Weekly Research Briefing: A New Risk

@CapEconUS: “.. Overall, the report suggests the labour market is enjoying a soft landing.. with wage growth and price inflation rapidly fading and the rise in long yields triggering a significant tightening in financial conditions, we still think the Fed is done hiking.”

@RenMacLLC: The things growth pessimists have been focusing on over the last several months don't exactly back them up today. Revisions? Those were up. "Cyclical" payroll growth? That has picked up too. No jobs report is perfect, but there is no sign of a sharp deceleration here.

@bencasselman: Markets obviously don't like today's report, and I understand why. But if your main concern was about the economy falling into a recession, seems like this report should be comforting. And if your main concern was a reacceleration in inflation, the earnings data was good news.

@LizAnnSonders: In month/month terms, average hourly earnings growth was fairly tame at +0.2% vs. +0.3% est. & +0.2% in prior month

Federal Reserve Bank of Dallas President Lorie Logan said the recent surge in long-term Treasury yields may mean less need for the US central bank to raise its benchmark interest rate again.

“Higher term premiums result in higher term interest rates for the same setting of the fed funds rate, all else equal,” Logan said Monday in remarks at the National Association for Business Economics meeting in Dallas.

“Thus, if term premiums rise, they could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening.”

In bond investing, the term premium is often defined as the extra compensation that investors require for bearing interest-rate risk over the life of the bond. Logan said “there is a clear role for increased term premiums in recent yield curve moves,” though “the size and persistence of the contribution are subject to uncertainty.”

@SpecialSitsNews: Federal Reserve Speakers this Week. Wow.

@WalterDeemer: "Parabolic advances usually carry further than you think, but they do not correct by going sideways." -- Bob Farrell

@tracyalloway: Yields on BBB corporate bonds now exceed the expected earnings yield of the S&P 500 for the first time since 2009. Citi: For pension funds "targeting on average around 7-8% annual returns" these higher corporate bond yields "offer a less risky way" of hitting the target vs stocks

@GunjanJS: Roughly half of the stocks within the S&P 500 are down for the year --Piper Sandler

The forward price-to-earnings (P/E) ratio suggests the S&P 500 isn’t cheap. This premium is found in a smaller share of the constituents of the index. Reflecting a similar dynamic, a low participation of stocks in this year’s rally of the S&P 500 also raises worry over concentration risk. An optimistic take is that a larger portion of the index is not as expensive compared to history. A diversification opportunity may exist, and cheaper Value-oriented segments of the Equity market may be beneficial, in particular if the rally ultimately broadens out, as the economy successfully absorbs tightened monetary policy at a limited cost to growth.

The French fry attachment rate is still steady which is a positive economic sign...
"The global frozen potato category continues to be solid with overall demand and supply balanced. Fry attachment rates, which is the rate at which consumers order fries when visiting a restaurant or other food service outlets across our key markets have remained largely steady and above pre-pandemic levels" - Lamb Weston Holdings President of Commercial Foods Thomas Werner

The leading blue jeans manufacturer showed that inventories are in good shape...
"Adjusting for this change, inventory increased just 1%, representing a 17-point deceleration from last quarter. Inventory in the U.S. is already below last year's level, and we expect to continue to make progress in Q4 with overall inventory below prior year levels by year-end on a comparable basis. Though inventories are now in line with expected revenue growth and by Q4 end will be down year-over-year we are working to further optimize inventories and improve turns and working capital." - Levi Strauss CFO Harmit Singh

Small-business bankruptcy filings are rising this year, a signal that increased interest rates, tighter lending standards and higher operating costs are straining entrepreneurs. At the same time, some government aid programs that helped entrepreneurs through the Covid-19 pandemic have ended...

The Federal Reserve’s efforts to slow inflation by raising interest rates have been particularly painful for small businesses, which tend to operate with thinner profit margins and smaller cash reserves than larger companies.

The increased bankruptcies are coming from filings under Subchapter V, a newer provision in federal bankruptcy code that makes it easier for financially stressed small businesses to restructure.

Nearly 1,500 small businesses filed for Subchapter V bankruptcy this year through Sept. 28, nearly as many as in all of 2022, according to the American Bankruptcy Institute.

Big food companies and investors are watching as Ozempic and other similar weight-loss drugs flow to millions of people, upending America’s diet industry and raising new questions about how consumers will eat...

The drugs, which suppress patients’ appetites, have exploded in popularity in the U.S., straining manufacturing capacity. Morgan Stanley has projected that 24 million people, or nearly 7% of the U.S. population, will be taking such medications in 2035.

Those people could cut their daily calorie consumption by as much as 30%, according to the firm, which surveyed over 300 patients. For a person on a 2,000-calorie diet, that could mean eliminating a one-ounce bag of salted potato chips, a bottle of soda and more each day.

Carolyn MacBain-Waldo said she is eating significantly less since she started taking Eli Lilly’s Mounjaro—her family orders from restaurants less often and their grocery bills have dropped by as much as 20%. The 50-year-old, who works as a senior director in retail, said the drug makes her feel full more quickly and that she is far less likely to overeat when stressed.

“I still have a fully stocked kitchen, there’s chips and pretzels in there,” MacBain-Waldo said. “I don’t find it tempting.”

RV manufacturers are discussing a post-Thanksgiving prolonged shutdown as the industry seeks to right-size inventory amid a steep drop-off in demand, D.A. Davidson analysts Brandon Rolle and Griffin Bryan say in a note. Orders from dealerships were weak last week at the Elkhart RV Dealer Open House, and big dealerships have canceled orders for new models, the analysts say. "Given the excess inventory around Elkhart and the low probability that dealer orders/retail demand accelerate over the next 3 months, our contacts indicated the industry is discussing the possibility of a prolonged production shutdown from Thanksgiving through mid-January," they write.

[CLX] Reports prelim Q1 adj EPS -$0.40 to $0.00 v $1.42e, organic sales -26% to -21%, gross margins to decline y/y; Due to the impacts of the recent cybersecurity attack

• Net sales are expected to decrease by 28% to 23% from the year-ago quarter. Organic sales are now expected to decrease by 26% to 21% for the quarter, compared to the Company's prior expectations of mid-single-digits growth as provided in the Q4 earnings remarks. This is due to the impacts of the recent cybersecurity attack that was disclosed in August, which caused wide-scale disruption of Clorox's operations, including order processing delays and significant product outages. Shipment and consumption trends prior to the cybersecurity attack were in line with the Company's prior expectations.

MGM Resorts International refused to pay a hackers’ ransom demand in a September cyberattack that threw its Las Vegas Strip resorts into chaos and crippled its properties and technology nationwide, according to a person familiar with the matter.

Service disruptions from the attack and efforts to resolve the issue will cost the company more than $100 million in the third quarter, MGM said in a regulatory filing Thursday.

The cyberattack was detected on Sept. 10 and forced MGM to shut down IT systems in response. The shutdowns hobbled slot machines, interrupted online hotel bookings and required hotel workers to check-in guests using pen and paper for days, among other impacts. The company said Thursday that guest-facing operations have returned to normal.

According to AAA, the average annual cost in the first five years of new-car ownership rose to $12,182 this year, from $10,728 last year, reflecting increased purchase prices, maintenance costs and finance charges. That’s 16 percent of the median household income, before taxes. (The figure includes depreciation.)