heading toward yearend


What I’ve been reading suggests that current inflation in the US can be divided into two roughly equal causes: an increase in cost of goods (i.e., raw materials prices, labor, rent…) and sellers expanding profit margins. For example:

–I mentioned in a recent post that the yogurt I like is 15% more at Costco than a year ago, but up 75% in supermarkets.

–I was driving to an auto dealer maybe 20 miles away from my home. Gasoline in that area was $2.90 a gallon for regular. Back here it was $3.45 or so–except for in the more upscale part of town, where it was $3.85. That’s about 20% more at home than in the car dealer’s town, and a third more in the area that doesn’t really count, where the overall extra expense is not worth the bother of driving an extra mile.

Presumably, as supply chains normalize and as consumers’ major consideration shifts from availability to price, these unusually high markups will become less frequent.

In other words, ex extraordinary markups, underlying inflation may be more like 4% now rather than the headline numbers above 7%.

early last week…

…as Washington announced slightly lower inflation than expected before the Tuesday open, stocks exploded to the upside in pre-market trading. Stay-at-home stocks, clearly out of favor this year, led the charge. ROKU, for instance, was marked up by about 12%

To my mind, backward-looking trading bots bid up the usual pandemic-era suspects. This makes no sense. Maybe they were acting on the idea that looser money policy would breathe life back into these fallen angels the way the dramatic plunge in rates during the pandemic did. At any rate, there was an almost immediate counter action as the market opened. By the end of the day, ROKU et al had lost their early gains. ROKU, in fact, was down.


Hennes and Mauritz (H&M) and Inditex (Zara) have both recently announced that they have a ton of excess inventory–H&M (no surprise) with more than Inditex. Add them to the long list of retailers, including Target and Walmart, in this situation. (Yes, both TGT and WMT have said that they’re past the worst. But a careful reading of the precise wording used, rather than relying on the impression they have been crafted to create, suggests there’s still too much merchandise on hand. Nothing nefarious here, just the way marketing works.)

It seems to me that merchants in general double-and triple-ordered in 2020 and 2021, just to be sure to get something on the shelves, so potential customers wouldn’t get in the habit of staying away. They likely made extra concessions like no-returns that leave their options limited for dealing with the excess. My guess is that as a result, sales will be higher for retail than expected in the fourth quarter, but profits will be lower. Writeoffs, albeit small ones, are probably on the cards for some time in 2023 for the most aggressive merchants (Target (which I hold)?), as well.

In a pre-bot world, 80%, say, or maybe more, would already be discounted in current prices. Hard to know we are today. Although I own a lot of TGT, I’d be a buyer on weakness. I think Dollar General is well-positioned, as well, although I don’t know enough about it at the present. Another buy on weakness candidate, I think.

a trendless market?

I keep reading/hearing this in stock market commentary. I understand this is bad for managers, especially in fixed income, who try to gain outperformance primarily by predicting and navigating through big macro changes of the type we’ve experienced over the past few years. These “big picture” strategists tend not to fare particularly well in periods where the merits of individual companies are more important. For most equity managers, and for you and me as well, though, a flattish market where outperformance means knowing a lot about a few good companies that post better results than the consensus expects is the best of all possible worlds.

It would also be nice if there were more intelligent anticipation of company/stock performance rather than ignorance + rapid reaction, but we can’t ask for everything.

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