Wednesday, July 14, 2021

The Update Issue: Inflation, Worker Shortages, Disney's Hybrid Black Widow Release Is a Winner

By Berna Barshay (View Archive)

► Inflation continues to run hot...

Yesterday, the Bureau of Labor Statistics released inflation data for June. The consumer price index ("CPI") rose 5.4% year over year, the most since August 2008. This graph from the New York Times puts the jump in historical context...

Source: The New York Times

Core CPI strips out food and energy prices, which tend to be more volatile. Even those were up 4.5%, the biggest increase in almost 30 years, with this level last exceeded in November 1991.

One area of particularly severe inflation was autos. Used car and truck prices rose 10.5% month over month. On a year-over-year basis, they were up 45.2%. Car and truck rental prices were up 87.7% year over year, while new car inflation was more muted at 2% month over month, but this was still the biggest increase since 1981.

Travel costs are also contributing to the surge in CPI. Public transportation costs are up 17.3% year over year, largely due to airline prices... which should be no surprise to anyone who has booked a flight lately. Hotels and motels also saw a 16.9% jump, although clearly prices were depressed in June 2020.

If you took out the big escalations in auto, transport, and lodging prices, core CPI would have been up just 0.2% month over month, which would be less alarming – but still a healthy rate of inflation.

You can see in the chart from CNBC below that price creep is widespread...

Source: CNBC

Companies are reacting to the inflationary environment for their inputs by raising prices. Just yesterday, food and beverage giants PepsiCo (PEP) and Conagra Brands (CAG) announced imminent price increases to offset the rising costs of ingredients, freight, and labor.

The word of the hour is 'transitory'...

Washington policymakers have been dismissing the jump in inflation as transitory (i.e., not permanent). They argue it's a reaction to the rapid reopening of the economy, the result of a supply chain hangover from the pandemic coupled with the surge in consumer demand for things like rental cars and plane tickets. Many economists think that inflationary pressure should abate once we get to the fall, when the rush to squeeze in long-delayed summer vacations has passed and supply chains have had a few more months to catch up.

But just how "transitory" inflation really is has become an increasing topic of debate.

Some economists are also revisiting their position that moderately higher inflation is a bad thing, wondering if, in fact, it might be the cure for the systemic problem of income inequality, which only worsened during the pandemic. The Times’ DealBook explains...

Inflation has long been seen as the economic villain. That view is changing. For those who worry about growing inequality, inflation might actually be a salve, up to a point. A 2014 study of developed economies found that as inflation rose, income inequality tended to shrink. Inflation could be as high as 13 percent, the research found, and still act as an equalizer, shifting the benefits of economic growth toward lower-income individuals.

Wages often rise with prices, as they have in recent months. What doesn't rise with inflation are college loans and other debt. Reducing the burden of debt with higher incomes could help improve many Americans' finances.

This actually makes some sense... and if moderate inflation is the route to more people earning a living wage, perhaps it's time to rethink what the "right level" of inflation is.

Typically the Fed is consumed with the delicate balance between keeping inflation in check by raising interest rates and keeping full employment by lowering rates. Despite a headline unemployment rate hovering a little high around 6%, we're seeing no shortage of unfilled job openings, which removes an argument against raising rates. But if 4% inflation is tolerable – or even desirable in some ways – the rush to raise rates to curb inflation abates.

Fed Chairman Jerome Powell testified in front of the House Financial Services Committee this morning and stuck with the "transitory" storyline and indicated that the Fed is "a ways off" from abandoning its easy monetary policy, which should make the markets happy. The market fears few things more than rising rates.

One Wall Street bank is presently pushing back against wage inflation...

On Monday, I wrote about how banks JPMorgan Chase (JPM) and Barclays (BCS) increased pay for the most junior bankers from $85,000 to $100,000.

Bloomberg columnist Matt Levine reports that whether to match these first-year analyst raises is a hotly debated topic at investment bank Goldman Sachs (GS).

