Stocks were flying oh so high last week. That is until Inflation numbers dropped on Thursday morning and killed all momentum for the week. January inflation numbers came in at 7.5% much higher than economist expectations of 7.2% (more on this below). Then on Friday, Geopolitical tensions with Ukraine and Russian seemed to be getting worse causing oil to rise and stocks to fall.
But on the bright side, mask mandates are coming to an end in a bunch of states including New York, California, Rhode Island, Delaware, Connecticut, Massachusetts, and New Jersey. But your boy gonna still be rocking that mask cause I trust NONE OF Y'ALL!
Indices Result for the Last Week:
Tale of the Tape
ECONOMY
Prices are acting like a 2-year-old in a toy store.
Just cannot remain calm AT ALL
Inflation continues to keep its foot on the neck of the economy. January Inflation numbers decided to ack like the Cincinnati Bengals and exceed expectations.
7.5% versus the expected 7.2% for the Year over Year comparison
0.6% versus 0.4% expected from December to January
This instantly sent stocks in a downward move (as shown above) because now there is no real reason for Papa Powell and the Fed to hold back on rate increases. Which had been predicted to happen during the next FOMC meeting in March. When stocks fell the 10 Year Treasury Yield ROSE to its highest point since 2019, crossing the 2% threshold.
HOWEVER; there is a risk that the Fed coming out guns blazing to fight inflation will cause the economy to go into a recession. As we have discussed in this post, America runs on a credit system. When borrowing costs increase people do not like borrowing money to do things to improve the economy.
A simplified example of this is with Mortgages. Interest rates have a huge impact on the amount of house you can afford.
With interest at 2.75% a person with a $1500 budget can afford a $360,000 house
With interest at 6% a person with the same budget can only afford a $240,000 house.
That is can be a 1200 square foot house versus a 3000 square foot house. So interest rates are very important to home purchase. Unfortunately, Mortgage rates just hit a two-year high. Which could cause a pull back in demand (but that's not happening cause a lot of people are at that point in time where they need to buy a house for family reasons).
I personally do not want to be Papa Powell and the Fed right now because they are kinda stuck between a rock and a hard place.
Does he wait patiently for supply chain bottlenecks to get resolved which means inflation probably goes on for longer and risks hyperinflation (I highly doubt this would happen)?
Does he rush in and raise interest rates quickly which in turn could cause an economic recession?
The Fed will try to find that Goldilocks zone where they can slow down but not cause total catastrophe. Think of it like driving, the Fed does not need to smash the breaks as it sees red lights ahead. They can slowly bring the car down from 80mph to 65mph.
My takeaway:
Girl Scout Cookies are facing supply chain issues as well from the Wall Street Journal:
This explains Consumer Sentiment being so low:
WE NEED OUR GIRL’S SCOUT COOKIES!!
(Yeah this had nothing to do with the story I just really wanted to share the Girl’s Scout Cookie story somehow)
For your investing purposes, this short-term inflation means nothing. We focus on the long term so we do not react to things that will change in the next 12 months. The best protection you can have against inflation is to keep bringing in income. The second best protection is to invest in businesses with pricing power. So as long as you stay invested, you'll be totally fine. It's fun to talk about but really it means nothing for your portfolio. So focus on the BIG PICTURE, not the minute details.
EARNINGS UPDATE
Disney
Never bet against the House of Mickey. It just does not work out well for those that do.
Disney returned to being the magical world that we know it to be after Fourth Quarter Earnings Report.
They brought in $21.82 Billion in the quarter.
The BIGGER deal was the earning per share which came in at $1.06 versus the expectation of 62cents.
The biggest player in the return towards profitability for Disney is their Parks are starting to return to pre-pandemic levels
Revenues for parks doubled from $3.6 Billion in 2020 (pandemic crippling) to $7.2 Billion in 2021. That was with Omicron running WILD at the end of the year.
Another good news for Disney is they added 12 million new subs in Q4. Now have a total of 129.8 million way above the expected 125 million (half of Netflix's totally subs).
But also important Disney's ARPU (Average Revenue Per User) grew from $5.80 to $6.68
Disney+ growth is a massive deal as this has the highest margin for any part of Disney's business
Consumer Goods Companies are all being taken to town by Inflation
Pepsi, Coke, and Unilever all reported earnings last week. These companies are a great Barometer to see how the economic recovery is going as they own a plethora of brands.
