Friday, May 27, 2022

Has Inflation Peaked?; American Shoppers Boost Retailers; Terra's implosion and Tether's slow bleed; More reader feedback on my colonoscopy

By Whitney Tilson

1) The debate over inflation continues to rage, which is roiling the markets...

Since I called the bottom two weeks ago (here and here), stocks have rallied, in part because investors are moving toward my belief that we've seen the peak inflation rate and that it will come down over the course of this year.

Here's Barry Ritholtz with a good summary of that argument: Has Inflation Peaked? Excerpt:

Has inflation peaked?

When we look at the data, there are encouraging signs in various sectors. Three of the most significant are Automobiles, Homes, and Labor/Wages:

  • Automobiles: The semiconductor shortage sent new car supplies down and prices higher; this also helped drive used car prices up. But industry insiders are confident semi supplies are normalizing (hopefully, over the rest of the year). And they are seeing prices begin to roll over... 
  • Homes: Inventory is increasing, with 6 months of new home supply under construction. Sales of new homes are falling, feeling the bite of higher mortgage rates.

April New Home Sales fell precipitously – the 4th consecutive monthly drop. And Existing Home Sales in April also fell – down 2.4% from the previous month, and down 5.9% year over year. We now have had 6 straight months of declines in EHS.

But we have yet to see prices roll over. The biggest obstacle to falling prices remains the low supply of homes relative to demand. The best hope for prices to moderate is for supply to rise. In the meantime, elevated rates are putting a cap on prices, especially for the under $1m homes...

  • Labor & Wages: Anecdotally, we are hearing that lots of companies' hiring sprees are over. Some retailers that may have overhired – Amazon (AMZN), Walmart (WMT), Target (TGT) – are even doing layoffs.

My colleague Josh Brown observes:

We're going to have a very healthy and happy labor force, paid more than it had been prior to the pandemic. But the labor shortage is going to ease considerably in the second half of this year. We're already hearing about this easing on conference calls across several industries. Including from both Walmart and Amazon, the largest and second largest private employers in America. They say they're overstaffed. Other CEOs and CFOs have been telling Wall Street that finding people has become easier this spring. Or that they will simply need less people. The effect is the same.

Labor has received a great reset over the past few years to the upside. That seems to be ending, as wages are stabilizing. The increases were overdue, but the mad scramble and hiring bonuses are coming to an end.

My take: Goods inflation has clearly peaked. Lumber and shipping were the first to roll. Now, comps are easier and capacity is coming in.

The only thing that matters now vis-à-vis inflation is labor costs. I think too much attention has been paid to tech layoffs, as this sector just doesn't employ that many people (in this country, anyway). The key wages to watch are in areas like construction and trucking.

I think we're likely to see continued pressure on labor at the low end (people paid hourly), which could pressure earnings of individual companies like retailers, but may be good for the overall economy, as people living paycheck to paycheck tend to spend everything they make.

2) Speaking of retailers, stocks across the sector got destroyed last week after Walmart and Target reported disappointing numbers, but they've come roaring back in recent days thanks to stronger-than-expected earnings reports from other companies, as this front-page story in today's Wall Street Journal notes: American Shoppers Boost Retailers With Spending on Work Clothes, Discount Staples. Excerpt:

American shoppers boosted spending at department stores and discount chains, showing resilience amid inflationary pressures that have weighed on consumers and dented results at many big retail chains.

Macy's (M) and Dollar Tree (DLTR) reported strong sales increases in their most recent quarters. Those results came as shoppers spent more on clothing for work and special occasions, while turning to discount chains for necessities to offset rising costs for food and fuel. Another budget chain, Dollar General (DG) posted flat sales but raised its outlook for the full year, saying cash-strapped shoppers are gravitating to its stores more frequently.

The results, which sent shares of all three chains higher, ran counter to the performance of other large retailers such as Walmart and Target, which last week reported steep profit declines as rising supply-chain, wage and inflation-related costs ate into earnings.

My take: I still think the retail sector is oversold, and it's a great area to look for bargains.

3) It has been two weeks since I called crypto "stablecoin" (talk about an oxymoron!) Terra one of the two best shorts I'd ever seen (along with another stablecoin, Tether):

This morning as I wrote this, TerraUSD was still trading at $0.63, which makes no sense. There are no underlying assets – its value depends solely on investor confidence, which is now shattered, as it has broken the buck and Luna is worthless. I confidently predict TerraUSD will soon be as well.

Sure enough, it's down 94% (!), on its way to zero.

Meanwhile, Tether continues to shrink, albeit at a slower rate. According to its website, the value of Tethers outstanding is $72.5 billion, down from $74.2 billion a week ago and $83 billion the week before that.

While I think there's only, say, a 30% chance that it "breaks the buck" in the next month or two and implodes like Terra did, it remains the perfect short because there's no way to lose money.

4) My e-mail on Wednesday about my colonoscopy continues to generate lots of reader feedback...

One guy didn't appreciate it, writing, "Who in hell do you think cares about your colonoscopy? You have an ego problem." (This made me chuckle as I've been accused of having an ego problem many times, but never for this reason!)

But most readers were appreciative:

  • "Whitney, your email is the best daily read period. Thank you for sharing about your personal life and activities too. I recently had my first colonoscopy because a relative passed away of colon cancer. I am encouraging friends to listen to your advice. Have a great week and thanks for all of your insights." – Pete C.

[When I sent Pete a draft of this e-mail yesterday, he replied with a link to his cousin's heartbreaking story:

"Awesome! Thanks again for all that you do.

