm coming at this a little differently than you but I do think it means that your comments about transitory inflation are likely to be spot on and proven correct. When we look back on this in hindsight,
Lenore Hawkins 29:32
Well, when you when you look at the kind of the big picture of it. We've never experienced, like you said such a massive global shutdown of production today an incredible scale. And I think to say that, now that we're getting back to business to save that demand is going to sustainably be significantly higher than than it was before. The CLI won't Be able to return to where it was or keep up with demand. I think those are both This is just a disingenuous argument. I don't I agree, a good reason for that, especially when you see all the the investment that's been made in productive capacity with last year, one of the one areas of the economy that really grew was this shift towards automation, improving productivity. So wait a minute, we've improved productivity, and you're telling me that we're not going to be able to make as much as enough stuff to keep up with demand? This is transitory
Chris Versace 30:31
I think we were compare contrast, you know, this is a total, you know, what we saw last year on those supplies that I mentioned, was a total pull forward because of fears over scarcity. And now what we're seeing is a tremendous amount of pent up demand spending, whether it's for makeup, clothes, what have you. And at some point, you know that the pendulum will swing, and we'll be back to a normalized level of demand, the
Lenore Hawkins 30:57
Supply chains, and the supply chains will get sorted out to it right, you gotta bring, you can't have shut down a factory set everybody home, you know, lock the door, and then just turn it all back on and everything working like no, it's all good. It's all good. Now, it'll take a bit people and and those supply chains as far as the transport, right, because that's really complex network. So we've talked about this many times it no boats, the ships and the trucks and trains, they're in the wrong place with the wrong containers full or empty. And it's gonna take a while to get that sorted.
Chris Versace 31:30
Well, especially since you may not have all the dock workers you once had, because they're sitting around collecting extra unemployment benefits, the the the lineup is that this is gonna take some time to settle out. And I think you and I are more inclined to be patient before calling anything extreme. But I also think we recognize that the demand factor that we're seeing today to your point, you can't what's the man? It's not linear? It's not going to keep growing? Well, it's it's not linear, you can't extrapolate this as the new demand path. Right? Totally great. Yeah. Okay. All right. Let's, was there any other company news that caught your eye last week?
Lenore Hawkins 32:07
Yeah. So a little warning, clear, Royal Caribbean announced that two passengers aboard their Millennium cruise ship tested positive for covid 19 on their asymptomatic, which makes me wonder, I think get tested cat, why are they testing? testing? Everybody must be testing. They've isolated the two of them and are now going to to trace, like do contact tracing on it. But this brings up sort of an interesting, you know, one, opening up the global economy opening up travel, you know, our dam, so this wasn't a good sign for that. There's also this odd tension right now that we've got between governors and some states and the cruise industry, governors that are saying we don't we're not going to allow businesses to test or to force vaccinations. So the governors are saying, No, you can't do that. And the cruise ship industry saying, We're we got to do something this is we can't we can't trap people on a boat and say, we have no idea what the COVID statuses, those governors. I'm just curious, have you done an analysis of their political leanings? Well, yeah, but that just that's it's, it has ramifications for those states. Because if these crews and these cruise companies just say, you know what, like, we can't take that risk, I understand that you for your state don't want us to do for sex, you know, say that you have to be vaccinated or you have to be tested to, to come on to our ship, I understand that you as a state don't want to do that. But well, ships can move. And that could hurt the tourism industry if they move their base, right. So that's one to keep an eye on. Also, American Airlines announced they're investing 25 million in electric fly taxi, startup vertical aerospace. So that is just more more proof on our cleaner living investment theme where we're seeing this shift towards cleaner transportation. Now,
Chris Versace 34:01
You know, it's and I have to wonder, though, like, when, when is that going to happen? And how big of a battery Do you need to have to fly an airplane across the country? Pretty good. It's gonna be a big freakin better, cuz you're not recharging in the air? Well, you Sorry, you were about to say,
Lenore Hawkins 34:21
Um, your your your favorite David & Busters. They also announced last week and it had a surprise profit for q1 of 40 cents a share versus expected loss. Are you surprised? Are you surprised?
Chris Versace 34:34
I'm not surprised about that. People want to get the pardon my language, get the EFF out and go do some Yeah,
Lenore Hawkins 34:38
Yeah, they really do. So.
Chris Versace 34:41
I'm waiting for the axe throwing companies to start going public. That's what I'm waiting. So what's coming up next week on earnings. So as I mentioned before, it's it's a pretty light week, Tuesday, we got Oracle. You know, we really want to see what they have to say about enterprise spending, particularly regarding cloud remember when they reported their last In March, they were having constraint issues, just because demand was simply unprecedented. Has that slowed down at all? Have they been able to meet demand? that's those are some things we'll be looking at as well as the closing of the slack acquisition. Once they 16th brings Lenore, that's a home builder. So there's a whole slew of questions we want to, you know, pay attention to how strong is housing demand, what price points are selling? are they seeing any consumer
Lenore Hawkins 35:27
Lumber prices are coming down finally?
Chris Versace 35:30
Well, right. But that's going to take time to work through the system, right. So, you know, what's the margin outlook for the back half of the year between the prices stay high, and we start to see some input cost relief there. Thursday, is really the busiest day with all of three companies to pay attention to. We got Kroger and you know, the trends during the quarter that their report as well as its guidance are going to tell us to what degree are people still really wanting to eat at home versus Hey, I need to get out of here a lot Dave and Busters in go experience, you know, some restaurant dining or something else. But the other thing that I think you and I will be focused in on unlike a lot of other folks will be what is going on in their private label business? Is it continuing to pivot in line with our cleaner living investment theme? Adobe look coming out of the pandemic, we know companies have adopted a digital first mindset. So what productivity tools have been killing it? What productivity tools are they bringing out? You know, one of the ones that I want to pay particularly close attention to after having to deal with lawyers and notaries over this last week or electronic signatures, I hope to God that we can get that get that rolling. And then lastly is one that you know, I'll say it out of the gate. It's not going to be for everybody. It's firearm companies Smith and Wesson. We know firearms are kind of a topical issue, both for individuals as well as for investors. But here's the reality. The FBI NICs, firearm background checks are up 17% year over year for the three months ending in May, the company is likely going to have a good print. But what do they see going forward? And what are they talking about in terms of manufacturing supply chain in input costs? Because at the end of the day, Smith and Wesson, they're a metal vendor, that's all they are.
Lenore Hawkins 37:19
And I think kind of a final thing that will be keeping an eye on is the g7 meeting results, which kicks off kicked off on Friday in the UK. There's kicking off in light of tensions between low well tensions again, between the US and China. And the US announcement that we're buying Was it 500 million doses of Pfizer donate it really, I kind of just say it's it is just it's nice to see the US doing something so great. Something so I agree that I agree. It's just nice to see that
Chris Versace 37:57
The only thing that G7 is, you know, any progress on the minimum global tax rate.
Lenore Hawkins 38:04
Yeah. I think that's right next door. Ireland right next door is like Don't do it. Don't do it. No, no, no.
Chris Versace 38:14
No, I know. I know what I think you were about to say something very important.
Lenore Hawkins 38:20
And that is the week ahead.