Good Friday Morning! Especially to Amazon, which is taking over Thursday night football for the NFL. I was pleasantly surprised with the quality of the broadcast, and who doesn’t like Kirk Herbstreit in the booth for the game? Listening to Al Michaels and Kirk Herbstreit made for an odd combo; Amazon should have poached Chris Fowler. But it was a good game nonetheless.
I have a Conservative Institute column below with thoughts on the “humanitarian crisis” in Martha’s Vineyard. That’s the actual term the emergency response team in Martha’s Vineyard uses to describe fifty migrants getting sent their way from Florida. You can’t make these stories up. Nor can you make up the craziness in the economy over the last week, which is what we’re diving into this week—market meltdowns, CPI prints, and why FedEx is a company worth watching — links to follow.
Where you can find me this week
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[9/12/2022] With a Ukraine victory, what happens to Putin? – Conservative Institute
[9/16/2022] Liberal hypocrisy shines in Martha’s Vineyard – Conservative Institute
Peak inflation? Or greater unknowns?
There are a lot of ways to gauge the health of the economy. During the time of former Fed chairmanship of Allan Greenspan, one of his favorite anecdotal pieces of evidence was talking to FedEx CEO Fred Smith. Joe Weisenthal at Bloomberg pointed this factoid out today because FedEx reported earnings, and they were terrible. That reminded Weisenthal of Greenspan’s point, which the Wall Street Journal memorialized in this February 2007 article:
Don Hays, in a market commentary, relates an anecdote about former Fed Chairman Alan Greenspan’s weekly talks with Fred Smith, CEO of FedEx, which he considered a good bellwether for the economy. Noting this “FedEx indicator,” Mr. Hays points out that the stock fell off last May, a suggestion to the Fed that they, and oil prices, “had moved to the point that choked off growth.”
Later on, when FedEx’s stock and economic outlook improved, Greenspan believed that the economy was improving. The theory is simple: a company like FedEx deals with consumer and business shipping of all kinds. If their business is dropping off, that tells us about business spending and consumer activity.
FedEx Corp. said its quarterly revenue fell below its expectations and it was closing offices and parking aircraft to offset declining volumes of packages moving around the world.
FedEx shares tumbled 13% on the warning, which came after markets were closed Thursday and about a week before the company was scheduled to report results for the quarter ended Aug. 31.
Chief Executive Raj Subramaniam, who took over in June, said he was taking actions to reduce costs including freezing hiring, closing 90 FedEx Office locations, parking some cargo aircraft, reducing Sunday ground operations and closing five corporate offices. FedEx didn’t say if it was cutting its workforce.
Most notable of all this was the fact that FedEx withdrew its 2023 forecasts. In the press release for earnings, FedEx said:
First quarter results were adversely impacted by global volume softness that accelerated in the final weeks of the quarter. FedEx Express results were particularly impacted by macroeconomic weakness in Asia and service challenges in Europe, leading to a revenue shortfall in this segment of approximately $500 million relative to company forecasts. FedEx Ground revenue was approximately $300 million below company forecasts.
“Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S. We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first quarter results are below our expectations,” said Raj Subramaniam, FedEx Corporation president and chief executive officer.
The first paragraph tells us much of what we know: China’s lockdowns and Europe’s energy crisis, combined with the droughts, are making life difficult. But noteworthy is the phrase “given the speed at which conditions shifted.” FedEx couldn’t anticipate those changes and has played catch-up ever since.
Does this mean anything? I don’t know. Allan Greenspan watched things like this closely at the Fed. It wouldn’t shock me if current people in the Fed were still watching FedEx closely.
But I lead with that because it’s a major US company flashing warning signs and pulling their 2023 forecasts. They can’t forecast what will happen in 2023. What was once thought true for 2023 is no longer accurate, and companies are shifting accordingly. FedEx isn’t alone.
The WSJ profiled the Scotts Miracle-Gro company this week. Like many companies, Scotts scrambled during the pandemic as sales skyrocketed from people fleeing to the suburbs. Now, they’re in a full-blown crisis because sales have evaporated, and they have more inventory than they know what to do with:
Just months ago, the chief executive of Scotts Miracle-Gro Co. was bracing for the biggest summer ever. After two years of struggling to fill store shelves, the company had ramped up production to catch up with consumer demand for lawn seed, fertilizer and other garden products. Investments in new manufacturing capacity were paying off as the 67-year-old CEO prepared for the usual rush of May orders from retailers looking to replenish their stocks.
The orders never came, and by Memorial Day, Mr. Hagedorn knew his company was in trouble. Scotts has already cut about 450 jobs, or around 6% of its workforce, since May, and more layoffs are coming. Manufacturing plants have been slowed. Cash is dwindling. Nobody is getting bonuses. Instead, the company is in full-blown crisis mode.
