Authored by David Stockman via Contra Corner blog,

The so-called Wall Street economists keep saying that inflation is going to abruptly cool. This prospect is owing to the fact, they claim, that the economy is about to roll-over into recession and especially because shelter costs, which are by far the largest component of the CPI and account for 31% of the weight in the index, are already falling sharply.

We don’t buy either proposition, of course.  We think the recession is already here, but the proposition that it will cause an immediate cooling of inflation is just warmed-over Phillips Curve nonsense.

Likewise, the second point essentially amounts to wishful thinking. To wit, it’s based on “asking rents” for newly leased units, which have cooled in the typical fall seasonal pattern at a slightly faster pace than normal. In turn, this is alleged to mean that the great rental inflation boom is already fading into the rear-view mirror.

Well, here’s the chart from the latest Apartment List national rent report. In both pre-Covid years of 2018 and 2019, month-over-month rents fell seasonally in the fall (blue bars) just like they are now. That puts the 0.7% decline reported for October 2022 versus prior month in appropriate context. In a word, it’s not much to write home about, given that October rents in 2019 fell by almost as much at 0.5% on a M/M basis.

Moreover, when we are dealing with a not seasonally adjusted month-over-month data set, the hugely aberrant increases of 2021 must be taken into consideration. For instance, the peak monthly gain in July 2021 amounted to 30% at an annualized rate.

Accordingly, on a two-year stacked basis, the October 2022 asking rent increase is still positive, a clear deviation from the implicit two-year stacked declines during the pre-Covid period.

More importantly, “asking rents” have a very limited meaning. They reflect conditions on the market for new leases as embodied in the soaring rent indices published by private real estate companies like the Apartment List. By definition, however, these new lease rates have yet to roll through the total stock of US residential housing—and we are talking about all 128 million units!

That is to say, there are about 44 million rental units and 84 million homeowner occupied units in the US. In its wisdom the BLS treats this as a giant stock of rental housing via the OER (owners equivalent rent) for the latter and the “rent of primary residence” for the former.

Consequently, in both the real world, as well as the BLS scheme of things, it would take an extended period of time for rent rates on new leases to roll through the entire housing stock. Yet the CPI is designed to represent rent prices paid by all renters during the month (and homeowners who are treated as imputed “renters” in the CPI), not just new renters.

For this reason, the CPI rental indices lag behind private market asking rents by a year or more because it takes at least that long for the rent rolls to turn-over. Not surprisingly, therefore, the annualized rate of CPI rent increases in recent months has accelerated sharply (purple line) as rising asking rents have rolled into the rent rolls.

Thus, during September, the annualized rate of CPI shelter increase was 8.9% versus prior month—a figure well above the Y/Y (black line) gain of 6.6%. Needless to say, even if the purple line now starts cooling consistent with the alleged weakening trend in asking rents, the Y/Y increase for shelter will continue to rise well into 2023.

What happens after that is not at all clear, but one thing is obvious from the Apartment List chart above. To wit, the only “cooling” that has occurred so far is a slightly elevated seasonal decline, which will likely be reversed to seasonal increases early next year if prior history is any guide.

CPI Shelter Index: Y/Y Change (black line) Versus M/M Annualized Increase (purple line),2012-2022

One hint about the future direction of the seasonally adjusted CPI shelter index, however, lies in the tight-as-a-drum rental unit vacancy rate. As of the latest data, (Q2 2022), the 5.6% vacancy rate was a modern low and compared to pre-Covid levels of 6.8% in Q2 2019 and 8.6% in Q2 2018.

In fact, the Q2 apartment vacancy rate was the lowest in 38 years, and since 1956 was matched or exceeded only during the 1970s. And those were not exactly disinflationary years for housing and rental prices.

Rental Housing Vacancy Rate, 1984-2022

Likewise, there is no evidence that a flood of new rental unit supply is about to come crashing into the market. The 376,000 units (annualized rate) delivered in Q2 2022 were only slightly above recent levels; and they were also well below peak deliveries in the 1970s and 1980s.

In sum, the rental housing market is extremely tight and is likely to remain so for an extended period into the future. Accordingly, the here-comes-deflation crowd is actually making a mountain out of a mole-hill, claiming that an ordinary seasonal decline in asking rents heralds a sharp deceleration of the shelter index.

It doesn’t.

New Apartment Units Completed, 1973-2022

Nor is there any reason to believe that a surfeit of owner-occupied units will flood into the rental market, causing rates to swoon. In fact, the vacancy rate among the 84,840,000 owner-occupied units in the US was just 0.7% in Q2 2022—the tightest vacancy rate for that series since it incepted in 1956!

