Post 233

A snapshot of what’s going on in the world’s economy.  Financial Ructions and book reviews can be a bit more technical so feel free to skip them.  See disclaimer at the end of this note.

Summary

News

Aston Martin (Thanks to PN for putting me onto this one)

The company is a British manufacturer of luxury sports cars.

  • Made famous as the car of choice in the James Bond films.

A little history:

  • 1913: Founded and first named Bamford & Martin after its two founders.
    • Eventually became Aston Martin:
      • Aston Hill is where Lionel Martin used to race cars.
    • It’s first car was called Coal Scuttle.
  • 1924: The company went bankrupt and was sold to investors.
    • PM: A sign of things to come.
  • 1939: Stopped producing sports cars and switched to airplane parts for the war effort.
  • 1947: Bought the automaker Lagonda.
  • 1975: Closed their doors due to financial difficulties.
    • Later that year it was bought for $2.3 million by three investors.
      • One of whom was Peter Spraque who was chairman of National Sem-Conductor Corp.
    • The name of the company was changed to Aston Martin Lagonda.
  • 1987: Ford bought 75% of the business
  • 1993: Ford bought the remaining 25%.
    • PM: You can imagine Ford waltzing in saying “Ok you idiots, we’ll show you how to run a car company.”
  • 2007: Due to financial difficulty at Ford, they sold Aston Martin.
    • It was part of a restructuring after Ford had lost $12.7 billion the year before.
    • By 2006 Ford’s share price was:
      • Down around 78% from its peak in 1998
      • Back to where it was in 1986 i.e. 20 years of gains wiped-out.
      • Today’s share price is still 64% lower than that peak in 1998.
    • The buyer of Aston Martin was Prodrive chairman David Richards.
  • 2013: Formed a partnership with Mercedes-Benz.
  • 2018: The company was listed on the London Stock Exchange.
    • The stock launched at a price of: 4,045
    • Today’s price: 174
      • Down 95.7%
  • PM: Their latest vehicle is the DB12.
    • Referred to as a supercar wrapped in velvet.
    • Top speed: 202mph
    • Engine: 671 horsepower V8
    • See motortrend report ‘here

The company has issued bonds to raise capital but due to the shaky financial situation of the business the bonds are rated what’s called “junk.”

  • So, “The name’s Bond, Junk Bond.”

Results

  • For the first nine months of 2023:
    • Volume:
      • 2022: 4,060
      • 2023: 4,398
        • +8.3%
    • Revenue:
      • 2022: £857.2 million
      • 2023: £1,039.5 million
        • +21.3%
    • PM: Dividing the revenue by the number of cars gives average prices of the following:
      • 2022: £211,133
      • 2023: £236,357 (US$300,000)
  • But it’s not sales that are the issue but profitability i.e. none.
    • Pre-tax losses for the first nine months of the year:
      • 2022: £511 million
      • 2023: £260 million
        • PM: So, getting better.

TV Ratings

According to Nielsen, last Sunday’s Super Bowl between Kansas City Chiefs and San Francisco 49ers was the second-most watched television event in US history:

  1. 1969 Moon Landing
  2. KC/49ers Super Bowl

But according to Sportsmediawatch, ratings for previous Super Bowls did not include “out-of-home” viewing until mid-2020.  If they are adjusted for like-for-like comparison, then the top-watched Super Bowls were:

  1. 2017: Patriots vs. Falcons
  2. 2024: Chiefs vs. 49ers
  3. 2018: Eagles vs. Patriots

From Boom To Bust

Breast implant maker Sientra has filed for bankruptcy:

  • Insert your own bankruptcy term here. J
  • The company blamed inflation for squeezing profits.
  • In the 3Q/2023 their sales sagged 13.7%
    • For the year they were flat.
  • They said procedural volumes were softer.
    • Although they had remained confident that sales would firm with the support of product innovations.
  • A far cry from the COVID days when sales perked-up significantly: +47%

Share price:

  • Sep 2018: $254.8
  • Valentine’s Day 2024: $0.18

US Inflation: Not Dead Yet

US Inflation: Down Year-on-Year, but Ticking Up Month-on-Month

Consumer Price Index (CPI):

  • Jun: 3.0%
  • Jul: 3.2%
  • Aug: 3.7%
  • Sep: 3.7%
  • Oct: 3.2%
  • Nov: 3.1%
  • Dec: 3.4%
  • Jan: 3.1%
    • Food: +2.6%
    • Energy: -4.6%
      • PM: Note that at current prices, energy may no longer detract from the inflation number as oil prices are now similar to what they were a year ago.
      • By May energy may start contributing to higher inflation.