That story is not alone. WSJ highlighted this one too:
Newell Brands Inc., the maker of Yankee candles and Sharpie markers, said that in a span of six weeks starting in early August, it went from being comfortable with its retailer stocks to cutting its sales and cash-flow forecasts for the year after chains slashed orders. “A number of our top retailers have chosen to make a more dramatic inventory reduction certainly than we expected,” Christopher Peterson, the chief financial officer, said at an investor conference this month.
After spending two years trying to play catchup with broken supply chains, companies now have cost-cutting customers and more inventory than they can manage. These facts are all butting up against the holiday season when they need to move products to make way for Christmas. Meanwhile, a belief that recession looms in 2023 is causing companies to think twice about major decisions.
Taking a macro look at this environment, the WSJ found warning signs across the corporate world:
From Walmart Inc. to Nordstrom Inc., retailers have a glut of inventory and are discounting items to clear out space for holiday goods. Many have already lowered profit expectations for the year and are working to cut costs as consumers are pulling back spending in categories such as apparel and home goods ahead of the key year-end shopping season.
Best Buy Co. warned investors last month that shoppers are buying fewer TVs and other electronics as they pay more for gas and groceries. Macy’s Inc. CEO Jeff Gennette said last week customers across income levels are pulling back on purchases. Days later Dollar General Corp. executives said people are trading down to less expensive versions of everyday items, such as powdered detergents, and putting more purchases on credit cards.
Companies are attempting to balance serving consumers who are eager to spend despite rising prices while also being sensitive to shoppers who need or want to be more budget conscious. As a result, retail executives and consultants predict the slowest sales growth in the period between November and January in years.
“The uncertainty moving forward is significant,” said Erik Nordstrom, chief executive of department-store chain Nordstrom, on a call with analysts last Tuesday. “There’s cases to be made that things could get better pretty quickly, and then there’s credible cases to be made that it’s going to be tough.”
Where this all leads is anyone’s guess. No one knows – that’s the critical part to note. I’m not going to pretend to predict because companies like FedEx are saying: we’re pulling our 2023 forecasts and reassessing. If you’re getting paid to get this right, to navigate a company through the last few years correctly, and you don’t know the answer, don’t expect anyone else to know, either.
Speaking of unknowns, we got the latest CPI/inflation report from the BLS. It surprised markets because it showed inflation coming in hotter than expected. Markets anticipated a headline CPI of 8.1% this month, and the actual number was 8.3%. If we’re being honest, markets were trading/hoping for a CPI number that surprised the downside, the 7.9% range. Instead, we got a hotter-than-expected number, and markets tanked.
While gas prices continue declining, food and housing prices are rising. Most importantly for the Federal Reserve, core inflation, which removes energy and food, was double expectations (0.6% vs. 0.3%). That suggests that inflationary pressures are much stickier than expected, forcing the Fed into more rate hikes for an extended time. At least, this is how markets are reading the new data.
According to CNBC, “The three major averages were on pace to notch their fourth losing week in five. The Dow Jones Industrial Average declined 3.70% this week, while the S&P 500 is 4.08% lower. The Nasdaq Composite is down 4.62%, headed toward its worst weekly loss since June.”
Those drops began the moment that the CPI report dropped. The markets plummeted instantaneously, with tech stocks taking it on the chin. Everyone believes more rate hikes are coming, and there’s no pivot in the cards from the Federal Reserve. Recession talk is back on the menu, and reality is settling in.
We’ll learn what the Fed does this upcoming week. Expectations are for a 75 basis point hike (again). I believe that will happen because anything more signals another policy failure by the Fed. Also, it would freak markets out even more. Watch Nick Timiraos at the Wall Street Journal because the Fed has leaked their moves early to him.
To reiterate: I’m not trying to predict where things are going. This week, there was a significant market drop, a bad CPI print, and more. If you ignore the political spin and look at companies paid to figure things out, they see increasing uncertainty across the board. If they don’t know, do you think the Fed knows? Or the White House? These companies also say the changes are swift, and it’s hard to keep up. This White House is slow, plodding, and barely responsive.
If you’re in the White House holding on for dear life to the notion that we’ve hit peak inflation, these earnings reports should keep you up at night because neither the companies nor investors have the slightest clue what happens next. No spin in the world can save you from that.
Links of the week
The Danger from a Wounded Putin – Jim Geraghty, National Review
A Very British Coup: The extraordinary fall of Boris Johnson – Andrew Roberts, Commentary
A Chinese Spy Wanted GE’s Secrets, But the US Got China’s Instead: How the arrest of a burned-out intelligence officer exposed an economic-espionage machine. – Jordan Robertson and Drake Bennett, Bloomberg
All living holders of the Victoria Cross and George Cross will be invited to the Queen’s funeral: Victoria and George Cross heroes honoured with Queen funeral invites: Iraq war veteran who saved his platoon in rocket fire, RAF ace who sunk Nazi U-boat and retired cop who protected Princess Anne from kidnap – Daily Mail
Twitter Thread(s) of the week
Satire of the week
Guide: How To Conduct Yourself In The UK Right Now If You’re Irish – Waterford Whispers News
Thanks for reading!