Stated differently, there are currently only 625,000 vacant owner units in the entire US. That figure compares to a vacancy rate of 1.7% and 1.3 million vacant owner units in Q2 2016, a period when shelter cost rises were already rising at a 3.4% Y/Y rate.

So with a dramatically tighter supply/demand condition today, why in the world would rental rates weaken, let alone plunge toward the flat-line, in the periods just ahead? The excess supply that would be required to sharply cool the home rental markets just isn’t there in either segment of the 131 million unit (counting vacancies) US housing stock.

Homeowner Vacancy Rate, 1956-2022

If shelter is not going to rescue a rising CPI, we doubt whether other services costs will, either. That’s because labor costs are still rising strongly and will pass through into service sector prices in the periods ahead.

Thus, as reported last Friday total compensation costs during Q3 2022 (including fringes and benefits) rose by 5.1% versus prior year, the highest gain since the series’ inception in 2002. It was also nearly double the 2.3% annualized increase between 2012 and 2019.

So, yes. labor costs have accelerated dramatically since the spring of 2020, and are now working their way into the prices charged by domestic vendors. Accordingly, Wall Street models showing CPI inflation plunging in the periods ahead (2023-2024) are just another case of stock peddlers moonlighting as “economists”.

Y/Y Change In The Employment Cost Index, 2002-2022

For want of doubt, consider the path of the CPI for services index, which makes up about 60% of the weight in the overall CPI basket. Between 2012 and 2019, it rose by an average of 2.59% per annum, which rate of gain has soared to a record 7.4% in Q3 2022.

That is to say, services inflation has nearly tripled from its pre-Covid steady state owing to the fact that domestic compensation costs have been rising rapidly, as well. Accordingly, it will take a far higher interest rate than the terminal rate of 5.0% which the market has currently priced-in, to bring wage costs and therefore service sector prices back to the Fed’s 2.00% target.

Y/Y Change in CPI For Services, 2012-2022

None of this, however, has stopped the Fed’s favorite whisperer, Nick Timiraos of the Wall Street Journal, from spreading false hope that the Fed’s anti-inflation campaign is nearing its end-stages. In particular, the current “pivot” meme consists of the notion that after the turn of the year the Fed will engage in a prolonged “pause” in its rate increasing campaign.

Supposedly, that’s to permit the monetary policy lag to work its magic, and also because Wall Street can’t stand the heat, whining that the increases have already been too large and prolonged:

Those officials and several private-sector economists have warned of growing risks that the Fed will raise rates too much and cause an unnecessarily sharp slowdown. Until June, the Fed hadn’t raised interest rates by 0.75 point, or 75 basis points, since 1994.

Well, no. The actual fact is that the Fed has not been confronted with soaring, increasingly embedded inflation since the early 1980s and it has never before started a rate increasing campaign from the zero bound.

What the latter means, of course, is that several 75 basis point increases were needed just to rescue Fed policy from its foolhardy embrace of zero interest rates. In turn, this means that its so-called “braking” action has barely begun to bite.

For instance, during the most recently reported week (October 19), the Y/Y increase in outstanding credit card debt hit 18.4%, a level that is self-evidently stoking consumer demand, not curtailing it. Accordingly, the Fed has a lot more interest rate wood to chop before it succeeds in slowing household spending and the resulting inflationary pressures.

Y/Y Change In Credit Card And Other Revolving Consumer Debt, 2012-2022

For want of doubt, here is the trend of interest rates on credit card debt. The slight elevation during the past few  months barely gets rates back to the level of the 1990s, a period when the CPI was rising at just 2-3% per annum.

In a word, 5% on the Fed funds rate doesn’t cut the anti-inflationary mustard in the current environment. It will take a “rate shock” far higher than currently expected by the Wall Street permabulls and perennial whiners to curtail the inflationary tides that are now assaulting the US economy.

So as one typical Wall Street economist inadvertently averred this AM while pleading for mercy from the Fed at tomorrow’s meeting.

“They have to think about calibration at this meeting. You’re trying to cool down an economy, not throw it into a deep freeze,” said Diane Swonk, chief economist at KPMG.

Well, whether they intend it or not, the “deep freeze” is necessarily exactly where the Fed is taking the inflation-bloated US economy.

Interest Rates On Credit Card Debt, 1994-2022

Another factor which is compounding the Fed’s anti-inflation challenge is the artificial build-up of “savings” during the Covid Lockdowns and resulting stimmy bacchanalia. By estimates of Fed staff, that build-up peaked at about $2.25 trillion during Q3 2021, but has since then been only moderately reduced to about $1.70 trillion. This means that there is still considerable spending power in reserve that has never before been present during a tightening cycle.