Core inflation excluding food and energy:

  • Jul: 4.7%
  • Aug: 4.3%
  • Sep: 4.1%
  • Oct: 4.0%
  • Nov: 4.0%
  • Dec: 3.9%
  • Jan: 3.9%

Food away from home:

  • +5.1%
    • Full-service meals: +4.3%
    • Limited service meals: +5.8%
      • Month-on-month:  +0.6% (7.2% annualised).
      • PM: As this category includes fast food restaurants it may be going up a lot faster in California.

Big movers up:

  • Motor vehicle insurance: +20.6%
  • Admissions to sporting events: +13.5%
    • PM: Taylor Swift driving prices higher?
  • Vet services: +9.6%
  • Nonprescription drugs: +9.2%
  • Baby food and formula: +8.7%
  • Beef and veal: +7.7%
    • PM: Note that we saw this with my recent post showing Tyson Foods beef prices up 10.5%.
  • Hospital services: +6.7%
  • Rent: +6.1%
  • Pet food: +4.8%

Big movers down:

  • Eggs: -28.6%
  • Health insurance: -23.3%
    • PM: Not sure what happened here.
  • Car and truck rental: -14.1%
  • Smartphones: -13.2%
  • Lettuce: -11.7%
  • Televisions: -9.7%
  • Apples: -8.9%
  • Audio equipment: -6.6%
  • Gasoline: -6.4%
  • Airline fares: -6.4%
    • PM: Note that the number of people traveling by air in the US is higher than January of last year (see ‘here’), but excess fleet capacity is driving prices down.
      • Jet fuel prices haven’t really fallen much and have recently started to rise (see ‘here’).
      • Regardless, I’m always suspicious that airlines are much quicker at passing on fuel price increases than they are at passing on savings from price declines.
      • Also, airlines tend to hedge their fuel costs i.e. lock-in a rate for perhaps 75% of their fuel needs for the ensuing six months.
      • Finally on airline fares, with the industry already in excess capacity, if we have a recession we could see the cost of air travel fall a fair bit.
    • PM: Prices are even lower than pre-COVID by 3.6% (see ‘here’)
  • Toys: -4.2%
  • Appliances: -3.9%
    • Laundry equipment: -12.4%
  • Used cars and trucks: -3.5%
    • New cars and trucks +0.7%
  • Ham: -3.0%
  • Fish & Seafood: -2.6%
  • Milk: -2.4%
  • Household furnishings: -1.3%

Consumer Price Index (CPI) month over month increase (annualised in brackets)

  • Oct: 0.1% (1.2%)
  • Nov: 0.2% (2.4%
  • Dec: 0.2% (2.4%)
  • Jan: 0.3% (3.6%)
    • Food: +0.4%
    • Energy: -0.9%

Core inflation, excluding food and energy (annualised in brackets)

  • Oct: 0.2% (2.4%)
  • Nov: 0.3% (3.6%
  • Dec: 0.3% (3.6%)
  • Jan: 0.4% (4.8%)

Cocoa “Poof”

The price of cocoa in $ per ton (Trading Economics):

  • Feb 2023: $2,377
  • Dec 2023: $3,746
    • Up 58%
  • Feb 2024: $5,995
    • Up 152% from last year
    • Up 60% in less than a month and a half.

The reason prices are soaring is apparently weather-related impacts from El Nino.

Hershey

Hershey is a US confectionery company.

A little history:

  • 1894 founded by Milton S. Hershey in Lancaster Pennsylvania.
    • PM: It would be funny if Paris Hilton’s brother was named Milton.
      • His favourite cheese: Stilton.
    • He stayed with the company until his death in 1945.
  • 1900: Started making milk chocolate bars.
  • 1907: Hershey’s Kisses.
    • PM: I’m writing this on Valentine’s Day.J
  • 1909: Founded the Milton Hershey School.
    • Started as a school for orphans.
    • Admission is now restricted to low-income children aged 4-15.
  • 1925: Mr. Goodbar
  • 1927: Listed on the New York Stock Exchange.
    • PM: Just before the crash.
  • 1963: Bought H.B. Reese Candy Company.
    • Reese’s Peanut Butter Cups were invented in 1928.
      • According to Statista the top selling brands of chocolate bars in the US are:
        • Reese’s
        • Hershey’s
        • KitKat
        • Snickers
        • Twix
  • 1996: Acquired LEAF Inc.
    • Jolly Rancher
    • Whoppers
    • Milk Duds
  • 2021: Bought Dot’s Pretzels

Share price:

  • 1981: $1.51
  • 2024: $193.9
    • Total return over 12,000 percent
    • Or 12% per annum over 43 years.

