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Gene Inger's Daily Briefing - for July 14, 2022

Inflation hit a 41-year high- in the prior month; generating a 9%+ annualized rate I had in-mind, based on data gathered before this month. That resulted in a predictable S&P shakeout; albeit not too dramatic considering many believe a number of Agricultural and even Retail prices (dry goods for instance) trying to peak are gradually curving over. Even new vehicle prices are dropping, as I noted last night reference a large car Auction that took place here in Florida.

Forward guidance from earnings is up next, and tricky. Market turbulence will find little short-term solace; although there's some pressure on companies for clarifying their outlook and 'plans to cope' varying with the global events too. If expectations are muddied, so may be share behavior, especially for the global behemoths that are so dependent on overseas sales for much of their sales.

Even the Dollar level figures into this; as the strong Greenback makes foreign goods cheaper here (hence the lower prices of mostly cheaper mass-market goods in big-box and mega-retailer stores); and U.S. products pricier abroad.

They say the typical American household is spending about $500/month more than last year to buy the same goods & services; and people snug-up budgets (if they can even maintain a budget) accordingly.

At mid-afternoon the Beige (Tan) Book came out; showing price increases in all Fed Districts; along with labor shortages. Cooling economy with inflation at still-high levels (of course) was the summary of the Beige Book Report; more or less replicating the data from the earlier CPI, but mixing-in slower growth or stagnant reflections in some sectors.

The fear is a wage-price spiral of course; but data suggests consumers don't expect the inflation pace we've just had to continue; although I suspect it will unless Oil prices stabilize at a lower level; rather than just rebound. Ceasefire in Ukraine, if it occurs, would be the more seminal event influencing all this.

Bits & Bytes . . . review last night's comments about the upside rip of Canoo in Tuesday (most up and highest volume ever), from news of a vehicle order from Walmart. And candidly it's a lifeline virtually ensuring Canoo survives.

After Tuesday's Close, in a full SEC filing which normally wouldn't be needed after a simple 'sales agreement', we learned that it's actually more involved as might be suspected. Canoo disclosed that it also issued Walmart a warrant to purchase up to an aggregate of 61,160,011 shares with an exercise price of $2.15 per share. That not only ties WMT to GOEV 'more' than a simple sale, but the share amount is more than 20% of all the outstanding shares.

To me that's probable cause to continue suspecting more 'afoot' than using a delivery vehicle. Firstly because it makes Walmart a very significant influence on the Company, not just the short-range deliveries for which the intended EV use is targeted (starting in Dallas). And it provides potential 'cash' to Canoo in a sense with eventual dilution (but that's ok as it virtually assures survival and maybe more than merely muddling through).

As part of this deal Canoo also agreed not to supply any vehicles to Amazon as part of the apparently broader deal with Walmart. So it's pretty clear that a feistier Walmart wants to have a unique 'delivery visibility' that Amazon won't. I think it's in that line of thinking, as Walmart included a provision that Canoo must also notify Walmart in-writing of any acquisition offers within 72 hours. In a sense that also infers that 'if' any other company tries to take over Canno; it will be quickly known (before a determination) by Walmart executives, giving I think the obvious opportunity for Walmart to respond with their own proposal.

The unit vehicle deal appears to be 'non-binding'; but may be less pertinent as contrasted to the 'warrants', which is a bit dilutive as some vest immediately, but at the same time give Canoo the 'lifeline' they've needed. The prohibition of sales to Amazon indicates Walmart is positioning to have their mark on the Canoo vehicles, perhaps as an overall part of their rising delivery image.

In addition to its fulfillment centers, Walmart uses 3,800 of its brick-and-mortar locations to fulfill and deliver online orders. Those locations are located within 10 miles of 90% of the US population. So there is the point about 'visibility'. As CEO Aquila stated: 'Canoo's LDV has the turning radius of a small passenger vehicle on a parking friendly, compact footprint, yet has the payload and cargo space of a commercial delivery vehicle. (He says it's a) winning algorithm to seriously compete in the last mile delivery race, globally. We tend to concur.

Clearly the latter is mostly speculation about what might be; but should erase going-concern worries and put this 'all-American' EV company in a good spot. This is a clear-cut aspsect of Canoo departing from the multi-year 'do-or-die' financing approach the CEO keeps people innovating (over-simplification) and enhances the chances (nothing is guaranteed) of Canoo making it over time.