"Here's the story on my cousin: 'On the cusp of this beautiful fairy tale,' suburban teacher dies at 39 of newly diagnosed cancer soon after becoming a first-time mom

"We are really pushing our family and friends to get their colonoscopy. Feel free to share this link too but I understand if it is too personal."]

  • "I really liked your feature about colon cancer. It's good to set a very positive example for everyone. One can only wish that the same thing could be done for prostate cancer. That is, you could publicly announce that you've gotten a PSA test and you were negative and you were getting one fairly regularly." – Jon F. 

[Comment: I went back and checked my records and I actually had four PSA tests from 2013 to 2018 because I had four excruciatingly painful kidney stones over that period – roughly every two years – and various doctors were trying to figure out why, as I have no risk factors. They were never able to come up with an answer, but I'm happy to say I haven't had one since. Here's a guide to when men should have a PSA test (generally ages 55 to 69): Prostate Cancer: Age-Specific Screening Guidelines]

  • "Congratulations on both having gotten this procedure and having published it for the benefit of your readers. It is heartening to know that you care about your readers financial health and their physical wellbeing as well." – Richard M.
  • "Enjoyed reading your blog on colonoscopies, I am a health nut and enjoy this kind of information. I sent your info in colonoscopies to about 15 friends and relatives." – Hubert O.
  • "Thanks for sharing re: colonoscopy. I was petrified a few years ago when I got mine, and it was articles like these that made me feel more at ease." – Stacey M.
  • "Thanks for sharing this with your readers – the best diagnostic test men have available – and the second best for women, after mammography – for avoiding cancer deaths. As a retired physician, I'm familiar with the procedure, benefits, AND the pictures and prep. I've had 2-3 adenomatous polyps each time except the last and knowing that these can develop into stage 1 carcinoma over 10+ years, so I probably would be either dead, well on my way there, or at least would have had to suffer surgical and chemotherapy treatments had I not started screening at age 45 (I'm 76 now). I'm hoping this will get some of your readers who may have been reluctant to get a colonoscopy to be willing to undergo short-term discomfort for long-term pain." – Otto K.
  • "Whitney, Thanks for sharing this with all of us. As a much younger man, I put off the screening because of all the reasons that you mentioned. Then I had a very good friend lose her father from colon cancer. It was a slow-growing type that could have been cured very easily with proper screening. I watched the pain and anguish that she and her family went through. I vowed then and there that I wasn't going to put my family through something like that.

"I had my first procedure at 50. And sure enough we removed 3 pre-cancerous polyps. I have faithfully scheduled the follow up procedures every 5 years with great results though we did remove 1 more a few years ago. I'm almost 70 now and that is one of my preventive maintenance items that I push every time I hear someone resist this simple procedure." – Ric B.

  • "Excellent article today and simple encouragement and advice for the long term investor. You keep us sane and steady in the turmoil we live in.

"I'm a family doctor who does colonoscopies. Thank you for being bold and speaking out. 99% of patients never know I even entered the room much less know I did it!

"The new age is 45! Insurance now covers it at that age. Don't wait until 50 and your first one is super important. I've watched a couple of friends die in their 40s with colon cancer.

"The greatest wealth is health. Thanks for your efforts!" – Clay L.

  • "Hi Whitney, Keep pushing people to get colonoscopies. I just turned 65 and will be having my 6th one on June 7th. I am firmly convinced that I would NOT be alive today if I hadn't gotten them. For some reason, I'm a polyp machine (doctor's phrase, not mine). I've had 10+ polyps removed on every colonoscopy, with half being pre-cancerous. And they are the type that turn into cancer in 4-5 years. I am currently on the three-year plan and have had only two years between them a couple of times.

"Personally I don't care how bad the prep tastes (although it is better than it was) because it is still better than chemo and surgery!!!

"I also have a friend from college whose second level manager disappeared for a month a few years ago. Once the guy was back in the office at an all hands meeting, he disclosed that he had colon cancer and that they removed a third of his intestine through his belly button. They guy was 51 and there was no family history! He decided to use his experience to get others to get scoped. I hope it helped save other lives." – John B.

  • "As a subscriber who just turned 60 and who has undergone the same procedure I feel it is important to acknowledge both your humility and care for your readers beyond simply their financial wellbeing. A heartfelt thank you to you Whitney." – Michael M.
  • "Whitney, You're a gem. Just wanted you to know that. Thanks for pushing me to go ahead with my colonoscopy. It's been 10 years since my first." – Chris N.

Thanks for the kind words!

Best regards,

Whitney

P.S. I welcome your feedback at [email protected].

P.P.S. Empire Financial Research and the market are closed on Monday for Memorial Day. Look for the next Whitney Tilson's Daily e-mail on Tuesday, May 31, after the Weekly Recap. Enjoy the holiday!

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Empire Financial Research

Whitney Tilson

Empire Financial Research founder and CEO Whitney Tilson is the editor of the Empire Investment Report, a monthly investment advisory that focuses on cheap, high-quality stock ideas.

Whitney graduated with honors from Harvard University and Harvard Business School, where he earned an MBA and was named a Baker Scholar. Whitney spent nearly 20 years on Wall Street, during which time he founded and ran Kase Capital Management, growing assets under management from $1 million at inception to a peak of $200 million.

Once dubbed "The Prophet" by CNBC, Whitney predicted the dot-com crash, the housing bust, the 2009 stock bottom, and more. Now, he's sharing his secrets and strategies with followers of his latest endeavor, Empire Financial Research.

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