Hershey, is the owner of brands such as:

  • Almond Joy
  • Kisses
  • KitKat: they own the rights in the US and Nestle everywhere else
  • Milk Duds
  • Mounds
  • Reese’s
  • Rolo
  • Skor
  • Twizzlers
  • York

4Q/2023 Results

  • Adjusted sales: Down 0.1% (up 10.7% the previous quarter)
    • Price: +6.5%
    • Volume: -6.6%
  • Net profit: Down 11.5%

Note that sales have slowed considerably as their continuing price hikes are starting to “bite.”

  • North American Confectionary:
  • 3Q
    • Pricing: +11.1%
    • Volume: -1.0%
  • 4Q
    • Pricing: +7.2%
    • Volume: -5.1%

Their outlook for 2024

  • They will continue to increase the prices of their products.
  • But this will be off-set by:
    • Higher cocoa prices.
    • Higher interest expense on their debt.
  • The result will be flat profit.

My post from October 2022:

The company morphed from being a chocolate company into being a snacks company by acquiring salty snacks such as:

  • SkinnyPop popcorn
  • Pirate’s Booty puffed rice
  • Dot’s Homestyle Pretzels.

They are now combining the two salty and sweet snacks in new products such as Reese’s Dipped Pretzels.

Hershey realised its expertise was in marketing and branding snacks; they just happened to be chocolates and realised they could do the same with salty snacks.

Tech Layoffs

The FT reports that technology companies have let go 34,000 people so far this year.

  • 263,000 last year (Layoffs.fyi)

Tech companies claim that the layoffs are due to investments in Artificial Intelligence (AI) which reduces the need for employees.

Coke

Coca-Cola owns a number of brands including:

  • Schweppes
  • Sprite
  • Dasani
  • Costa Coffee
  • Dasani
  • Smartwater
  • Fanta
  • Powerade
  • Fresca
  • Minute Maid
  • Barq’s

Coca Cola Results:

  • Adjusted sales: +12%
    • Price/mix: +9%
    • Volume: +3%
  • By region:
    • Europe, Middle East & Africa: +25%
      • Price: +24%
        • In part due to high inflation in Zimbabwe and Turkey.
      • Volume: +1%
    • Latin America: +23%
      • Price: +14%
      • Volume: +4%
    • North America: +5%
      • Price: 8%
      • Volume: -1%
    • Asia Pacific: +13%
      • Price: 10%
      • Volume: +2%
  • By category:
    • Sparkling soft drinks: +2%
      • Coca-Cola Zero Sugar: +4%
    • Juice, value-added dairy and plant-based beverages: +6%
    • Water, sports, coffee and tea: +1%
      • Water: +1%
      • Sports: -1%
      • Coffee: -7%

The company was ranked number one in the US in terms of enabling its employees to progress within the company (American Opportunity Index).

1.    Coca Cola

2.    J.M. Smucker

6. Meta (Facebook)

9. Costco

11. Target

Note that six of the top 20 were companies in financial services.

Can You Give Me A Lyft?

Ride-sharing firm Lyft announced their latest results: 4Q/2023:

  • Gross bookings: +17%.
  • Sales: +4%
  • Net loss:
    • 4Q/2022: $558.1 billion
    • 4Q/2023: $26.3 million
  • During the 3-month period:
    • Rides: 191 million (vs. Uber’s 2.6 billion)
      • +26%
    • Active riders: 22.4 million
      • +10%

Financial Ructions

Yield on the 10-Year US Treasury:

  • Feb 2020: 1.51%
  • Aug 2020 (low): 0.55%
    • PM: This is how stupid things got with QE.
      • The pre-COVID 1.51% was already stupid.
  • Oct 2023 (recent high): 4.98%
    • PM: Cue panic pivot from the Fed.
  • Dec 2023 (recent low): 3.79%
  • Feb 15, 2023: 4.21%

In an opinion piece in the FT, Stephen Roach discusses the end of Hong Kong.

  • He says there are three reasons for this.
    • Domestic politics.
      • They went awry in 2018/2019 when an extradition arrangement was proposed.
      • The people responded with pro-democracy rallies.
      • China responded with a national security law.
      • This effectively accelerated the planned 50-year transition period to being taken over by China.
    • The Chinese economy faltering.
      • Many Hong Kong stocks operate businesses in mainland China and investing in the Hang Seng index was a way of getting access to one of the largest and fastest growing economies in the world.
    • Global developments.
      • Tariff wars between the US and China.
  • He does not see any easy way out for Hong Kong.