Moreover, upwards of half of that excess is held by the top quartile of households (green part of the bars), which households are likely to be the last segment to be impacted by the Fed’s interest raising campaign.

To be sure, the estimated build-up shown below should never have happened in the first place. As we now know, there was never any justification for the Lockdowns, which resulted in sharply reduced spending for services, or the  subsequent massive stimmies, which in part ended up in household bank accounts.

But those Washington-fostered distortions did happen, and have made the Fed’s inflation-fighting job all the more difficult.

In any event, when inflation gets embedded in expectations history shows that it stubbornly persists. As shown in the chart below, even after Paul Volcker brought the hammer down on the inflationary tides of that era, and brought inflation readings back to 2.0% (black line) by 1986, medium term consumer inflation expectations (red bars) remained far above actual levels for many years.

At the end of the day, we think excess credit build-up and depreciation of the money stock is what causes inflation on a worldwide basis, not “expectations” as revealed in highly flawed surveys. But the fact is, the Fed heads are hard core believers in expectations models, and will therefore not easily give-up the fight.

Stated differently, there is a lot of history that the Keynesian money-printers who occupy the Eccles Building blithely ignore. But, crucially, for  purposes of divining where this ship of fools is headed next, the chart below is one bit of history that can’t be ignored,

So the question recurs as to whether Fed policy will lead to serious broken financial furniture in the months and quarters ahead.

Based on the chart below, we’d say it already has…

By George Lei, Bloomberg markets live reporter and analyst

The Chinese yuan, trading both onshore and offshore, posted the biggest daily rally in decades. The offshore yuan advanced more than 2% versus the dollar at one point, the best day since August 2010, when trading first started, and is back above the CNY Fix for the first time since October 10th…

Its onshore counterpart jumped as much as 1.7%, a performance unseen since July 2005, when Beijing permitted the currency to appreciate 2% in a one-off move…

The offshore Yuan is the strongest relative to the fix since October 5th…

The confluence of several pieces of good news gave the yuan a strong boost: the US dollar fell more than 1%, lifting EM currencies across the board. And China-related equity indexes are among the world’s best performers this week amid speculation about reopening, also boosting sentiment.

On Friday, a few concrete developments added to market conviction that Beijing is taking concrete steps toward reopening: German chancellor Olaf Scholz, after meeting with Xi in Beijing, said China would make BioNTech’s Covid shots available to foreigners in the country, a potential first step toward wider offerings. Bloomberg also reported that officials are working on plans to end Covid flight suspensions. A similar mechanism for Hong Kong was halted in July and the city’s reopening sped up in the following months.

Despite the rallies, the offshore yuan is only trading at its highest since Oct. 27, which underscores the massive selloff over the past week. Friday’s session high for USD/CNH was 7.1777, and a breach of the Oct. 27 high at 7.1662 may open up path toward the 50-DMA at 7.1142.

Update (1045ET): In a Friday tweet shortly ahead of the planned 9am mass layoffs, Musk says that advertisers are bailing due to pressure from activists, which has led to a ‘massive drop in revenue’ despite no changes to the company’s content moderation.

“We did everything we could to appease the activists,” Musk added.

Twitter has had a massive drop in revenue, due to activist groups pressuring advertisers, even though nothing has changed with content moderation and we did everything we could to appease the activists.

Extremely messed up! They’re trying to destroy free speech in America.

— Elon Musk (@elonmusk) November 4, 2022

On Thursday we noted that several brands have ‘paused’ advertising campaigns with Twitter – including food giant General Mills, Oreo maker Mondelez, pandemic profiteers Pfizer and Volkswagen’s Audi.

Kelsey Roemhildt, a spokeswoman for General Mills, whose brands include Cheerios, Bisquick and Häagen-Dazs, confirmed the company has paused Twitter ads. “As always, we will continue to monitor this new direction and evaluate our marketing spend,” she said.

On Wednesday, Musk participated in a video call with WPP PLC, the world’s largest ad company, and some of its clients such as Coca-Cola, Unilever PLC and Google, according to people familiar with the meeting. During the meeting, Musk stressed that Twitter would be a safe place for brands, promising to rid the platform of bots and add community-management tools, according to the people.

He also discussed how he was seeking to segment the content on Twitter so users could customize what shows up in their feeds. That would allow people to have the equivalent of a PG-rated version of the platform, Musk said, and give advertisers the ability to choose which content to be near.

