JPow vs. The Labor Market | The Daily Peel | 2/1/23

Feb 1, 2023 | Peel #390

Market Snapshot

Happy February, apes.

And Happy Rate Hike day too! (probably). That’s right, it’s the moment we’ve all been waiting for as JPow and the gang take the stand once again to erase your gains as much as they possibly can. If that’s not enough excitement for ya, then stay tuned for a few hours later when Meta reports its quarterly figures. We’ll see if they can keep yesterday’s momentum going.

Speaking of which, yesterday’s trade carried breadth we haven’t seen thus far in 2023. NYSE stocks gained at a 5-to-1 ratio vs. decliners, while the Nasdaq observed a 3-to-1 advancers-decliners ratio of their own. All 11 S&P sectors were in the green, so why even bother mentioning boring ol’ bonds? Nah, not today.

Let’s get into it.

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Banana Bits

More talk, less action—that’s the widely expected game plan for JPow & Co. to follow at today’s Fed meeting. Hey, big dogs gotta bark, I guess
How Lisa Su and AMD are dancing all over Intel’s grave
Fed Woj Nick Timiraos is back to his dastardly ways, setting Fed policy before JPow even touches a mic
Oh, would you look at that? Coincidentally, the U.S. reports that Russia is all of a sudden not following a nuclear arms treaty…Those naughty boys!

Macro Monkey Says

Employment Cost or Employees’ Income?

Phew, for a second there, I was getting worried. It was almost like low-income earners were gonna start to make actual money for themselves. Thank god we killed that…

Just jokes, apes, quit monkeying around. Although, that ocean of sarcasm kind of does speak to one of the great balancing acts of economics. To lay it out for a second…

Most people earn income from wages
People want the highest wages possible (obviously)
But the higher their wages, the higher the costs of goods & services will be
So, higher wages drive inflation, which after adjusting for inflation, ends up being little to no real income gain in the long run

Sucks, doesn’t it? Yeah, tell me about it. That’s why the name of the game should be driving down costs for everything besides wages as much as possible. Technological innovation FTW.

But JPow doesn’t really care about that right now. And as this man moves markets with every twitch of his face, let’s get back to what he wants to see real quick.

Wages have spiked more so than almost ever before over the 3-year period since C-19 showed up, particularly at the lowest-earning level. While that’s great for those individuals, it’s not so great when that wage-push inflation leads to a $23.79 bill for a carton of eggs and 5 apples at the grocery store.

This is the exact problem Powell and his band of macro nerds have been wrestling with for the last 33 or so months. And yesterday, we got fresh data on the subject.

The Employment Cost Index, a measure of the change in aggregate labor cost per hour worked over a given period, grew at its slowest rate in over a year this past quarter. Average costs of labor to employers (aka earnings to employees) grew by just 1.0%, barely beating one consensus estimate for 1.1% growth.

That’s a damn good sign on the inflation front. See, the inflation registered over the past two years—although partly attributable to supply chain disruptions and things like the avian flu—has been primarily driven by growth in wages, or cost of labor.

This is largely a result of employment demand vastly outweighing employment supply. Remember all that talk about “there’s 2 jobs for every 1 unemployed person” or something like that? Yeah, like any other good or service, when demand outstrips supply, prices for that in-demand thing, which in this case is labor, will spike.

So the whole rate hike crusade has really been a crusade against employment demand. Higher rates = less money to go around = fewer projects to work on = fewer employees needed. Fair enough.

And according to this data, along with the downtrend in CPI, PCE, and other broad cost indices, it’s exactly what the Fed has told us they are looking for to slow inflation. Will they actually care? Well, we’ll find out at 2 pm. Stay tuned.

Markets were loving the data yesterday as the equities trade of late has been little more than guessing how one dude nicknamed “JPow” will feel about the state of the labor market. Is this what George Washington wanted?

What's Ripe

Spotify ($SPOT) ↑ 12.72% ↑

Listen up—Spotify really blasted analyst expectations (and probably a few speakers) yesterday when the firm dropped its Q4 earnings figures.
Shares really started bumpin’ following the release of the quarterly numbers, gaining almost 13% on the back of a wider earnings loss and lower revenues than expected. Makes sense, right?
Of course. Thankfully, the volume was far more turned up around the firm’s subscriber growth numbers. Both premium and ad-supported tiers demolished estimates and posted record quarterly growth for the Swedish king of sound.
Monthly active users hit 489mn, 20% annualized growth, while Premium users grew to 205mn, posting 14% growth. That destroyed expectations and put CEO Daniel Ek on a pedestal on the same day that he said, “I was too ambitious in investing ahead of our revenue growth,” but Wall Street must’ve had him muted.

General Motors ($GM) ↑ 8.35% ↑

Most companies try to just barely make their earnings numbers, wondering if a slight beat of expectations will be enough to spike their stock
GM did not have that problem yesterday. For a boomer-a** automaker to speed over 8% in one day, something as eye-catching as a car accident must’ve happened. GM eviscerated estimates for the quarter, posting EPS of $2.12 vs. $1.68 expected while beating by nearly 10% on revenue estimates as well.
Mostly, that was due to egregiously low expectations set by analysts. Profits still fell annually, and the firm guided for continued margin pressures in FY’23. But because everyone was expecting this thing to go up in smoke, they managed to have themselves a day.