It turns out that first-years at Goldman were already paid about 6% less than the Wall Street average before the recent round of increases. Assuming bonuses don't change, only salaries, Goldman first-years are now paid about 12% less than their peers... even more if bonuses creep up, too, which I suspect they will.

Having been an analyst at Goldman, now almost 30 (yikes!) years ago, this discount doesn't shock me at all. When I was there, we were paid at least 10% less than analysts at other firms, as Goldman was such a coveted credential and training ground. Young people regularly chose to trade a little money for not only the extra prestige, but also a shot at getting some of the best experience and mentoring on Wall Street.

With that legacy, it doesn't shock me that an anonymous Goldman employee involved in the comp decision told Bloomberg...

We should not participate in this game of moving salaries up and down every few months. If you behave like that you simply end up with mercenaries. We pay at the end of the year for performance.

This sounds like the Goldman I knew – that is, the privately held Goldman of the pre-Internet 1990s, which had closer to 10,000 employees. Today, the publicly held Goldman has more than 40,000 employees. It's not just the size and ownership of the firm that has changed, but who it has to compete with.

In the mid-1990s, I remember an analyst a year behind me was lobbying one of the senior managers of the Equity Division to install this new tool that would make it easier for us in New York to communicate with our trading colleagues in London, Tokyo, and Hong Kong... making the handoff across time zones smoother. I think the manager indulged him in his request, since it wasn't going to be an expensive endeavor.

The cutting-edge tool that the analyst wanted to install? E-mail!

I take this trip down memory lane not to deride Goldman or to make myself feel old (which I certainly accomplished), but to point out that Goldman has a lot more competition for the best and the brightest than it did back then.

Alphabet's Google (GOOGL) and Facebook (FB) wouldn't be founded for several more years, Apple (AAPL) looked like a "tech has-been," and no one was even commercially thinking about electric vehicles, space exploration, or genomics at the time.

Simply put, Goldman has a lot more competition for young grads these days and would probably be wise to match the first-year salaries. Levine, also a Goldman alum, agrees...

"You simply end up with mercenaries" is a reasonable objection, if you have an alternative. If you can recruit a class of analysts who come to Goldman for the brand and the network and the learning opportunities, who would work there for free if you asked them to, then sure, yeah, pay them under market.

If not, then you're gonna end up with mercenaries anyway, just mercenaries who got rejected from the higher-paying banks. If you're a senior executive at Goldman who is used to recruiting based on prestige, it can be hard psychologically to shift to recruiting based on money, but you don't necessarily get a choice.

Elsewhere in the land of labor pushing back...

A Nebraska location of Restaurant Brands' (QSR) Burger King is making national news after most of its employees quit. It was a reaction to a frenetic work environment in which two or three employees repeatedly found themselves covering shifts designed for five to seven workers, often with no air-conditioning in high heat.

The story went national because of the dramatic way they resigned...

Source: Yahoo News

Finally, Disney's (DIS) decision to release Marvel flick Black Widow simultaneously to Premium video on demand ('PVOD') and movie theaters proves a winner...

Black Widow set a new post-pandemic box office record, with an $80 million opening weekend, besting the record set by F9: The Fast Saga three weeks ago by $10 million. The film also did a healthy $79 million overseas on opening weekend. But the bigger story here is the $60 million the film pulled in, $30 at a time, through sales on streaming app Disney+.

People have been afraid that PVOD releases the same day that movies hit theaters would materially cannibalize box office sales. In the case of Black Widow, that didn't happen. Black Widow isn't just another movie, though – it's part of a beloved, blockbuster franchise, was released by the most powerful studio in Hollywood, and got great reviews from both critics and audiences. Not every PVOD title will pull like Black Widow.

But giving movie fans the option to see films at home or in the theater is the most consumer-friendly choice studios can make in a world in which Hollywood is reaching to have more direct relationships with its customers through streaming services and even direct retail. Expect to see more of these hybrid releases, especially as both Disney and AT&T's (T) Warner Brothers, who collectively control half the new release market, seem totally on board.