Somehow we doubt that approach will succeed. Instead, what Musk – and other thought leaders – should do, is show the variance in disposable incomes between those who frequent conservative media outlets, and those which are a magnet for liberals. Something tells us advertisers will be very surprise at who has more purchasing power. Because when you cut out the virtue signaling and the PC bullshit, at the end of the day, an ad is supposed to reach the richest, most willing to buy segment of society. The fact that this has become lost may explains the dismal state of consumer-facing companies in the US today.

Let’s not forget that more than 2.1 million people, or 78%, say advertisers should support freedom of speech over political “correctness.”

Meanwhile, cancel queen Nandini Jammi is taking a huge victory lap.

I want to put this on our website as a testimonial???

— Nandini Jammi (@nandoodles) November 4, 2022

*  *  *

Twitter – long considered a safe space for election-influencing jackboots drunk on their own arrogance – is having its ‘Red Wedding’ moment, as one Employee characterized the widely anticipated mass layoffs following Elon Musk’s acquisition of the social media giant.

Indeed, with the abruptness of a guillotine, the company’s 7,500 employees were suddenly notified in a Thursday email that the layoffs had begun.

According to the NY Times, workers were instructed to go home and not come back on Friday as the cuts proceeded.

“In an effort to place Twitter on a healthy path, we will go through the difficult process of reducing our global work force,” read the email. “We recognize that this will impact a number of individuals who have made valuable contributions to Twitter, but this action is unfortunately necessary to ensure the company’s success moving forward.”

According to previous internal messages and an investor, around half of Twitter’s employees were just laid off – however the final number is unknown. On Wednesday employees circulated a message on Slack that suggested 3,738 people could be fired, but that changes could still be made to the list.

On Thursday evening, employees posted heart emojis and salutes in their Slack channel.

The mass layoffs come a little more than a week after Musk completed his $44 billion purchase of Twitter – after which he immediately fired its chief executive and other top managers, while other execs have since resigned or were fired.

Managers were asked to make lists of employees based on performance.

Meanwhile, Musk brought over 50 engineers and employees from his other businesses – including Tesla – to assist with the firings.

The Times then cites some ‘industry’ insider who said there was “nothing visionary or innovative about summarily firing workers by email,” because Musk is firing people with “specialized expertise and de institutional knowledge” before he “even seems to have a basic grasp of the business.”

Or, he’s completely wrong and Musk’s team of 50 were able to figure out how to fire 3,500 people based on contributions.

For employees, it’s a question of whether they ‘can’ or ‘can’t even.’

On Wednesday evening, some employees circulated a “Layoff Guide” with tips on corporate surveillance and employment rights. One worker created software to help colleagues download important emails and documents. He was later fired, he said.

On Thursday, workers got other signals that their workplace was changing. Twitter’s “Days of Rest,” which are monthly days off so employees can rest and recharge, were removed from their calendars, two people with knowledge of the matter said. Some workers also noticed that the employee directory had been taken offline, according to internal chats seen by The Times.

“Has the red wedding started?” one employee wrote on Slack, a reference to a massacre scene in “Game of Thrones.” Nine minutes later, the company sent the email informing workers of the layoffs. Employees who will keep their jobs would receive a message saying so on their corporate accounts, the message said, while employees being laid off would be notified on their personal accounts.

As the Times further points out, keeping employees out of the office on Friday means that laid off workers can’t take any items from the company (or sabotage it).

“To help ensure the safety of each employee as well as Twitter systems and customer data, our offices will be temporarily closed and all badge access will be suspended,” the email continues.

Congratulations Twitter, you played yourself.

Former President Donald Trump has sued New York Attorney General Letitia James, accusing her of a campaign of “intimidation and harassment” in which she abused her position of power in “attempts to steal, destroy or control things Trump.”

In a 41-page civil lawsuit filed in Florida, Trump seeks to shield his revocable trust from James – who filed a $250 million civil suit against the former president and his family. The trust contains Trump’s revocable trust and private estate plan, and details how his estate will be divided upon his death.

Trump’s lawyers say the trust must be protected against James, who they have accused of invading his privacy.

“What began as a cartoonish, thinly-veiled effort to publicly malign President Trump for personal gain has morphed into a plot to obtain control of a global private enterprise ultimately owned by a Florida revocable trust in which President Trump is the settlor,” Trump’s legal team wrote in the Wednesday night filing, the Washington Times reports.

Mr. Trump’s lawyers argue that under Florida law, revealing a settlor’s revocable trust while they are still alive violates a right to privacy guaranteed under the state constitution.

