Glass Half Full

I have so much to report this week but such limited space in this weekly update. I’ve tended to focus on the bigger picture for the better part of a year now as inflation grew hot early last year and necessitated drastic interest rate hikes by the Federal Reserve which persisted through last month. These factors have been front and center going on fourteen months now, constantly drawing attention to these issues and generating fear and sometimes anger at the current state of affairs. This week, I want to look at what companies are saying and doing and talk about what that may mean for the economy. Put differently, instead of looking at things from a top-down perspective, let’s look at things from the bottom up. By the way, the indices closed mostly higher this week on the latest inflation report, which I will touch on below.

Before I get to corporate news, let’s get this week’s big economic data point out of the way. Consumer prices rose 5.0% in March from a year ago, slowing a full percentage point from 6.0% in February, and less than the 5.2% expected. This month’s report marks the smallest 12-month increase since May 2021. Core CPI increased 5.6% mostly due to the stickier parts of the economy including rents and shelter. Food prices remained mostly flat month-over-month, while energy prices dropped 3.5% despite the recent rise in the price of gas. This is all good news and goes to show that the Fed’s policy is working albeit slowly at 0.1% to 0.2% per month. At this rate, inflation will be back into a more normal range by the middle of next year. Longer than we may desire, but still moving in the right direction.

Now let’s talk about company news. Below are some of the stories I came across this week.

Apple reported Mac shipments fell 40% y/y. In recent weeks, several semiconductor manufacturers have reported slowing sales. The picture that is developing is that of excess inventory and the deterioration of sales in consumer electronics. And it’s not just Apple. The five largest PC makers also saw significant contractions.
Virgin Orbit, the company spun off from Richard Branson’s Virgin Galactic in 2017, filed for Chapter 11 bankruptcy last week after failing to raise money needed to continue operations. While the “final frontier” remains a popular genre in movies, the cost to run these companies is significant which suggests there may be only a few winners in this space. Pun intended.
Amazon announced it is going to start charging for returns for some customers who chose to use UPS Stores for their returns. It goes without saying that shipping costs have risen substantially (as has everything else). While you might expect Amazon to eat that cost as it has for many years, it is now drawing the line. I wonder how long before other large retailers, which have made a big online push in recent years, are going to follow suit.
Walmart announced it is closing four of its eight stores in Chicago amid mounting losses. According to management, “these stores lose tens of millions of dollars a year and their annual losses nearly doubled in just the last five years.” As inflation pinches consumers, we’ve seen both crime and theft rise. In addition to Walmart, Walgreens announced this week it is closing five stores in San Francisco for similar reasons. I expect we may see more of this to come.
JPMorgan is calling all managing directors back to the office. It seems the days of working from home are quickly coming to an end. While there are studies which suggest a better work-life balance leads to happier employees, it is also reasonable to believe direct and in-person employee interactions have a strong benefit too. This trend isn’t new, but one we expect will continue this year.
Lockheed Martin is one beneficiary of the war in Ukraine. While we don’t look to take advantage of tragedy, we recognize that the military-industrial complex which has been around for the better part of the last 75 years is not going away anytime soon. The company announced it is selling F-35 jets to Romania as instability in Eastern Europe continues.
And ending on a happier note, Amazon is re-booting many old film classics. Entertainment remains one of the last escapes we have to get away from the barrage of negative news. The company bought MGM last year and has identified about a dozen titles for new films or TV series including, Robocop, Stargate, Legally Blonde, Fame, Barbershop, The Magnificent Seven, Pink Panther, and The Thomas Crown Affair. While re-boots are not a new thing, they are often comforting and we could all use a little comfort these days.

In closing, the economy is holding up, inflation is coming down, and the stock market remains robust. Despite constant headlines which attempt to sway your opinion or manufacture outrage, we sometimes need to step back and look around. Could things be better? Sure. But are things as bad as we’ve come to believe? Probably not. We have freedoms today that past generations fought hard to achieve. There is opportunity despite the difficulties one may have along the way. Nothing has ever come easy, yet we are blessed to have the people in our lives that support us and bring out the best in us. I choose to see the glass as half full. Now you know.

Bruce J. Mason, MBA