Weekly Research Briefing: The Midway Point

June 29, 2021

If we are raising flags for the upcoming 4th of July celebration here in the U.S., then that must mean we are also halfway through 2021. The year has gone super fast with vaccinations, a return to normal life and good market returns helping to quickly pass the weeks. What a difference a year of incredible scientific advances has made.

As the economic pendulum has swung from very bad to very good, the markets remain highly focused on the Fed and the triggers which would cause them to reduce stimulus and raise interest rates. Inflation right now is the biggest trigger that they are watching. We knew that the economic recovery would cause supply chain and labor shortages as consumers and businesses returned to pre-COVID activities. The Fed and most others are hoping that current inflation spikes will be temporary, and prices will fall as capacity is added. But right now, we are in the thick of it and uncertainty is high. Lumber prices just took a ride on the meme-stock price roller coaster. Auto auction prices and some agricultural commodities could be next. Some prices like rent costs should begin to move higher while other prices are reluctant to bend lower (see oil, copper and steel). All we can do is watch, measure and wait.

With interest rates low and financial capital easy to access, one would think that capacity could be quickly added anywhere that prices remain too high for too long. In most cases, those supply/demand curves that you studied in Econ101 should prevail. But, it has been so long that any of us have been witness to higher prices that it has put watchers a bit more on edge. The equity markets don't seem to be bothered as they have returned to new all-time highs in a slow summer tape usually known for beach time. Long bonds also appear relaxed with the 10-year Treasury yield back at 1.5%. Shorter rates have floated higher as the Fed warms up its inflation-fighting cattle prod just in case it is needed. So, sit back and watch to see if higher prices are the cure for higher prices. Will Disneyland benefit from a delayed purchase of a new car? Or more dining out for the person who decides to rent versus buy?

Last week was Infrastructure Week in Washington. A bipartisan group of Congress and the White House managed to get over the goal line and agree to the largest infrastructure bill ever. Plenty of specifics in the details, which is a good sign. Now they must sell it to both parties, vote and then hand out the pens in the Rose Garden. Expect some Infrastructure PR this week as we ramp up into the big holiday weekend. Friday will bring us the big U.S. monthly jobs report. We could print a seven-figure number given that some states have eliminated bonus unemployment payments which could push some to get work. There is also a large seasonal adjustment to the education category that could add a couple hundred thousand to the number. So, fireworks could begin early. The U.S. markets are closed on Monday for the 4th of July holiday. Enjoy yourselves and be safe.

The Fed reiterated to Congress last week that they are ready to act, but feel that the re-opening is responsible for most temporary price spikes...

WASHINGTON—Federal Reserve Chairman Jerome Powell said it’s highly unlikely that inflation will rise to levels seen in the 1970s but acknowledged significant uncertainty as the economy reopens.

While the Fed anticipated that the end of the pandemic would temporarily push up inflation this year, Mr. Powell said Tuesday on Capitol Hill that the increases in prices have been larger than central bankers had expected and may prove more persistent. But he underscored his view that shortages—including of used cars, computer chips and workers—will fade over time, bringing inflation closer to the Fed’s 2% long-run target.

“If you look behind the headline and look at the categories where these prices are really going up, you’ll see that it tends to be areas that are directly affected by the reopening,” Mr. Powell said in a hearing before a House subcommittee. “That’s something that we’ll go through over a period. It will then be over. And it should not leave much of a mark on the ongoing inflation process.”


Supporting the Fed could be last week's New Home sales, which plunged in June while prices soared...

@Not_Jim_Cramer: New Home Sales slow sharply in May as Median Price rises 18% to record $374,400

U.S. New Home Sales - June

The housing misses were so big last week that Goldman Sachs cut its Q2 GDP estimate...

Did housing just peak? In what could be considered the latest 'back to normal' moment of the post-pandemic world, the housing market seems to be cooling off, at least for now. Coming on the heels of yesterday's weaker-than-expected Existing Home Sales, we got a decline in New Home Sales this morning. Sales of newly constructed homes fell at a surprising pace of 5.9% month-over-month in May.

On the back of this news, our economists lower our Q2 GDP tracking estimate again, this time by 0.25pp to 8.75% (qoq ar). Homebuilding stocks are characteristically trading down in response. A slowdown in home sales, however, may be less about demand abating and more the result of limited supply with labor and material supply constraints reportedly hamstringing the construction of new homes. KBH is scheduled to report results tonight, providing investors with a real-time update on just what builders are seeing.

(Goldman Sachs)

Some will point to low inventories, but don't count out soaring prices bringing product to market...

Yesterday showed the US May Median Existing Home Price +23.6% On Yr To $350,300 - "On average, properties remained on the market for a 17 days in May, matching an all-time low. Eighty-nine percent of the homes sold last month were on the market for less than a month, the NAR said."

US May Median Existing Home Price


In fact, here in Denver, the front-line housing demand datapoints have begun to slow...