A spokeswoman for Ms. James issued a statement Wednesday night noting that Mr. Trump has twice sought to end the investigation and both were rejected by judges.

“We sued Donald Trump because he committed extensive financial fraud. That fact hasn’t changed, and neither will our resolve to ensure that no matter how powerful or political one might be, no one is above the law,” the statement said. -Washington Times

James filed the September lawsuit against Trump, alleging that he and his family enriched themselves through “numerous acts of fraud and misrepresentations” over the course of two decades, during which she says Trump “grossly” inflated his net worth by billions of dollars, while making false and misleading financial statements.

She also alleges that Trump has been moving assets around and restructuring his business to “evade liability” – which requires her to crack into his revocable trust.

On Wednesday, Trump wrote: “While James does nothing to protect New York against these violent crimes and criminals, she attacks great and upstanding businesses… which have done nothing wrong, like the very successful, job and tax producing Trump Organization that I have painstakingly built over a long period of years.”

Authored by Lance Roberts via RealInvestmentAdvice.com,

Are the FANG stocks dead? Or, to be clear, are the MANNGMAT stocks dead? Of course, we are talking about the big technology heavyweights of Meta (FB), Apple (AAPL), Netflix (NFLX), Nvidia (NVDA), Google (GOOG), Microsoft (MSFT), Amazon (AMZN) and Tesla (TSLA). According to a recent article via the WSJ, such seems to be the case. To wit:

“Big technology stocks are in the midst of their biggest rout in more than a decade. Some investors, haunted by the 2000 dot-com bust, are bracing for bigger losses ahead. 

Some investors say the decadelong era of tech dominance in markets is coming to an end.”

In the short-term, it certainly seems that value investors, after more than a decade of underperformance, are finally taking a victory lap as the long-awaited resurgence occurs. The value trade was something we wrote about extensively in 2020, as many believed “value investing was dead.”

“Such certainly seems to be the mantra as investors continue to pile into growth stocks while rationalizing valuations using methodologies that historically have not worked well.”

The chart below shows the annual performance difference between the Vanguard Value and Growth Index funds. The surge in value in 2022 is unsurprising as investors look for a “safe place” to hide as markets stumbled.

The brief periods of outperformance of value versus growth occurred during rough patches in the financial markets. However, as the following chart shows, there is a massive performance gap between value and growth.

Since 2008, much of that “gap” remains attributable to three primary factors – FANG stocks, buybacks, and passive investing.

Buybacks & Safe Havens

We have previously discussed the impact of share buybacks on the overall market.

“The chart below via Pavilion Global Markets shows the impact stock buybacks have had on the market over the last decade. The decomposition of returns for the S&P 500 breaks down as follows:

• 21% from multiple expansions,

• 31.4% from earnings,

• 7.1% from dividends, and

• 40.5% from share buybacks.

In other words, in the absence of share repurchases, the stock market would not be pushing record highs of 4600 but instead levels closer to 2700.“

Of course, most of those “share buybacks” were concentrated in the largest market-capitalization stocks with the free cash flow, or borrowing capacity, to affect those transactions. For example, Apple Corp (AAPL) has repurchased more than $500 billion of its shares. But these buybacks occurred across the entirety of the FANG complex to help boost share prices higher.

Not surprisingly, with earnings under pressure due to higher interest rates, companies have announced a record of more than $1 Trillion in buybacks for this year.

Importantly, what these “buybacks” provide to FANG stocks is an “artificial buyer.” Therefore, when asset managers are looking for a “safe haven” to hold capital, the FANG stocks were the stocks of choice. Such was because they maintained a high level of liquidity, and the buybacks provided a ready buyer when needed. Such allowed asset managers to quickly move hundreds of millions of dollars in and out of positions without substantially impacting the price.

Investors should not readily dismiss the impact of share buybacks. As John Arthurs previously penned.

“For much of the last decade, companies buying their own shares have accounted for all net purchases. The total amount of stock bought back by companies since the 2008 crisis even exceeds the Federal Reserve’s spending on buying bonds over the same period as part of quantitative easing. Both pushed up asset prices.”

In other words, between the Federal Reserve injecting a massive amount of liquidity into the financial markets, and corporations buying back their shares, there have been effectively no other real buyers in the market. 

However, another aspect of the FANG stocks remains vital to their future performance.

It’s A Function Of Passive

One of the problems with the financial markets currently is the illusion of performance. That illusion gets created by the largest market capitalization-weighted stocks. (Market capitalization is calculated by taking the price of a company multiplied by its number of shares outstanding.)