Coke not only owns the Coke line of products but almost any other drink you can think of
PepsiCo has its Pepsi line of products, but they are also heavy in the snacks industry. Check it:
Unilever not only does food but also does cosmetics as well:
So in some way, we use every single one of these companies almost on a daily basis. Because of this, they can show us how consumers are spending their money. The good news is people are back to spending on services. As these companies work with restaurants, stadiums, movie theaters, etc. They all reported record revenue growth
Coke reported a revenue increase of 9% finally topping pre-pandemic 2019 levels
Pepsi reported revenue growth of 12%
Unilever reported growth of 4.5%, which was the highest growth they have seen in 9 years.
When you are this large it is extremely hard to move the needle (law of large numbers).
However, inflation ate into their bottom line. Profits for all companies fell year over year as manufacturing costs ate away at any increase in revenue
Coke's profit fell 28% in Q4 and Pepsi's fell 9%.
Both companies are paying more for sugar, plastic, and aluminum
Unilever's profits were so bad they did not share it with the public
All three companies warned that inflation will continue to drive down profits for the year ahead.
Looking Ahead
The big question on everyone’s mind for this week is:
WHAT WILL PUTIN DO?
He is keeping the world at the edge of our seats as he has amassed all the forces he needs to invade Ukraine. President Biden met with Vladimir Putin on Saturday to discuss and try to talk things out. However, that has basically no substantial results. The US has urged all its citizens in Ukraine to leave immediately, as it predicts that Russia will begin launching missiles into Ukraine. Other nations are following, the US' leads and calling their citizens back home.
I do not fully understand the situation with Ukraine but from what I gather the main thing Putin wants is:
US promise to NEVER invite Ukraine into NATO because it borders Russia and would make the perfect invasion spot for the US and its allies
The US cannot make that promise because Russia has no right to make decisions for other countries
Plus if the US agrees to this can other autocratic nations just threaten war and get whatever they want?
Putin fears the rise of democracies in Eastern Europe. Previously, Russia has tried to force its own type of leadership in Ukraine. That BACKFIRED badly with Ukraine swinging even harder in the opposite direction.
This is a fear of Putin that once every nation around him is more democratic that will flow into his own country as well. Causing him to lose power.
Putin wants to be respected.
He feels that the world has forgotten the power that was once Russia.
With the rise of China, Russia is no longer the World Power it once was as the World moved to be connected by trade.
This is a move to remind everyone that Russia is still powerful and can cause changes in the world order.
Also important to note, China and Russia seem to have become rather a buddy buddy recently. Which I don't think is good for the long-term stability of the world.
I am hoping that all this blows over and it's a major feint from Putin just to flex his muscles a bit. Too many lives are at stake over the ego of one man. How things play out here will send waves throughout the world.
For those who ask “Why should the US be involved in anything in Ukraine?” These were the same questions people asked before WW2. If you don't quail and stop a virus fast. It grows and it mutates and before you know it, Pearl Harbor is bombed. The point is Putin won't be able to just stop at Ukraine, he will keep advancing further west. Plus every autocratic government would know if they want something all they have to do is go to war and the rest of the powers would capitulate to their demands.
Point is, this is a slippery slope.
EARNINGS
The biggest focus of the week will be Walmart, which reports earnings on Thursday. Walmart is a great barometer for goods spending but also to see how inflation is adjusting consumer spending. Are people spending more on necessities and avoiding excess to save money?
It'll also be interesting to see how manufacturing and energy costs are affecting a business with as tight margins as Walmart (about 15-20%).
I want to see how Walmart has continued to use its stores to become an online powerhouse to combat Amazon.
Also, we get numbers from leisure and hospitality companies like Marriott, Airbnb, Wynn Resorts, and Hilton. How did Omicron affect their numbers at the end of the year and are they seeing an increase in foot traffic this year?
I will mostly be focused on Airbnb.
The rest:
Totally Unnecessary Man U Update
This team has no mental fortitude. How do you make the same mistakes, GAME AFTER GAME AFTER GAME!
Literally, it's exactly the same story every game:
Man U scores in the first half, playing well as a team
The Second Half begins, they lose focus, and boom game is tied.
Everyone tries too hard to be a superstar.
Man U never recovers and they end up either tying to lesser opposition or losing.
This is no longer a coaching problem. This is about the players on the field. It's like everyone is just playing their own game with no respect for the system. Don't know what will happen moving forward but it ain't looking good at all.
Thank you for reading
I hope you all have A WONDERFUL WEEK. I will see you back here on Wednesday for another post. In the meantime, Go subscribe to Rambling Mind Podcast for mid-week stock market updates. You can also catch me on TikTok, Instagram, and YouTube every day.
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Remember GENEROSITY > greed
God bless Each and Everyone of y’all
✌🏾