After the Beige Book, Atlanta's Fed President Bostic actually responded in a very pedestrian way (meaning he embraced the headline CPI number without a reflection on whether it's hindsight, which it is): he suggests 100 bp increase in rates; and that (no surprised) reversed the mid-session rebound on a dime.

The Fed may have a case to raise by 75 basis points; more says they express 'shock' at the numbers; and it would be a mistake. Bostic's remarks amplify a tendency for reactionary responses; rather than allow a return to normalcy in a reasonable time-frame, especially if Oil prices do not meaningfully advance.

Hiking rates dramatically has the Fed (apparently) determining policy not just on higher Food & Energy issues; but also structural wage increases that really do have 'stickiness'; and which won't be impacted much by pressing high rate policies. The U.S. inflation situation is broad; and the Fed is backward-looking to a degree, which has them thinking a stronger response is needed. Maybe they should look at Europe, which has entrenched inflation and tighter policies too, with the result being the deeper 'stagflation' we think should be averted.

The Fed is focused on inflation; not growth; and continues to think they impact matters adequately by re-calibrating to ever-higher interest rates; which is not a great way to approach a coherent strategy including the Oil and war issues; which really are dominant in the situation. The Fed taking an aggressive tact toward deepening what we already feel is a 'recession'; and you may even get employment contracting later this year. So then the Fed pivots; and maybe it's a strong effort by the Fed to 'break things' with knowledge they can pivot later.

In-sum: it's unclear whether the 'energy crisis' is the worst in world history as at least a couple Oil analyst suggest; but we think not, which is part of why I'd disputed the outrageously high Oil price forecasts a couple Wall Street firms had a couple weeks back. We got retrenchment but a bounce may be next.

Inflation fading is a reasonable expectation; with ideally the Fed not pumping the economic brakes so hard that it creates 'deflation' instead of cooling-down the economic frenzy; which I generally view as already having chilled.

A 'take-home' message from all the Fed reports tends to be 'they don't know' whether to shoot first and ask questions later; but they 'do' know the more or less 'everything is in-play'. Well price elasticity exists where it does; but with wages not likely to be clawed-back, it has limits even during economic dips. I think there are some stocks that have adequate funding lines and won't need higher interest loans (or market offerings) so are relatively immune from those influences. But clearly others (Housing again comes to mind) remain riskier.

It remains 'good news' is bad news (it prompts a hawkish Fed); and remarks from (often off-base) Fed-heads like Bostic, smack of panic about fighting this inflationary situation. They were so far behind-the-curve so they've got a long way to go if they really intend to get ahead of things...but stagflation can be a part of the tough environment in bigger-caps 'for now'; with inflation-fighting efforts risking economic breaks; not normality's return. Maybe the Fed needs to defer to the State Department, as working towards a ceasefire and Oil drop would do more for inflation in both Food & Energy; then all the Fed chatter.

Global pessimism .. still looms in the background of everything; well beyond a continuing analyst-focus on what moves the Fed will or should take ahead.

The Dollar is a reflector of how tight things have gotten even abroad; not just a response to the Fed moves here. The strong Dollar hurts the bottom-lines of mega-cap multinationals and some Enterprise stocks, as I've noted. So there is part of why some commodity prices eased too; especially if imported 'to' the U.S. (foreign goods cost less with a strong Dollar); but doesn't really reflect an easing of global tensions that contribute to global food & fuel-based inflation.

Regardless, forward-looking inflation is looking lower and for the markets that has to be the main concern; aside another wave of Covid or the Ukraine 'war' widening, which is also a concern. Biden in Israel and on the way to the Saudi Kingdom (hopefully not to grovel for production deals) reflects new concern at the same time Putin planning a trip to Tehran purportedly related to 'training a cadre of Russians' to operate Iranian drones, emphasizes global sparring.

There have been a slew of developments somewhat reminiscent of the 1930's pre-World War 2 era or strategic moves that were mostly aimed at resources. I think if there's anything positive this week, it's quiet negotiating in Turkey as they are hosting a group trying to facilitate opening the Port of Odessa clearly free of mines, to grain shipments, helping to avert a deeper food crisis. What's unclear is whether Russia's participating in resolving a crisis they created.