Metro Denver’s housing market has undergone a shift in recent weeks, not unlike a cold front that ends a spell of record heat, and it could provide significant relief to buyers if it continues, according to local real estate agents.

“The market has begun to move over the last two to three weeks and has been very noticeable to most agents within the last seven days,” said Bret Weinstein, founder and CEO of BSW Real Estate in Denver. “There is absolutely a market shift occurring.”

Whereas a popular listing might have attracted more than a hundred showings and 15 to 20 serious offers earlier this year, now even a “great property at an affordable price point” might see 30 to 40 showings and three to four offers, Weinstein said...

“In the last two weeks we saw 3,600 new homes go on the market, which is the biggest supply increase since the pandemic,” Miller said.


University of Michigan consumer survey also highlighted that it is a bad time to buy, and good time to sell a house...

U. Michigan Bad Buying Conditions for Houses


Lumber prices are still double from a year ago, but no longer triple...

CME Random Length Lumbar Curve


40% of last week's monthly increase in PCE inflation is being driven by auto-related prices...

Tweet from @WhiteHouseCEA

And it looks like the Manheim auto price index may have peaked as consumers elect to delay purchases...



Will Semiconductors remain a future bottle neck to the auto industry with all of this CapEx in the next 18 months?

Semiconductor manufacturers worldwide will have started construction on 19 new high-volume fabs by the end of this year and break ground on another 10 in 2022 to meet accelerating demand for chips across a wide range of markets including communications, computing, healthcare, online services and automotive, SEMI highlighted today in its quarterly World Fab Forecast report.

"Equipment spending for these 29 fabs is expected to surpass $140 billion over the next few years as the industry pushes to address the global chip shortage," said Ajit Manocha, SEMI president and CEO. "In the medium and longer term, the fab capacity expansion will help meet projected strong demand for semiconductors stemming from emerging applications such as autonomous vehicles, artificial intelligence, high-performance computing, and 5G to 6G communications."

China and Taiwan will lead the way in the new fab construction starts with eight each, followed by the Americas with six, Europe/Mideast with three, Japan and Korea with two each.


Even in the shipping world, the California ports are getting cleared, which will be better for future intermodal transportation costs...

@UPFINAcom: The number of anchored ships off the California coast has fallen by 75% since the peak in February.

Choke on the Water

Even bacon prices getting less fat...

CME Lean Hog Futures


F9 might have helped Vin Diesel's summer spending, but it will still be quite a while before a movie theater can raise ticket and popcorn prices...

Real Movie Theater Purchases


Even Google searches for 'Inflation' have peaked...

Google Inflation


But there do remain pockets of strong pricing...

Blas Tweet

Oil prices continue higher even as rising supplies threaten...

@charliebilello: Crude Oil closed above $74 a barrel for the first time since October 2018, up 91% in the last year.

Paying More


@lisaabramowicz1: The year-over-year increase in restaurant prices is the highest since 2009.


We haven't talked about rent yet, but it is the biggie to keep an eye on...

There's one big category for consumers that hasn't really started going up yet (per the official statistics), but which many people expect to start moving: the Owner's Equivalent Rent. It plunged last year, and it's still at depressed levels. But with all kinds of housing indicators on the rise, there's a big assumption that it too will gather steam. Because this category alone represents about a quarter of the entire CPI, watching it is a pretty big deal...

The first is that yes, this will almost certainly jump substantially, especially since market measures of rents that we're seeing now, based on private sector data, are clearly on the rise.

That being said, the measure isn't just going to instantly spike, since not everyone is taking out a new lease right now. The CPI is based on a rolling average over several months. (Some people moved into a new place six months ago, for example, and so that's what they're still paying now.) However because it's a slower-moving index, the effect of any rise is going to last for a while, probably well into next year.

Another interesting dynamic is that while OER is about 25% of CPI, this category is less than half as big in the PCE (which is the Fed's preferred inflation measure). This, he says, is going to create a substantial and unusual spread between the two measures (he predicts a 120 basis point gap compared to the usual 30). This will create some other tensions, because financial markets (things like TIPS) tend to price CPI, so there will be a disparity between how the Fed is looking at inflation vs. what the market is reacting to.


Here are five-year Treasury yields rising to reflect the uncertainty of near-term inflation...

CBOE 5-Year US Treasury Yield

But stock prices look to long term Treasury yield stability and move to all-time new highs...

S&P 500 Large Cap Index

Narrow breadth in a thin volume market could be worth keeping an eye on...

Unusually Narrow Breadth


Seasonally, these summer months are the market doldrums...

S&P 500 vs its seasonal pattern


The four-month pause in airline stocks should tell us something about the outlook for business travel...

US Global Jets ETF

Industrial stocks should begin to breakout if this Infrastructure Bill sails through Congress...

Industrial Select Sector SPDR Fund

A bank stock breakout after the recent Fed hit would surely be a sign of a very strong market...