What's Rotten

Caterpillar ($CAT) ↓ 3.52% ↓

Sure, beating on sales is cool, but Wall Street is still gonna throw up if you can’t deliver on the bottom line (unless ofc you’re a hot, sexy tech stock like Spotify).
Anyway, Caterpillar learned this lesson the same way the people that buy its products like to do jobs: the hard way. Don’t get me wrong; earnings still grew at a solid pace, just not fast enough.
And for a company that actually managed to eke out a gain in 2022, that’ll never get the job done. At least part of the bulldozing shares went through is likely profit-taking after an up year and an overall solid quarter. Like DJ Khaled, our boy Caterpillar appears to be suffering from success.

McDonald’s ($MCD) ↓ 1.29% ↓

Oof. Talk about flopping on your earnings day strategy. McDonald’s delivered Q4 results ahead of analyst expectations, but it was the narrative around the growth that shot them in the Big Mac.
EPS weighed in at $2.59 vs. the $2.45 anticipated, while sales beat handily, too. But, the firm appears to have learned a big lesson: chalking up results to inflation, like every company ever did in 2022, might not be the move this year.
Execs hyped up the fact that “inflation-weary” customers resorted to McNugs more last year amid skyrocketing food prices. But, as we all know since reading Macro Monkey, inflation looks to be trending down. Not ideal if your whole strategy is, “yeah, our sh*t food is cheaper, so we cleaned up last year.”
Sidenote: I’ll fight anyone who says McDank’s chicken sandwich is anything but hot garbage. Utter disgrace to the food category. That is all.

Data Peel

chart

Source

Thought Banana

Cornhub

Let’s talk commodities.

This is a topic we spend all too much time ignoring here at the Peel, but it’s a massively powerful force in macro and markets. Not only is the commodities trade a key input to producer costs, but it’s also the clothes on your back, the fuel in your car, and what you buy at the grocery store. You could argue everything you have either is or began in some way as a commodity.

If that felt obvious to you, then good, we’re on the same page.

Of course, of those commodities, one of the most important factors is, in fact, the food that you eat. If you’re like literally every other human being on Earth, that involves a lot of grains.

As alternative investment provider Teucrium has pointed out for literally decades, the “Golden Grain Cycle” is pretty much the key. I won’t say it’s all that matters to soft commodity traders, but it is pretty much all that matters to soft commodity traders.

Anyway, using Tiktok’s favorite vegetable as our example, here’s how it basically works:

Corn prices are higher / lower than the equilibrium
Farmers plant more / less corn crops in response to prices
Planting more / less corn now leads to lower / higher corn prices in the future
And the cycle continues…

Teucrium points out that this framework worked like a charm from 2010 to 2019. Corn prices began rising from 2010-2012, leading farmers to plan more of their high-priced product to maximize profit margins (yes, farmers are people too).

Then, after a few years, an overabundance of corn crop in the global market led to falling prices. Falling prices continue until demand eventually outstrips supply, causing prices to rise and kickstarting the multi-year cycle all over again.

Now, there’s gotta be a reason why we’re talking about this, right? Are you wondering where corn prices are now? Let me save you a Google / ChatGPT search.

Since early 2021, corn prices have remained elevated. Average production costs are estimated at $3.50 per bushel (is it a bushel of corn?), but futures markets have the stuff pegged around $6.80, ranging from low $5s to low $8s per bushel in the past two years.

So, what does this mean? Go read that long a** paragraph again. But before you do, let me be clear: there is absolutely no guarantee the cycle continues. Putin could light all of Ukraine’s corn fields on fire or something, or maybe technological innovations will come in to mix the market up a bit. As always, in investing, you never know.

And this dynamic isn’t unique to corn; it’s basically the fundamental driver of all commodity markets. To quote Jordan Belfort’s quaalude-selling friend in the Wolf of Wall Street, “supply and demand, m*therf*cker.”

The big question: Will the Golden Grain cycle continue to reign supreme in the corn market? How about other commodities; where are they in their own version of this super cycle? And most of all, how can I profit from it??

Banana Brain Teaser

Yesterday — There is a magical waffle in a storage locker. Every minute, each waffle undergoes mitosis and turns into two waffles. At the end of an hour, the storage locker is full of waffles. At what minute is the storage locker 25% full of waffles?

The 58th minute. At the 59th minute, it is 50% full, as it is ½ of 100%. At the 58th minute, it is ½ of the 59th minute’s waffle content.

Today — It’s 100 bananas off the WSO's Elite Modeling Package for the first 5 respondents. LFG!

Three envelopes are presented in front of you by an interviewer. One contains a job offer, and the other two contain rejection letters. You pick one of the envelopes. The interviewer then shows you the contents of one of the other envelopes, which is a rejection letter. The interviewer now gives you the opportunity to switch envelope choices. Should you switch?

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser” or simply click here to reply!

Wise investor says

“In the world of investing, things that are true and things that are perceived to be true are the same thing.” — Howard Marks

Happy Investing, Patrick & The Daily Peel Team

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