Aside 'energy' (mostly Oil stocks); there's not much expectation for higher real earnings; and I especially mean 'inflation adjusted' numbers. Mixed signals in the Enterprise sector are likely; maybe from Amazon, Microsoft or even the Banks, if you suspect loan-losses forthcoming (perhaps from JP Morgan and that could explain Dimond's aggressive 'hurricane' warnings).

Meanwhile you're back to great yield inversions; as well as Euro/Dollar parity (be careful if flying to Europe and they try to take advantage of Exchange rate differentials, as I've heard reports of that occurring, especially in Germany).

Hiking rates dramatically has the Fed (apparently) determining policy not just on higher Food & Energy issues; but also structural wage increases that really do have 'stickiness'; and which won't be impacted much by pressing high rate policies. The U.S. inflation situation is broad; and the Fed is backward-looking to a degree, which has them thinking a stronger response is needed. Maybe they should look at Europe, which has entrenched inflation and tighter policies too, with the result being the deeper 'stagflation' we think should be averted.

The Fed is focused on inflation; not growth; and continues to think they impact matters adequately by re-calibrating to ever-higher interest rates; which is not a great way to approach a coherent strategy including the Oil and war issues; which really are dominant in the situation. The Fed taking an aggressive tact toward deepening what we already feel is a 'recession'; and you may even get employment contracting later this year. So then the Fed pivots; and maybe it's a strong effort by the Fed to 'break things' with knowledge they can pivot later.

Bottom-line: the challenge of an economy not slowing sufficiently for the Fed is the basic theme out there. There is insufficient respect for the influence of a protracted Russian war on Ukraine; and the impact on Food and Energy price levels, 'if' that were to come to an early resolution.

So the Fed proceeds 'as if' they really are the arbiter of the situation; and we'll face higher rates. How severe the National impact will be is tricky; clearly that portion (a majority) of the population under 50 that 'rents' rather than owns, of course does not have an attractive time to buy property; but they do have the high costs that are normally associated only with a couple major cities. That's a complicated issue alone, since wages are not comparable to New York, say in an Atlanta or Houston; although the living costs are getting there (Florida is a special case; where it's almost 3rd world contrasting wealth and poverty at least in Miami, and somewhat in other cities).

Anyway yes 'everything is up in the air' and that's why the turbulence persists.

'Pick your poison' - is the typical mood of money managers this Summer; as a realization that the best deals are when growth is slowing, and share prices are down; although not many will recognize that. In this sense it's like today's Amazon Prime Day for stocks, but it lasts for weeks or even months. And it's not resolved by the turbulence of Tuesday's session; and even what's ahead.

For sure, generally there will be margin pressures on many sectors, and sure, we all know the conflicting views about the implications of the upcoming CPI Wednesday morning; which could result in alternating turbulent S&P waves. A similar situation can occur with certain key big-cap technology stocks; mostly those that focus in the Enterprise sector. Plus you have Oil stocks declining in the wake of our belief the upward spike to 120+ was unsustainable. To some degree the slippage of Oil was desirable for 'inflation peaking'; but not for the behavior of the Averages, or for that matter confidence in economic strength.

There's no point to dwell on the impact of a +/- 9% annualized CPI coming up; while a 10% rate would probably impact the S&P more in the initial moments. I will not be surprised if, after digesting an reaction, the S&P stabilizes later as various sectors are dissected and evaluated, as I've previously noted likely to start showing signs of fading; if not flat-out evidence of inflation peaking.

Today, Heathrow (London's primary airport.. LHR) announced trimming flights permitted for the Fall; and that's based on incredible Summer demand so far. I suspect the 'travel' component of the CPI will rise notably; but again ensuing data will likely reverse that; as travel plunges after next month; partially as the new school year starts; but also if Covid variants continue to spread as claims suggest. I know The White House is claiming inflation is 'not so bad' to worry people; although while their premise is disputable; I agree it's starting to fade.

So, Oil is shaking-out as suspected likely; although I'd prefer if it were Ukraine ceasefire initiatives; rather than 'curious' cozying-up between Russia and Iran. The idea of Iran teaching Russia how to use drones in warfare is shameful if it is true (the Russians are supposed to be a significant technological nation).

At the same time Putin planning a trip to Tehran suggests he wants to muddy the waters of the Middle East (or stir-up oil-laden desert sands I should say) .. yet-again. And we have our President Biden going to Saudi Arabia, perhaps to just explore business or military deals; but probably to press for production increases from the OPEC leader, as lamentable as that idea is to many of us. Besides the perception for several years of indirect diminished U.S. interest in the region, any groveling for foreign oil production is a bit .. well, desperate as even if it's primarily on-behalf of the EU needs; this is getting out-of-hand.

