Market Update
The week in stocks started out relative calmly, without the massive intra-day moves that have marked the year so far. Even after the January inflation data was released on Thursday morning at a fresh high of 7.5% annualized, stocks took it in stride. But comments to Bloomberg by the Federal Reserve Governor James Bullard set off renewed selling on Thursday. Bullard said that he would like to see rates lifted by 1% by the first of July, just 4.5 months from today. The Fed is now in the position of needing to react to a red hot economy in which inflation is the highest in 40 years and widespread, affecting prices of not just food, gas and housing but also healthcare, up .6% in the last month, and household furnishings, up 2.2% in the same period. There is little consolation in seeing that Inflation has not been even across the country. The west coast and parts of the east have actually had it better, if only slightly.
While the game of “what will the Fed do” continues, so does the volatility in stocks. It has overshadowed a strong earnings season, which is admittedly more about gaining insight into a company’s earnings projections for the future than what already happened last quarter. But to touch on the past, companies showed that they made the the most of a wildly difficult quarter, posting earnings that were up over 25% for the period. That rate is blended across all companies that reported through February 4th. In the forecast, companies anticipate a more modest 2022 earnings growth of 5-6%.
When factoring in future earnings, less money sloshing around in the economy, more expensive borrowing costs, continued supply-chain woes and a consumer whose enthusiasm for spending is wearing thin, traders are right to question the price and value of every public company in this economy.
Investors continue to sell bonds, which lowers prices and lifts the yield. The 10-year Treasury note yield rose above the psychologically important 2% mark on Thursday. Keeping a close eye on the yield curve, which is the plotting of yields at each of the different Treasury maturities, is a very important insight to economic expectations. The curve has been flattening lately, with the spread between the 10 year and 2 year yields shrinking. Flattening curves indicate coming rate increases, which is no surprise, but also can signal a loss of confidence in economic growth. Frequently this year as bonds have sold off sharply, stocks have followed suit. But here is some decent news to end on; supply shortages should ease the second half of this year. The Danish shipping giant Maersk reported that it was able to raise costs 80% in 2021 while shipping fewer containers than usual. Ships are still jammed up getting into ports like L.A. where a lack of workers to unload the containers and drive the goods away still remain bottlenecks. However, and here is the good news for consumers, Maersk projects a return to normal later this year. With Covid restrictions set to ease, port workers will return, backlogs will ease and costs will come back down to earth.
Pain at the Pump
Remember when oil prices were negative? If not, it was probably because the rest of the world’s virus issues loomed so much larger in spring 2020. Remember when oil prices were over $90? Well that’s happening right now.
Producers have been slow all over the world to increase supply to meet demand, which is expected to exceed pre-pandemic levels later this year. Per the International Energy Agency (IEA) demand will require 99.7 million barrels a day which is 200,000 more than in 2019. The IEA said that production will barely outstrip demand and reserves that were built up in 2020 are running thin.
International tensions, like the buildup of Russian troops on Ukraine’s border, has everyone nervous about how to handle the provocateur Russia, which provides 40% of Europe’s oil. Perhaps Russia should worry too as oil and gas are 60% of its exports and therefore a significant contributor to its income which would be devastated should Europe halt its pipelines.
At home, oil producers have reduced rigs and exploration. Climate change worries have led to less funding for these projects yet alternative sources of energy have not filled the demand gap as yet. Exploration may pick up a little bit but not in time to save you at the gas pump or in most any other way anytime soon.
The way the world runs now, when pump prices are high, prices everywhere are higher.
Super Bowl LVI
For evidence of social life getting back to normal, you only need to look at football. Stadiums have been at capacity all season. Only a handful of games were postponed for a few days to accommodate players sick with Covid. America’s most popular sport will be hosting its biggest party, ahem, game, this Sunday with the Super Bowl in a much more normal environment. The Cincinnati Bengals will visit the Los Angeles Rams in the Rams’ hometown arena, the gorgeous brand new SoFi Stadium. This will be the second year in a row when the host city is also home to one of the contenders.
Unlike last year when the Tampa Bay Buccaneers win over the Kansas City Chiefs in Tampa in front of a mere 25,000 attendees, all seats are available for purchase this year. The stadium normally holds 70,000 but expands to 100,000 capacity for events such as this. Ticket prices are, of course, wildly expensive and selling for more than last year. That seems to be a given for each successive Super Bowl. But consider that this is California, home to some of the richest people in the world, and money is no object for many. Thus, tickets on the resale websites were successfully selling VIP seats for $100,000 for a pair. Regular seats were going for a mere $5,000. However as the week progressed, and potential attendees wavered on purchasing, prices began to slide. Today tickets could be found for less than $3,000.
Many L.A. fans do have the benefit of waiting it out. For starters, thousands can just drive over on the day of the game. This has forced hotels to lower their rates to attract guests. Along with competition from short-term rental businesses like Airbnb which siphon off demand, the hotel-analytics firm STR expects occupancy to top out at 89%. Revenue per available room will still be near $400 a night, a great boost for an industry that has struggled hugely for the last two pandemic years.
A bit of history – the first Super Bowl was also held in L.A. at the Coliseum in 1967. Only 66% of the seats were filled but millions of viewers watched from home. Promoters worried from the start that TV viewers would change the channel during the game not to return. Of particular concern was the break during halftime when players could grab a soda or a smoke. But what of viewers, who would be doing the same but maybe get so engaged in another show that they would not come back? So, taking advantage of the creativity of nearby Hollywood, they engaged artists to choreograph a halftime show that would demand viewership. And 55 years later, that is still one of the most anticipated events of the game.
Advertising, while not the draw that it is today, was also a feature of the earliest games. Even as viewership is declining, down to about 100 million from 115 million in 2015, advertisers are as committed as ever to earning their own win with ads that are sharp and witty. This year has been dubbed the Crypto Bowl given how many cryptocurrency-based businesses will be showing up on the screen. Producing an ad costs upwards of $750,000 and much higher if you want a superstar like Scarlett Johansson and husband SNL's Colin Jost. This year a 30-second ad is pegged at $6.5 million, up from $5.5 in 2021.Inflation is a bugger.
Whether you are rooting for the sheep or the cats, may your team win and the ads as entertaining as the halftime is promised to be!
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