Expensive Turkeys and Supply Chain Glimmers, Terry Gardner, CJ Lawrence Market Comment 11.22.21 – YouTube Video & Transcript

https://youtu.be/EKOlCXhKRjc

Terry Gardner, Jr.:

Hi, good evening everyone. It’s Terry Gardner from C.J. Lawrence on Monday, November 22nd, with a brief video on this holiday week, covering three topics. First off, it’s that time of year where we take a look at the American Farm Bureau’s annual Thanksgiving dinner cost index. And so, it’s quite timely, particularly all the discussion around inflation. So, we’ll come back to that in a second. Second thing, we want to take a look at the global supply crunch and see if freight flows are starting to ebb a little bit. And thirdly, I want to answer a couple of questions that I’ve been asked over the past few weeks, particularly on of my last video.

Terry Gardner, Jr.:

So, first off, one of our favorites, this week, every year, and really for the last two decades, we’ve taken a look at the American Foreign Bureau’s Thanksgiving dinner cost index, where they measure the cost of the traditional Thanksgiving dinner and compare it to previous years. And by the way, that cost has fallen for the last five years, but this year, as you can imagine, it spiked. So, your Thanksgiving dinner looks like it’s going to cost about 14% more than it did last year. The last time we saw a rise in the Thanksgiving dinner cost was 2015, but we only saw one and a half percent rise over 2014. So, this is clearly a very meaningful jump.

Terry Gardner, Jr.:

I guess there’s not a big surprise, just given what we hear in the financial press with regard to inflation across all commodity and product groups. But the catalyst for the big jump this year was the bird. That Turkey’s going to run you 24% more than it did last year. But there’s a caveat to that, which I’ll come back to in a second. Dinner rolls, one dozen dinner rolls are going to run you 15% more than last year, and cranberries are up 11% from last year. So, those are a couple of the ticket items that are analyzed in this basket of items of the traditional Thanksgiving dinner.

Terry Gardner, Jr.:

One that I don’t quite understand is if dinner rolls are up 15% from last year, it surprises me that a bag of stuffing is down 19%. So, isn’t it kind of made from the same stuff? Very confusing. Something we’ll have to dig a little bit deeper into. But the bottom line is that, load up on the stuffing, because it’s cheap this year. So, secondly, with regards to inflation and cost, and actually was intimated at the end of the American Farm Bureau study, the supply chain. So, interestingly, the American Farm Bureau came out after they had done their study and said, “Hey, by the way, the Turkey prices that we had in our study have actually fallen quite a bit in the last couple of weeks.”

Terry Gardner, Jr.:

So if you have waited to get that Turkey, you’re probably going to be better off because Turkey prices have actually fallen over the last few weeks. And that leads us to a discussion of the global supply chain and inflation in prices, and what’s happening around the world with regard to manufacturing the delivery of products, particularly in advance of the holiday season. And there were a few items that have come out in the last few days that we thought were interesting. These are just anecdotal points, but maybe suggesting that the worst of the supply crunch may be behind us.

Terry Gardner, Jr.:

And there were a few items that we thought were worthy of noting. And the sources for these anecdotes vary from the Wall Street Journal to Bloomberg News, to others. But a couple, including that Toyota is boosting its production in December to a level that is 21% higher than where they were in, in December of 2019. So, they clearly feel confident that they have the raw materials to boost production this December. That was quite encouraging. Certainly, here in the US, out on the West Coast, the Port of LA announced this weekend that they had cleared 29% of the containers that were clogging their storage and staging areas. So, the grease is started to be applied to the wheel of the Port of Los Angeles.

Terry Gardner, Jr.:

The CEO of GXO Logistics, which is one of the world’s largest contract logistics companies and a company that we actually like quite a bit here at C.J. Lawrence, said in an interview that they thought the worst may be behind them. They were seeing an increase of flow of goods into their facilities, and that goods were moving more rapidly than they had over the past several weeks. And then interestingly, the cost of sending a shipping container from Shanghai to the Port of Los Angeles is down now about 20%, just since September.

Terry Gardner, Jr.:

And then, other anecdotals that we’re seeing in the data flow include very strong industrial production and capacity utilization numbers that came out for October, just in the past couple of weeks, which exceeded expectations. So, it’s likely that the supply chain crunch will continue well into 2022. And in particular, in some areas of the economy worse than others, but we are starting to see some ebbing of the tightness in that market in the last couple weeks.

Terry Gardner, Jr.:

And then with regard to a couple of questions that I’ve been asked, first one being, in my last video, in my conclusion, I stated that we were constructive on the US equity markets. And I got a lot of questions about what does constructive actually mean. And my first response was, “Hey, I’m glad you asked the question, because it means you watched the video.” But secondly, to clarify that, we’re constructive, meaning that we think that stock prices can go higher, but that 2022 may be a tougher year than in terms of return expectations than what we’ve seen in 2020 and 2021.

Terry Gardner, Jr.:

So, the market is going to be fighting this headwind of higher rates and higher inflation, which will keep a lid on valuations, which have risen fairly dramatically over the last several years. Earnings have now caught up in 2021. Earnings growth seems to be peaking. And so, it’s likely that under those circumstances, the market may narrow a bit in 2022. And that’s why we think that there are names that can carry them market higher, but we want to be increasingly selective and really focus on the names that can grow earnings in excess of PE compression. So, as multiples come down, you want to own the names where their earnings can grow faster than their multiples compress.

Terry Gardner, Jr.:

And then secondly, I’ve got a question about an analysis that we’ve done regularly but haven’t talked about more recently, which is the fund flows, ETF and mutual fund flows into bond and equity funds. And why is that important? Because it is thought it shows that the retail investor biases towards bonds versus stocks, and it’s somewhat of a measure of sentiment. Although, these numbers have sent cross currents for the past several years, we’ve seen dramatic outflows of equities and dramatic inflows into bond funds. So, in fact, and you think about this year and last year, the stock market has done so well, but we continued to see outflows from equity funds. It really doesn’t make sense. And I was asked that question.

Terry Gardner, Jr.:

My response is that I think something has to do with rebalancing, because these mutual funds and some of these ETFs are primarily owned by retail investors. And if you think about the old 60/40, or the 70/30 asset allocation with monthly or quarterly or semi-annual or annual rebalancing, when stock prices rise and that portfolio gets out of whack and is no longer 60/40, but it’s 70/40, at the end of the quarter, at the end of the year, the manager or automatically a rebalance takes place where stock are sold and bonds are bought. So, it makes some sense that bond funds would see inflows in a period where stock prices are rising. I hope that makes some sense.

Terry Gardner, Jr.:

And then finally, to wrap things up for this week. On behalf of our group here, our family here at C.J. Lawrence, we want to wish you and yours a very happy Thanksgiving. As always, feel free to reach out with any questions or comments to tgardner@cjlawrence.com or give me a ring here at 212-888-6403. Thanks.