Actually the slide in Oil is predicated on slower demand in China; but that's for sure the Covid fear more than actual longer-range demand contraction. China essentially closing Macau casinos yesterday was an eye-opener to hopes that China would back-off their Covid-zero policies; given that it's contradictory in a sense to growth objectives proposed before the Communist Party Congress.

The most crucial concern is not merely if a 'recession is on the way'; or even whether it's already here. It is a potential of energy-based carnage in the EU if 'G Day' comes and goes without Nordstream 1 reopening after 'maintenance'.

Natural Gas being curtailed would of course endanger the German economy; and I think you've seen the ultimate greed today when BMW announced (and it's not April Fools Day as far as I know) they will charge 'subscription rates' to use heated seats presumably in all new BMW's sold. To wit: if you own one no charge to use what you already paid for (this is hilarious if not incredible), and if you don't it will be standard, but you can't turn it on without a subscription.

Of course that can't be allowed to fly. They tried something similar before (it might have been with Navigation updates); and reversed that effort. Maybe if they succeed with 'heated seat' subscriptions; by Spring you'll have to pay to lower the power windows. I'm being slightly sarcastic; but the automakers for a long time have been jealous of the recurring business model of satellite and radio and Tesla (who really started this); for-instance charging for a hotspot in your car even if it can simply link to the cellphone you already have present.

The graphic embedded comments are adequate to describe today's very key and newly announced deal by Walmart to commit to 4500 Canoo vans and an option for another 5500; for a total of 10,000. It's important to note remarks by Walmart; and that the initial pre-production cars being made this year are intended to be used for Walmart Delivery in the Dallas-Fort Worth area, so the Companies can evaluate and fine-tune aspects of this new arrangement.

A few weeks ago I noted the shuffle of a long-time Walmart executive attorney to Canoo; which inferred (along with the initial warehouse space leased for an assembly facility almost next door to Walmart's distribution central facilities in Bentonville Arkansas) .. which inferred that was more than coincidental. Also I realize that Walmart has a reputation for pressing pennies out of suppliers; so it won't surprise me if they squeezed for the best deal; but that's not the point. First if was NASA, and now Walmart (the former was just to give visibility and it is better than a Super Bowl commercial when it's seen with the astronauts), while this Walmart deal sort of implies security that the company will survive all this, and (as we had hoped) minimize the 'going concern' warning. It's very feasible that the shares would not have dipped as low as they did if not for the warning at the time. Now they run the shorts big time.

Incidentally the breakaway gap was so huge this morning that it invited selling and maybe even a 'short attack'. I doubt the gap will be filled on the pullback; as a lot of reassessment will be looking to enter on a concession. However in this market with the turbulance coming and going; it's impossible to be sure at the same time prospects for investors in at low levels looks more intriguing for the next couple of years. Between Walmart and NASA, the Canoo 'brand' will be pretty well seen, without Canoo spending the first dime on advertising.

But above all is the specter of possible earnings guidance that is slower than the Q2 reports (aided by inflated revenue); followed by sobering realization of a European crisis in the making, 'if' the Russian 'nuclear gas' option is applied (Putin could be nuts enough to swallow the loss of revenue, if he's confident a desperate Germany would turn favorably to his terms quickly; which they sure must not do; but that doesn't mean he doesn't perceive things incorrectly.)

So the real risk might be fears of Gas rationing, industrial shutdowns, massive economic dislocations and so on .. not now but next winter. Some of this may be Putin trying to convey that he's 'not done' and 'not' ready for a ceasefire. Of course that matters; and one way or another; a resolution would be bullish for stocks; preferably without further compromise of Ukraine's sovereignty.

Bottom-line: we expected to see turbulence with a defensive on-hold market ahead of CPI and initial earnings flows; and that's surely the case. Intimidation from Russia and Iran isn't helping; as our President heads to the Middle East.

If the stock market does take another hit this Summer, maybe BMW will find it in their corporate interest to rescind their latest greedy $180 / yearly charge to heat your seats. That has as good odds of being acceptable to customers as a view of the S&P roaring to record highs in the next few weeks. Not doable.

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