Mr. Smith Goes To Wall Street
Great Ones, after this weekend’s rant from FedEx (NYSE: FDX) Founder and Chairman Fred Smith, I’m convinced that Wall Street doesn’t have the stomach for the truth.
What truth does Mr. Smith speak?
I don’t wanna spoil it, but let’s just say it’s about … stagflation!
Dun dun duuun!
Let’s listen in, shall we?
You simply do not have the workers to meet the demand that’s been juiced by the printing of money… It’s like sitting in your car and putting your foot on the accelerator and the brake at the same time.
Now, where have I heard that before?
Oh, right! I said it right after the August U.S. jobs report!
But Mr. Smith was far from finished. He proceeded to tell viewers of Fox Business’ Kudlow on Saturday that:
Over the last 15 or 16 months, there have been five separate occasions — from the American Recovery Act in March — where you had money being pumped into the economy.
The problem is when that comes head-to-head with the lack of labor we have in the United States to meet the demand.
People misjudged it as some sort of shipping issue in the main after the correction of the pandemic. There wasn’t enough labor to offload the containers and distribute the items in the fulfillment centers.
All of those economic themes should sound rather familiar to you, Great Ones, because I’ve harped on them for a long, long time … especially the “easy money” and the fact that we’re looking at a supply-side issue and not a demand-side issue.
Stagflation! Coming Soon To An Economy Near You!
Supply chain issues were always about labor. Always. And Mr. Smith hit the nail on the head about there not being enough workers to load and unload shipping containers and about the potential for stagflation.
And now, we have essentially two open job positions for every one unemployed worker in the U.S., which … let’s be honest … you aren’t going to fix by raising interest rates. At least not in the way all of us believe it should be fixed.
Remember, when all you have is a hammer … it’s very tempting to treat every problem like it is a nail.
And a hammer is all the Fed has left right now. So it’s going to nail the U.S. economy hard.
Umm … phrasing? Are we not doing phrasing anymore?
Laugh it up, fuzzball, because the Fed could potentially issue its biggest rate hike in more than 40 years this week. Prior to last week’s Consumer Price Index (CPI) report, the Federal Open Market Committee was all but guaranteed to hike interest rates by another 0.75 point.
After the CPI came in hotter than expected, economists are now dreading a full 1.00-point hike.
“We continue to believe markets underappreciate just how entrenched U.S. inflation has become and the magnitude of response that will likely be required from the Fed to dislodge it,” Nomura Securities told clients in a research note last week.
Now, I would not be surprised at all to see a full 1.00-point rate hike from the Fed this week. Chair Jerome Powell knows what’s going on, and he’s terrified right now, though he hides it well.
And what he’s terrified of is “stagflation.” For y’all newbies out there, stagflation is what you get when the economy stalls out, but inflation keeps right on soaring.
Stagflation is exactly what we’ll get … if the Fed’s rate hikes don’t start affecting inflation soon. We’re already in a recession, inflation is still running hot, and we’re about to see a spike in layoffs.
Mark my words on that last one. The Fed’s talking point when U.S. gross domestic product (GDP) declined for two straight quarters was that employment numbers were still strong. That’s about to change, and Wall Street isn’t ready for that truth yet…
So what do we do? How can we survive the fallout from the Fed’s forced march?
Forced march? I like that one.
Don’t worry, Great Ones! I’ve got just the solution to the market insanity about to take Wall Street for a very bumpy ride…
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Up? In this market?! How?
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The Good: In The Zone
You might be surprised to know that corporate earnings reports are still rolling in, in the midst of all this economic tomfoolery. This morning, automotive DIY specialist AutoZone (NYSE: AZO) stepped into the earnings confessional … and was promptly smacked down despite strong results and optimistic growth prospects.
For fiscal Q4, AutoZone reported earnings of $40.51 per share versus expectations for a profit of $38.51 per share. Revenue rose to $5.3 billion, which also beat Wall Street’s targets.
Looking ahead, AutoZone said that the future looks bright, as falling gas prices pushed more customers to drive, thus boosting demand for repairs from both DIY handymen and commercial repair shops.
Morgan Stanley was so impressed that it upgraded AZO stock to overweight from equal weight and lifted its price target to $2,420 from $2,125.
Despite all of this optimism, AZO stock dropped more than 2% today.
To me, however, this looks like a potential buying opportunity. Not only is AutoZone outperforming — it’s actually positive for the year! Take that, S&P 500! — but it’s also on track to further excel amid a U.S. recession. After all, the DIYers come out of the woodwork when economic times are hard. I mean, it’s cheaper to do the work yourself if you can, after all.
Keep an eye on AZO stock, Great Ones. This might be a good recession investment if you’re game.
The Bad: Little Mud Brick Houses…
For you and me? I think not. Little pink houses, maybe. But I have a feeling Adobe (Nasdaq: ADBE) houses aren’t going to hold up all that well…
It all revolves around Adobe’s recently announced $20 billion acquisition of Figma. Adobe announced the deal last week in conjunction with its Q3 earnings report. At the time, BMO Capital, Jefferies and Mizuho Securities downgraded ADBE stock because of the deal. All agreed that Figma was a good fit for Adobe, but the price tag was just too much.
According to Jefferies: “While Figma may prove transformative as in past deals (e.g., Macromedia), payback period is years out on a record investment.”
This morning, Wells Fargo joined the downgrade parade, cutting ADBE to equal weight from overweight. Wells’ reasoning was exactly the same as Jefferies: “Despite our favorable view of the business, we have concerns around the $20 billion purchase of Figma.”
It does seem like a bad time to drop $20 billion on an acquisition, especially if said acquisition drags out due to antitrust concerns. And, yes, there are plenty of antitrust concerns … just ask Charles Rule.
Rule works as a partner at the Rule Garza Howley law firm and is a former DOJ antitrust specialist: “This deal appears to raise straightforward, traditional antitrust issues.”
Can you say “Oof!”? Sure, you can. You can also stay away from ADBE stock while all this plays out. It’s gonna be bad for Adobe either way.
The Ugly: Grand Theft Take-Two
Video game maker Take-Two Interactive (Nasdaq: TTWO) finds itself in an interesting position this morning.
Rockstar Games, a Take-Two subsidiary, confirmed that gameplay footage of its highly anticipated Grand Theft Auto VI video game has leaked online.
The footage surfaced last week from a GTAForums user by the name of “teapotuberhacker.”
Is that Teapot Uber Hacker or Teapo Tuber Hacker? Who cares? Not I.
Anywho, TTWO stock is down today on the leak after Oppenheimer issued a bearish note on the hack:
[These leaks will have a] negative impact on Rockstar’s near-term operations such as audits and investments in cybersecurity, legal actions against the hacker and websites that share the footage.
Oppenheimer also noted that damage to the Grand Theft Auto franchise would likely be negligible.
Let me tell you a little secret here, Great Ones. The leak won’t do any damage to the franchise at all. I’ve seen the footage. It’s not enough to judge the game on quality or playability one way or the other. In fact, the footage is so early looking that you can basically only tell that it is a Grand Theft Auto title.
Fans of this franchise have been waiting for more than 10 years for a new Grand Theft Auto game. They’re not going to let some basic early footage discourage them. In fact, this leak just further confirms that the game exists and is coming soon.
Take-Two is gonna make bank on this game when it releases. That’s a fact. So I would think that the revenue from a new Grand Theft Auto game will likely offset any costs related to litigation or security investments. In short, I think Oppenheimer is blowing this a bit out of proportion.
Nearly all video games have leaks one way or another. So while this leak is ugly, Wall Street’s overreaction is even uglier.
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