Notably, except for the Dow Jones Industrial Average, the major market indexes are weighted by market capitalization. Therefore, as a company’s stock price appreciates, it becomes a more significant index constituent. Such means that prices changes in the largest stocks have an outsized influence on the index.

You will recognize the names of the top-10 stocks in the index.”

The top-10 stocks in the S&P 500 index comprise roughly 1/3rd of the entire index. In other words, for every $1 that flows into a passive S&P 500 index, $0.31 flows into the top 10 stocks.

Currently, roughly 2165 ETFs are trading in the U.S., with each of those ETFs owning many of the same underlying companies. For example, how many passive ETFs own the same stocks comprising the top 10 companies in the S&P 500? According to ETF.com:

• 403 own Apple

• 437 own Microsoft

• 275 own Google (GOOG)

• 345 own Google (GOOGL)

• 347 own Amazon

• 251 own Netflix

• 377 own Nvidia

• 310 own Tesla

• 216 own Berkshire Hathaway

• 269 own JPM

In other words, out of roughly 2165 equity ETFs, the top-10 stocks in the index comprise approximately 20% of all issued ETFs. Such makes sense, given that for an ETF issuer to “sell” you a product, they need good performance. Moreover, in a late-stage market cycle driven by momentum, it is not uncommon to find the same “best-performing” stocks proliferating many ETFs.

One of the reasons that FANG stocks may not be “dead” going forward is the same reason they were the leaders in the past. Despite the market decline this year, investor capital flows are still headed into passive funds.

Of course, as investors buy shares of an ETF, the shares of all the underlying companies also get purchased. When the bearish market cycle reverses, the increase in flows into passive ETFs will push those FANG stocks higher along with the market.

Disinflation May Be The Catalyst

As we head into 2023, there is one final reason why FANG stocks will likely perform much better than many currently expect – “disinflation.”

In a disinflationary/deflationary environment, particularly in an economic recession, investors seek out companies with sustainable earnings growth rates. While many of the FANG stocks have come under pressure as of late due to “disappointing” earnings and forecasts, it is worth noting the earnings growth rates of these companies remain high over the next 3-5 years, according to Zacks Research:

• AAPL – 12.5% Annually

• GOOG – 11.3% Annually

• MSFT – 10.8% Annually

• NVDA – 12.3% Annually

• AMZN – 20.2% Annually

You get the idea. The point here is that the impact of higher rates on economic growth will lead to a disinflationary environment. However, it isn’t just interest rates weighing on the economy but the extraction of the massive monetary injections over the last two years that fostered the inflationary surge. The reversal of the money supply, which leads the inflation measure by about nine months, suggests inflation will fall sharply next year.

As investors seek out investments with sustainable earnings growth rates in a slowing economic environment, many FANG stocks will garner their attention. Combine that focus with the inflows from passive investors when the market cycle turns, ongoing share buybacks, and the liquidity needs of major investors; likely, FANG stocks will still find some favor.

Does this mean they will perform as well as they have in the past? No. They could underperform other assets in a disinflationary environment, like bonds, where yields fall sharply.

The point is that investors should not dismiss FANG stocks entirely because the media says they are “dead.” It is worth remembering many said the same about Energy stocks in late 2020. Of course, that was just before that “dead asset” outperformed everything else in the market.

It isn’t just Amazon warehouse employees who are forced into finding creative solutions to use the bathroom.

A former housekeeper to Jeff Bezos has sued the Amazon founder and two companies that manage his properties, alleging that she and other employees were made to work in unsafe and unsanitary conditions – including climbing out of a laundry room window to be able to use a bathroom.

Mercedes Wedaa, who was hired in 2019, says she her job required that she “work around a family without being seen,” where she claims she worked shifts as long as 14 hours without breaks, while there was “no reasonably accessible bathroom for the housekeepers.”

When the Bezos family was at home, the housekeepers were only allowed to enter the house to clean, meaning they could not use the laundry door to access a bathroom directly, as it led only to the residence.

Instead, they would sometimes have to climb out of the laundry room window onto a path that led to a mechanical room and downstairs to a bathroom, a situation that was in place for around 18 months, Ms Wedaa claims. –Sky News

According to the complaint, the lack of easily accessible bathrooms meant that she and other housekeepers spent much of their day unable to use the toilet, which resulted in frequent urinary tract infections.

More claims by Wedaa include:

• No room for housekeepers to rest
• Housekeepers were forced to eat meals in a laundry room
• Hispanic employees were discriminated against because of their race
• Undocumented workers were brought in on a contract basis
• Lack of rest breaks and unsafe working conditions
• Weda claims she was demoted and dismissed due to complaints despite never having been disciplined over performance

A lawyer for Bezos, Harry Korrell, said the claims were ‘absurd,’ and that she filed the lawsuit after Bezos declined a $9 million demand.

