Week of Jan 30th, 2023

08 Feb Week of Jan 30th, 2023

Market Indexes:

Economic Data:

Monday:

Q4 Germany GDP surprised to the downside this morning at -0.2% Q/Q, which was a deceleration versus Q3 at +0.5% Q/Q. 

On a SAAR basis, which is how the U.S. reports headline GDP, this would equate to -0.8% annualized.  The primary negative driver was household consumption, which slowed for the 3^rd straight quarter.

Tuesday:

Consumer Confidence Declines. Housing Decelerates M/M, While Wages and Salaries Remain Elevated At +5.1% Y/Y

January Chicago PMI slows again this morning to 44.3, versus 45.5 -> the regional soft data in the U.S. continues to be very weak

January U.S. Consumer Confidence slows to 107.1, versus a downward revised December at 108.3

*The big drop was in expectations, so the longer-term view of confidence, which cratered to 77.8, from 83.4 in December

Probably not a big surprise, but both November Case-Shiller and FHFA home prices declined M/M

*Case-Shiller was -0.8% M/M, but still up +6.8% Y/Y

*FHFA Home Price Index was -0.1% M/M, but still up +8.2%

*On a Y/Y basis, home prices continue to track above CPI

The Employment Cost Index remains elevated near multi-decade highs with wages and salaries at +5.1% Y/Y for Q4 2022

Redbook Weekly Retail Sales continue in their downward trend at +4.9% Y/Y (includes inflation)

**We are now at the lowest levels in almost two years and have been in a downward trend since the beginning of 2022

China:

December South Korea Industrial Production slowed to -7.3% Y/Y, from -3.7% Y/Y

December Japan Industrial Production slowed to -2.8% Y/Y, from -0.9% Y/Y

A fairly sharp “re-opening” acceleration in China’s PMI:

**January Manufacturing PMI accelerated to 50.1, from 47.0

**January Non-Manufacturing PMI accelerated to 54.4, from 41.6!!

Eurozone:

December Germany Retail Sales decelerated for the 3^rd straight month to -6.4% Y/Y

In the U.K., housing demand has all but evaporated with U.K. Mortgage Approvals coming in at 35.6K, which was down roughly -35% from the prior month and the lowest since May 2020

Finally, we get more slight accelerations in Eurozone inflation with January France CPI accelerating to +6.0% Y/Y

Wednesday:

ISM Manufacturing hit a new post pandemic low at 47.4, which is the third straight month of contractionary data (sub-50)

**New Orders fell off a proverbial cliff to 42.5 – Every other time New Orders have hit these levels it has signaled a recession

**Interestingly, ISM Prices accelerated M/M from 39.4 -> 44.5

Manufacturing PMI remained contractionary at 46.9

*Then there is the labor market . . . JOLTS Job Openings accelerated in December to 11.0MM, from 10.4MM

*That said, we did see a slightly weaker ADP Employment number reported at +106K for January, versus +253K in December

**Bars, restaurants, and hotels added 95K jobs – this is the lowest number in more than a year, but weather was also a likely factor

MBA Mortgage Applications crashed back down to earth this week coming in at -10.3% W/W and -41% Y/Y

*This data can be noisy, so we shall see whether the last two weeks of acceleration were meaningful. Or whether this week is the true trend.  Either way, demand remains anemic and mortgage apps are now below the depths on the pandemic

Friday:

January Non-Farm Payroll (NFP) Printed +517K steamrolling estimates vs the market expectation of 185,000.  The private sector employment rose by +443K and the Unemployment Rate fell to the lowest level since 1969 at 3.4%.  This extreme pop in hiring has the feeling of revisions down in the coming months, but we will see how it plays out.

Company Data:

This week was the busiest week of earnings announcements for the quarter, with 35% of the S&P 500 companies releasing Q4 2022 data.  This week we had five of our holdings releasing earnings: Hershey, Inc (HSY), McDonalds (MCD), Amgen (AMGN), Lancaster Colony (LANC), and Apple (AAPL).

HSY: Hershey announced quarterly earnings of $2.02 per share, beating the Zacks Consensus Estimate of $1.78 per share. This compares to earnings of $1.69 per share a year ago. These figures are adjusted for non-recurring items.  This quarterly report represents an earnings surprise of 13.48%. A quarter ago, it was expected that this chocolate bar and candy maker would post earnings of $2.07 per share when it produced earnings of $2.17, delivering a surprise of 4.83%.  As Producer Prices continue to drop from the highs seen last summer, companies like HSY should naturally experience margin expansion and thus why it is at the top of our Consumer Staples Buy List.

MCD: Reported earnings; double digit growth across all the segments; CEO saying they expect short term inflationary pressures to continue into 2023; comps are still negative in China; EPS beat by 13 cents; globally strong comps minus China.  Despite inflationary pressures we still like MCD here as it historically outperforms during recessionary times.

AMGN: Reported quarterly earnings of $4.09 per share which met the analyst consensus estimate.  This is a 6% decrease over earnings of $4.36 per share from the same period last year.  As cancer patients return to hospitals from COVID lockdowns, we believe AMGN will receive the largest benefit as their product line is superior to their competition.  We also continue to like their 3.5% dividend in recessionary times. 

LANC: Lancaster Colony reported FQ2 non-GAAP EPS of $1.66 vs. consensus expectations of $1.67. Project Ascent expenditures were $.21 this quarter compared to $.24 in the prior year and are not included in the non-GAAP results. Overall revenues grew 11% with volumes measured in pounds falling 4%, or 2% excluding discontinuations. Retail segment sales grew 6% driven by New York frozen garlic bread, Buffalo Wild Wings sauces, Arby’s Horsey sauce, and Arby’s sauce products. Retail volumes decreased by 4% with about 1% of the decline coming from exiting less profitable product lines. Foodservice sales grew 19% due to price increases and volume growth at certain QSRs. Sales volumes decreased by 5% due to the exit of some less profitable SKUs. 

Lancaster’s input basket has experienced higher inflationary pressures than the overall consumer staples basket. The inflationary pressures are not going away in the next couple of quarters either, but management now has pricing plans that have caught up to the higher costs. The company’s underlevered balance sheet is a strategic decision away from creating additional value. Lancaster Colony is on our Best Idea Long list due to the acceleration in sales from the capacity expansion, upside in margins over the next two years from pricing and other initiatives, and the long-term visibility from Chick fil A’s compounding growth. 

AAPL: Apple shares slid more than 4% on Thursday after the company posted a disappointing first-quarter earnings report, including rare misses on revenue, profit, and sales.  The iPhone maker missed analyst expectations on profit for the first time in seven years, after strict Covid-19 lockdowns and related protests in China upended iPhone production at its biggest supplier.

The company also marked its largest quarterly revenue drop in nearly seven years, posting $117.2bn – down 5.49% from last year when it reported record holiday sales. The number was lower than analysts’ average estimate of $121.10bn.

Apple alluded to ongoing headwinds in a press release accompanying the report, which observers are calling shocking. Strict lockdowns in China, which produces 90% of its devices sold globally, cost it approximately $4bn in lost sales in 2022. In a call with investors on Thursday, Cook said iPhone revenue would have grown in the quarter if not for these supply issues, but said production is back to pre-shutdown goals.  Apple’s poor quarter proves that even the most valuable US-traded company isn’t immune to the challenges facing the tech industry at large.