KBW Bank Index


Has there ever been a better time to be a highly leveraged company?

Or said another way, public credit is very expensive right now for the buyers of debt.

Tweet from @BChappatta

Germany is marching to its own strong beat right now. Good for Europe...

@Schuldensuehner: #Germany's Ifo Index hits highest level since 2018 as lockdowns ease. Jumps to 101.8 in June from 99.2 in May, beating estimates of 100.7. Current assessment component in particular beat w/99.6 vs 97.9 exp. Ifo Expectations Component surged to 104, highest in more than a decade.

German Ifo Business Indices

The U.K. economy isn't recovering as solidly as Germany's, but wow are their stocks cheap...

@Callum_Thomas: Deep value in UK equities

UK shares unloved with relative valuations extremely low

Interesting to see how consumers are paying online...

Multiple wallets

If a kid asks you for a long-term stock pick this summer...

You might suggest that they take a look down at their pair of swooshed shoes. What a beast the Beaverton-based company has become as the world rapidly shifted to digital. Incredible.

Consumers are taking Nike’s “Just Do It” slogan to heart. Vaccine rollouts and resurgent economies have encouraged a spending spree. Sales at the athletic-wear giant nearly doubled to $12.4bn in its fiscal fourth quarter. Net income surged to $1.5bn. An upbeat outlook has added to the buying frenzy. Nike shares jumped 14 per cent on Friday morning, hitting a new high.

The market reaction is not just a response to the post-pandemic sales jump. Results show that the company’s decision to step away from third party brick-and-mortar retailers in favour of selling directly to consumers online has paid off. Sales at Nike Direct, its direct-to-consumer channel, rose 73 per cent during the quarter. Cutting down on wholesale distribution has also proved more lucrative, with gross margins rising 850 basis points to nearly 46 per cent.


Nike's near-term target is 50% in digital sales...

"The combination of owned and partner digital revenue is now nearly 35% of our total business, more than 3 years ahead of our prior plan. We believe we will achieve 50% digital mix of business across owned and partnered in fiscal ‘25." (Nike conference call)

Nike Cuts Out the Middleman


Underpromised and overdelivered...

Tweet from @JonErlichman

In the U.S., the 5G footprint is wide in the big cities. Time to upgrade those older handsets...

5G Is Reliably Faster Than 4G


This piece of plastic just ended hiccups...

Called “the forced inspiratory suction and swallow tool” (FISST), and patented as HiccAway, the $14 (£10) plastic device is a rigid L-shaped straw that has a mouthpiece at one end and an adjustable cap with a pressure valve, in the form of a small hole, at the other. Hiccuping people place the device into a glass of water and use it to sip.

The idea is that the enhanced suction required to draw water up through the device requires the phrenic nerve to trigger a contraction of the diaphragm, while the subsequent swallow involves activation of the vagus nerve, among others. As these two nerves are responsible for the hiccups in the first place, the researchers say keeping them busy stops them from causing the unwanted phenomenon.

“It works instantly and the effect stays for several hours,” Dr Ali Seifi, associate professor at the University of Texas Health Science Center at San Antonio, and a co-author of the study, said.

To evaluate the device the team analysed responses from 249 volunteers – more than two-thirds of whom said they had hiccups at least once a month.

Published in the journal Jama Network Open, the results reveal that the device stopped hiccups in almost 92% of cases. Just over 90% of participants said they found it more convenient than other home remedies, while 183 of 203 participants said it gave better results. The authors say the results held across all demographics, hiccup frequencies and hiccup durations.

A rigid drinking tube can eliminate hiccups in adults and children


With future business travel uncertain, the discounts on international air travel are ridiculous right now...

If you have a future trip in mind, now is the time to look at the prices and book something before business travel returns.

The downturn of business travel creates an unexpected gift for vacationers: Cheap first-class and business-class tickets in big-city markets abound with airlines no longer holding back premium seats for corporate customers.

Fare-watchers say there are great bargains on roomy seats this summer and into the fall—not to beach destinations but to cities that typically attract corporate fliers. Airlines expect some rebound in business travel later this year. Until that happens, the discounting is extreme.

“I’ve never seen anything quite this volatile on pricing,” says Rick Seaney, chief executive of 3Victors, a Dallas data firm that tracks airline pricing. His research found first-class and business-class fares 20% to 70% below the same seats on comparable dates in 2019, with savings of as much as $4,000.

One particular bargain opportunity: business class to Europe. The European Union agreed last week to let countries lift restrictions on nonessential travel from the U.S. Some, like Italy, Greece, Spain and Croatia, already have opened up for vaccinated U.S. travelers...

Between New York and Paris, business-class tickets for September can be had for $1,662 on La Compagnie, a French airline offering all-business-class flights. That’s 68% cheaper than the 2019 price. New York to Vienna on Austrian Airlines in business class priced out at $1,861 for September travel, or 70% less than in 2019.


Airline business class



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