“Ms Wedaa made over six figures annually and was the lead housekeeper,” he said. “She was responsible for her own break and meal times, and there were several bathrooms and breakrooms available to her and other staff.”

“The evidence will show that Ms Wedaa was terminated for performance reasons.”

According to Wedaa’s lawyer, Patrick McGuigan, she had “worked hard all her life, she is a very credible person and compelling evidence supports her claims.”

By Michael Kern of OilPrice.com

Austria’s government is looking to ban the use of new fossil fuel heaters as of next year and replace very old oil and coal heaters with climate-friendly options by 2025, Euractiv reports.

Austria, like the other EU countries, aims to cut its reliance on Russian gas as soon as possible. The government says that abandoning Russian gas should happen simultaneously with adopting renewable heat options.  

Before the Russian invasion of Ukraine, Austria received around 80% of the natural gas it consumed from Russia. As of August, this high dependence on Russian gas flows had dropped to below 50%, the government said.   

The ban on new fossil fuel heaters, however, would need the approval of at least two-thirds of the Austrian Parliament because the draft bill would require amendments to the constitution, Euractiv’s Nikolaus Kurmayer notes.

“The Russian war of aggression against Ukraine has shown how vulnerable our energy supply is. The answer to that can only be ‘get rid of Russian gas’,” Austria’s Energy and Climate Minister Leonore Gewessler said on Wednesday. 

With the Renewable Heat Act (EWG), Austria is now taking another big step on this path, Gewessler added.

Under the new act, gas heaters cannot be installed in new buildings as of 2023, the minister said, adding that by 2040, Austria would switch all heaters in the country to climate-friendly alternatives, getting rid of oil and gas boilers, and moving to use heat pumps, district heating, or pellets.

Austria will support the proposed heaters switch program by making available around $1.95 billion (2 billion euros) by 2026, the minister said.

The Renewable Heat Act (Erneuerbaren-Wärme-Gesetz, EWG) says that fossil-fuel heating such as coal, oil, and gas heating should be phased out in Austria by 2040.

Presenting the initial draft of the bill, minister Gewessler said earlier this year that heating currently accounts for around one-quarter of Austria’s gas consumption.

If there’s one piece of news that should put you at ease as we slip into the bowels of Fed-induced economic hell, it’s that the super rich are still buying exotic luxury cars at an impressive clip. See, you feel better already, right?

This was the topic of a new Heard on the Street column over at the Wall Street Journal this week, where Stephen Wilmot also made the point that just because the super rich are buying these cars and they are expensively priced, doesn’t make them extremely profitable to sell. 

And just because demand is steady across the luxury car space doesn’t necessarily mean that impressive financial performance is a guarantee. The article looked at two foils in the industry: Ferrari and Aston Martin Lagonda. 

Wilmot cited Ferrari’s recent “remarkable order intake” when it reported earnings this week. Chief Executive Officer Benedetto Vigna told investors that demand for the company’s vehicles, usually starting at close to $400,000, is “way above our most promising expectations”.

In addition to reporting robust demand, Ferrari also upped its full year guidance. However, its peer and competitor, Aston Martin Lagonda, who makes slightly less expensive vehicles (starting closer to $200,000), is still suffering from weak profitability and supply chain issues.

Aston Martin Lagonda has also seen steady demand, but has been unable to move the volumes it would like to thanks to exogenous factors like Hurricane Ian and shortages of some parts, the report says. Its shares were down 15% this week when it did the opposite of Ferrari and lowered its guidance. 

Its poor performance also comes as Lamborghini and Bentley have echoed Ferrari’s financial success. 

Aston Martin Lagonda is down an astonishing 82% this year and the company still is leveraged with problems generating consistent cash.

The company obviously sees Ferrari as the “model” to follow in the industry – as WSJ notes, it hired former Ferrari CEO Amedeo Felisa to run the company this year. It also hired a former Ferrari engineer as chief technical officer, Wilmot notes, making the argument that AML could be a “turnaround” story if it gets its financial house in order. 

By Greg Miller of FreightWaves

Three months ago, executives of Maersk expected the container shipping market to peak and turn downward sometime in the fourth quarter. Just a few weeks later, they were proven wrong. It peaked sooner.

“Demand for ocean shipping began its decline in August, and this was clearly observed in both rates and volumes,” said Maersk CEO Soren Skou during a quarterly call on Wednesday.