Rent Asunder

The WSJ reports that a new rent control law went into effect in New York in 2019.

  • Since then, prices of affected buildings have dropped 34% (Maverick Real Estate Partners).
  • Maximum rent increase for these buildings last year was 3%.
  • As reported in my recent post, New York Community Bank has meaningful exposure to these buildings on its loan book.
    • According to Peter Winter of D.A. Davidson, interest rates on loans to these multifamily building borrowers are set to reprice significantly higher.
      • Current: less than 4%
      • Renewal: Up to 8%

Also from the WSJ, warehouse space available for sublease has skyrocketed (Savills).

  • Pre-COVID: around 75 million square feet.
  • 4Q/2023: 156 million square feet

Despite this, rents keep increasing: up 12.5% last year.

Book Review

The Mystery of BankingMurray N. Rothbard (1983)

Conclusion: The Present Banking Situation and What to Do About it. Part 1

MR notes that the Federal Reserve created the booming stock market in the 1920s and when the market crashed in 1929, they attempted to inject liquidity into the system with “massive open market purchases.”

  • However, the large increases in reserves didn’t result in a high number of loans being made by the banks because they were hoarding their reserves due to:
    • The banks being afraid of being the victim of a bank run.
    • Worried about their customers going bankrupt.

In 1933 President Roosevelt confiscated everyone’s gold then debased the currency from 1/20 of a gold ounce to 1/35.

  • It was the beginning of the US fiat dollar.
  • Although, the dollar was still on a gold standard with other countries.
    • Only other central banks could redeem their US Dollars for gold and do so at the newly debased price.

Also in 1933 was the establishment of the FDIC (Federal Deposit Insurance Corporation).

  • This opened up the sluices in terms of bank-fueled credit inflation.
  • As MR puts it “Only a dubious hope of Fed restraint now remains to check bank credit inflation.”

MR notes that the Fed continued to inflate the money supply during the 1930s which only “succeeded in inflating prices without getting the United States out of the Great Depression.”

MR as well as many others have pointed out that the only reason the recession of of 1929 turned into a 12-year depression was due to massive political intervention in the market clearing process;

  • First by Hoover
  • Second by Roosevelt.

A non-exhaustive list of some of this intervention:

  • Forcing businesses to pay high wages.
    • Which results in companies hiring fewer workers.
  • Lent large amounts of government money to “keep unsound businesses afloat.”
    • PM: Sound familiar?
  • Inflated the money supply in order to maintain high farm prices.
  • PM: To this I would add the impact of the Smoot Hawley tariffs, which resulted in retaliatory tariffs being imposed by other countries which served to kill global trade i.e. American farmers lost a big part of their market.
  • PM: He believes that the “pervasive national and regional economic warfare during the 1930s played a major though neglected role in precipitating World War II
  • PM: Given the current state of economic warfare, this is something we should all be worried about.

He says that Roosevelt created the first “inflationary boom of 1933-37 within a depression.

  • PM: The first stagflation.

In 1944 a new gold exchange standard was established at Bretton Woods.

  • The US dollar would be backed by gold.
  • All other fiat currencies would hold US dollars in reserves instead of gold.
  • It was expected that foreign countries would not exercise their right to redeem US dollars into gold.
  • In this way the US could export its inflation to other countries i.e. US dollars would pile up in foreign central banks being used as reserves to increase the local money supplies.
  • However, unsurprisingly things didn’t turn out as planned as more “hard currency” countries objected to importing US created inflation and in the 1950s and 60s started demanding gold for their dollars.
  • This started to put pressure on the price of gold with the US having to sell gold in the London market to prevent it from rising above $35.
  • Measures were taken in 1968 that delayed the inevitable, but on August 15, 1971, Nixon axed any link with gold and turned the US dollar into a pure fiat money.
  • In the meantime, he notes that “Congress had progressively removed every statutory restriction on the Fed’s expansion of reserves and printing of money.”
    • Which later that decade led to the “greatest sustained inflationary surge in US history.”

Disclaimer: Note that Paulitical Economy™ should not be considered as investment advice, and I have not verified all of the sources of information.  It is meant for general interest purposes only.  Please consult an advisor if you plan on putting any of your hard-earned capital to work during these turbulent times.

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