While Black Widow’s in-theater haul is a relief for movie theaters, this hybrid-release trend is generally not their friend.

In today's mailbag, a reader takes me to task for choosing to sidestep what I really think about movie theater chain AMC Entertainment (AMC)...

Are you an inflation hawk... or do you think that economists may be on track with tolerating higher inflation as a means of addressing income inequality? Do you think Goldman should match the analyst pay or hold the line? If you saw Black Widow, was it at home or in the theater? Which Marvel movies do you think are the best ones? Share your thoughts in an e-mail to [email protected].

"Berna, In your most recent letter you claim that you have no idea where meme stock AMC may go? But like all 'crazy' meme stocks you know exactly where it will go. It will come crashing down.

"What none of us knows is how high it may go up before it comes crashing down. I first shorted AMC at $30 and doubled my short position at $60 and stand ready to short again at $120 if the opportunity presents itself.

"The company selling over a billion dollars in shares is the absolutely correct thing to do at prices over $30. It lowers the possibility of bankruptcy greatly. However, it doesn't add to the per share bottom line. The company recently pulled another billion-dollar stock offering because retail investors didn't approve, and the stock has dropped 20%. It is between a rock & a hard place.

"It would be gross mismanagement not to sell shares here for financial stability, but the company must massage its new bankers/ shareholders. Today the company spends more time managing its stock price than its business.

"As a financially challenged company, it must because the hoard of retail shareholders is now its only source of affordable capital. The company is still financially challenged in a shrinking market. Its shareholders have become its bankers, making the daily stock price movement the most important aspect of the business. This is not a good business model.
Offering free popcorn to shareholders won't improve the business. This is almost a definite short at $30, $60, or $120 a share. One must just sip at the cup of short selling because tiny positions are the key to making money. Don't look at the $60 price but look at the $30 billion capitalization and at $120 at the $60 billion figure. That's an awful lot of popcorn? Actually more hot air than corn!" – Gene N.

Berna comment: Guilty as charged, Gene.

I agree with everything you said and know exactly where it will go eventually – which is down. In fact, it's down more than 20% since I wrote about it a week ago. But it is so disconnected from reality that nothing can stop it from going to $100 on its way back to $5.

It's a dangerous stock. As much as I think it's ultimately a short, trading a meme stock such as this one on the short side requires experience and risk-management skills rarely found among amateur traders. For most of Empire Financial Daily readers, the best decision here is to simply watch from the sidelines. Even those with tons of experience have gotten their heads handed to them betting against these meme stocks.

Also, I couldn't agree with you more that AMC executives seem to be spending more time managing shareholders and the stock price than managing the business... and this is always a bad sign longer term. In my experience, the best-performing companies rarely focus on their stock price... They just execute on the business plan and know the stock will eventually catch up.


Berna Barshay
July 14, 2021

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Berna Barshay

Berna Barshay is editor of Empire Financial Daily and a contributing editor to the Empire Stock Investor and Empire Investment Report newsletters. She graduated cum laude from Princeton University and earned her MBA from Harvard Business School in 1997. Following her graduation, Barshay spent 20 years on Wall Street. She began her career in equity derivatives at Goldman Sachs and later worked as a buy-side equity analyst at Sanford Bernstein, where she covered global consumer cyclicals and conglomerates. Later, Barshay spent five years working as a portfolio manager of the Ingleside Select Fund, a long/short fund with a focus on value and event-driven stocks. She later was a portfolio manager at Swiss Re, where she managed the Consumer long/short book on the equity proprietary trading desk. She has additional experience as a buy-side analyst at several long/short hedge funds – including Sky Zone Capital, Metropolitan Capital, Buckingham Capital, and LaGrange Capital – where she primarily covered consumer and technology, media, and Internet stocks in the U.S. and Europe, with some additional work in financials and energy. Barshay is a fashion enthusiast, a pop culture addict, obsessive indoor cycler, and prolific social media user. She currently lives in New York with her husband, daughter, and three dogs.

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