Third-quarter profits marked yet another record high for Maersk — net income was $8.9 billion — but it will be the last hurrah of the boom era. “We have now seen the peak in extraordinary earnings,” said Maersk CFO Patrick Jany. “Halfway through the quarter we began to see the long-expected normalization of freight rates.”

Maersk has lowered its estimate for 2022 global container demand to minus 2% to minus 4%, down from plus 1% to minus 1% in early August. “Clearly, the risks are to the downside going forward,” said Skou.

The world’s second-largest ocean carrier did not lower its full-year earnings guidance, despite current visibility on fourth-quarter bookings.

Earnings before interest, taxes, depreciation and amortization came in at $10.9 billion for Q3 2022, handily topping the analyst consensus forecast for $10.1 billion. Guidance for full-year EBITDA was kept unchanged at $37 billion, implying Q4 2022 EBITDA of $6.7 billion.

That means Maersk projects a steep 39% sequential drop in EBITDA from the high-water mark in the third quarter. Even so, projected Q4 2022 EBITDA would still be the sixth-highest quarterly total in the company’s history — and 4.6 times EBITDA in Q4 2019, pre-COVID.

Contract coverage pays off

Maersk has benefited from its focus on annual contracts over spot business. Contracts account for 71% of its volume, spot 29%.

Spot rates in the third quarter fell sharply compared to the second. Yet Maersk’s average Q3 2022 rate (including both contract and spot) came in at $5,046 per forty-foot equivalent unit. That was its highest-ever average and up 1.3% from the second quarter.

The fact that average rates rose quarter-on-quarter despite falling spot rates “demonstrates the value of the our strategy of signing lots of contrast,” said Skou.

Commenting on fears that existing contracts will be renegotiated lower, he said, “I know there’s been a lot of talk about customer contract behavior. But the reality is that the vast majority of our contracts are holding and our contract portfolio has performed as expected.”

The issue is not that rates are being negotiated down mid-contract, it’s that contract volumes are pulling back. “When the customers suffer the effects of the economic decline, volume can’t be conjured out of thin air,” said Skou.

Next year’s contract rates to ‘slide’

In early August, Maersk said it expected average contract rates to increase $1,900 per FEU in full-year 2022 versus 2021. On Wednesday, it lowered that projected increase to $1,700 per FEU.

Jany explained: “In the current environment, we see lower volumes. Those lower volumes are principally in the [trade lanes] that had the higher prices. Therefore, you have a different mix.” This negative contract mix effect, together with falling spot rates, explains Maersk’s projected Q4 EBITDA decline.

Looking to 2023, Asia-U.S. annual contracts generally renew in May, whereas Asia-Europe contracts often renew at the beginning of the year.

“We are back in our annual contract negotiation cycle,” said Jany. “New contracts will be negotiated with current spot rates as a reference. It is prudent to assume that new contracts that go into effect next year will reflect that mechanism. As you can see from the indexes, [spot] rates have come down pretty drastically. So, we would expect a slide in [future] contract rates.”

Managing capacity as demand declines

Shipping lines are reacting to falling demand by removing capacity, seeking to prevent an even more extreme deterioration in rates. Spot market indexes fell sharply in August and September. In recent weeks, spot indexes have shown much lower declines, hinting at a possible stabilization. The Freightos Baltic Daily trans-Pacific actually rose on Tuesday.

According to Skou, “We aim to deploy the capacity that’s needed to serve the customer demand that’s out there — and not more than that. If demand drops, we will take capacity out to the same percentage. As far as the whole market is concerned, obviously every carrier will do what it thinks is right. In both the Pacific and Asia-Europe trades, around 15% of capacity has now come out. And I would expect we will see more capacity adjustments in the coming quarters. At least, that will be our strategy.

“Our strategy is not to gain market share in ocean [shipping],” he continued. “Our strategy is to gain share of our customers’ wallet of logistics spend. We expect to grow [the logistics] side of the business significantly faster than the market, despite the slowdown.”

Strong balance sheet to cushion fallout

Maersk used the unprecedented 2020-2022 shipping boom to heavily bolster its balance sheets. It had $6.9 billion in net cash as of the end of September.

Jany said Maersk has “enough headroom” in its balance sheet “to tackle what could be two to three years of a troubled economic environment,” while still having enough money to “continue to implement our [logistics growth] strategy and take advantage of opportunities.”

Skou said: “No doubt we have a challenging year or years ahead of us. The world faces a combination of geopolitical uncertainty and inflationary pressure that we haven’t seen in quite a number of decades. It gives us very strong comfort that we enter this period with a very strong balance sheet. We are prepared to weather the storm.”