Smooth seas ahead for cruise lines?

Stocks inched higher yesterday in the void that exists between now and when Fed Chair Powell speaks tomorrow afternoon, because right now, nothing else matters… to the market. The National Association Homebuilders Builders Sentiment Index logged another decline as prospective buyers are sidelined by high mortgage rates.

Tricky, sticky inflation. I’ll bet that you are surprised that we are still talking about inflation… if not frustrated. A few snags in the supply chain with empty shipping containers piled up on the wrong side of the Pacific after the start-stop-start caused by the pandemic would be expected to send a couple of supply-shocks through the system. Economics… basic economics usually has a way of working things out for us. Not this time, however.

Remember, at the end of the day, it is suppliers that control prices. Of course, they can’t just charge any price they want. Competition amongst suppliers and demand from consumers is supposed to be the constraint on price hiking. That certainly works in the textbooks and, for the most part, when economies are running under normal circumstances. The pandemic did all sorts of things to supply and demand mechanics. We already know about the supply hangups, but demand… demand simply went off the rails. Perhaps, the driver was society’s collective brush with death, or perhaps it was the boatloads of cash from government stimulus, or… who knows what, but consumers were not only willing to pay higher prices for things, but they stood in line to pay those prices. That left suppliers with NO CHOICE but to raise prices. Their logic was that they had to cover higher costs in order to maintain margins. But by how much?

As aforementioned, raising prices is not easy under normal circumstances. Consumers will either seek out lower cost substitutes or simply refuse to buy and wait for prices to moderate. Therefore, suppliers are typically reticent to raise prices out of fear of losing sales altogether… never mind healthy margins. If you follow corporate earnings closely, AS I DO SO YOU DON’T HAVE TO, you would have noticed a pattern develop over 2021 through 2022. Companies first complained of higher costs, some, but not as many warned that they were going to have to raise prices to cover cost increases. Slowly others joined. Once it became clear that consumers were willing to pay up, just about every company jumped in. I am not talking about dipping a toe, or dangling feet, I am talking about full-blown jump in and get your hair wet. Speaking of hair, I love to use my wife’s hairdresser as an example. Now, I know that running her household has gotten more expensive and I know that the products she uses have gone up in price, but by how much? Over 100%? Obviously not, but in economics, rational companies will discriminate if they can. And boy, are they ever! At the start of 2020, just before the pandemic pandemonium, the S&P500 had an EPS of around $42. In 2021 when consumer inflation really kicked in, the S&P ended the year with an EPS of around $56! Higher… despite their rising costs! That EPS rise peaked in Q3 of 2022 along with… wait for it… wait for it… peak inflation. In case you were wondering how companies continued to grow margins through those “tough” times, now you know. Maybe, we should look at it from a different perspective, like, say profit margin. I won’t go through the numbers, but the following chart of S&P500 profit margins should tell you this story. Margins are healthier now than they were leading up to the pandemic. That is all thanks to consumers like you and me who are willing to accept higher prices.

So, will companies cut prices anytime soon and give up those healthy margins? Probably not, not the rational ones at least. With charitable price cuts off the table, only consumers can force companies to lower prices by simply refusing to pay. What will force consumers to stop paying up for rents, homes, eggs, fruit, iPhones, vacations, hairstyling, and cars? In the past the only thing that worked was a recession. As recession fears are slowly dissipating, companies may not be so fast to give consumers a break on prices. This leaves the Fed with very little incentive to cut rates any time soon. Let’s hear what they have to say. We will hear from them tomorrow. Powell will speak at 2:30 PM Wall Street time tomorrow and tell all. Make sure you are not at your hairdresser during his speech, it will be a good one 💇‍♀️.

WHAT’S UP OR down IN THE PREMARKET

Carnival Corp (CCL) shares are higher by +2.19% in the premarket after Truist upgraded the stock to a HOLD from a SELL, raising its price target. Competitor Royal Caribbean was elevated to a buy as well on what the analyst dubbed “a rising tide will lift all boats,” and that tide is strong expected demand. Royal Caribbean is up by +2.28% in the premarket. Potential average analyst target upside: +26.1%.

Starbucks Corp (SBUX) shares are lower by -1.57% after Cowen downgraded the stock to MARKET PERFORM from MARKET OUTPERFORM and cut its price target to $107 from $117. The analyst cited reduced sales in China resulting from low-cost competition. Dividend yield: 2.19%. Potential average analyst target upside: +15.0%.

YESTERDAY’S MARKETS

NEXT UP

• Housing Starts (August) are expected to have moderated by -0.9% after climbing by +0.1% in the prior month.
• Building Permits (August) may have declined by -0.2% after gaining +0.1% in July.
• The FOMC will start its deliberations today, but we will have to wait until tomorrow to hear their policy decision and peruse their quarterly forecast, which will include an updated Dotplot.