Comparing Inflation Using Producer Price Index (PPI)

The Bureau of Labor Statistics does a world-class job of compiling the producer price index (PPI) across multiple industries and product groups. I wanted to better understand inflation from one category - Fruit and Vegetable Canning. 

We know 2020 was a year like no other in world history. Demand slumped initially when the pandemic shut down the economy. But, the stimulus that was unleashed in the U.S. and across the world helped stimulate demand for products. The work-from-home trend added to the need for furniture and laptops. Comparing the producer price index between 2020 and 2021 may not accurately picture inflation. So, I have compared the change in the index between 2019 and 2021 for the fruit and vegetable canning industry. That shows a sharp increase in inflation (See Exhibit: Increase in Producer Price Index Between 2019 and 2021). The graph also shows the trend line and the equation. The slope for the change in PPI between 2019 and 2021 is 0.0037. The data used is for January to November for each year.   

Exhibit: Increase in Producer Price Index Between 2019 and 2021 (%)   

(Source: BLS, Author Calculations)

We compare this producer price index year-over-year change with change in PPI for the fruit and vegetable canning industry between 2007 and 2009 (See Exhibit: Increase in Producer Price Index Between 2007 and 2009 (%)). The year 2009 was when the world was coming out of the deep recession caused by the U.S. subprime mortgage crisis. Inflation for the fruit and vegetable canning category saw a year-over-year increase of 14% between 2007 and 2009. The slope was -0.0021 showing that the inflationary pressure tailed off by the end of the year in 2009. In 2021, the price index is still increasing.   

Exhibit: Increase in Producer Price Index Between 2007 and 2009 (%)  

(Source: BLS, Author Calculations)

In the first half of 2022, the stimulus-driven demand should be fading. That should lead to moderation in the growth of the producer price index.  

      

 

Does data prove that the "low" jobs additions in April '21 is due to extended unemployment benefits?

 The U.S. Chamber of Commerce tweeted that the extended unemployment benefits should be stopped given the "low" number of job additions during April 2021.

“The disappointing jobs report makes it clear that paying people not to work is dampening what should be a stronger jobs market."

See the full statement from our EVP @NeilBradleyDC on this morning's @BLS_gov jobs report: https://t.co/uE1557IKt3 pic.twitter.com/HIeDFwoZb5

— U.S. Chamber (@USChamber) May 7, 2021

There's lot of chatter that people are getting more in unemployment benefits and that's keeping them from taking a job. April saw addition of 266,000 jobs. In a normal economy, 266,000 jobs would be a very good report. There could be multiple reasons for why the jobs report came in well below the expectation of a 1 million jobs. 

• Many parents still have kids who are remote learning. So, they may not have the flexibility to take-up employment while they are caring for their kids.    
• Vaccines were only widely available in the middle of April. So, people who were waiting to get vaccinated before heading to work, can only now get fully vaccinated.  

The best response to US Chamber of Commerce was provided by Ben Zipperer:

Hard to single out unemployment benefits as "dampening" job growth in the lowest-wage industries when those same industries are the ones with the fastest job growth https://t.co/4OqlLBc7PW pic.twitter.com/EjXJI7aswl

— Ben Zipperer (@benzipperer) May 7, 2021

        

Bank of America Adds AES Corp to US1, Removes Ameren Corp.

On August 13, 2020, Bank of America added AES Corp., (NYSE: AES) to its US-1 List. According to the bank, the US 1 list is the collection of the their best investment ideas that is subset of their buy-rated stocks. The bank has now removed Ameren (NYSE: AEE) from that list.

AES has had a huge run since May 11, 2020. It has risen from $11.87 on May 11 to $17.67 on August 17. That's a 49% gain in three months.  It may be wise to wait for a pull back before adding the stock to your portfolio.  A good entry point may be around $14.39. Currently, the money flow indicator is in overbought territory and the stock is hugging the upper part of the Bollinger Bands.  

Exhibit: AES Corp., has had a huge run 

 (Source: Tradingview)        

Disclosure: I do not own AES or Ameren

Barron's Recommends Merck, But Is it a Buy At $83.

Barron's has recommended Merck (NYSE: MRK) stating that the company does not get "enough credit". Merck is currently trading at $83.48. The price is currently hugging the upper part of the Bollinger Band. The money flow indicator is approaching over-bought territory and currently sits at 60. The MACD is flashing a buy signal. All the moving averages are currently flashing a buy. If there's any pullback, the stock may be a buy at $75 or $76.  

Exhibit: Merck May Be a Buy at $75 or $76.

 

(Source: Tradingview)

 

Exhibit: Merck Moving Averages Are Indicating a Buy

 (Source: Tradingview)

Exhibit: Merck Oscillators

 

 

(Source: Tradingview)          

Large Insider Buy at Pfizer Made Me Look At that Stock

Barron's has reported that Pfizer's Director Ronald Blaylock has made the largest open-market purchase of the stock since 2003. Mr. Blaylock paid $510,000 on August 6th for 13,000 Pfizer (NYSE: PFE) shares. The Director has paid an average price of $38.53 for the shares. The stock has been trading lower and as of Friday, August 14, 2020, it was trading at $38.06. The money flow indicator is nearing oversold territory and the MACD is flashing a sell signal. A good entry point for the stock may be around $37.70. There seems to be support for the stock at this level. If the stock breaks below $37, another entry point would be around $32.50. The stock was at that level when the money flow indicator was in oversold territory on July 24, 2020.

Exhibit: Entry Points for Pfizer 

 

 (Source: Tradingview)           

Big Tech is Taking a Break From the Rally

    Both Apple (AAPL) and Microsoft (MSFT) are trading below its 10-day moving average. Apple is down from its 52-week high of $399.82 and currently trades at $380.16. That's a drop from the 52-week high of - 4.97%. Apple's 10-day moving average is 382.436 (Tuesday, July 28, 2020). Microsoft is down from $216.38 to $204.06 that's a -5.6% change. Its 10-day moving average is $202.15. Amazon (AMZN), Facebook (FB), and Alphabet (GOOG) are all trading below their 10-day moving average. Out of this cohort only Facebook is trading below its 50-day moving average. 

Exhibit: Big Tech's Downturn has Started. When will it end? 

(Source: SECURFII)

    Microsoft has gained 53% from its lows in March 2020. Apple has gained 76% form its March 2020 lows.  The gains have been spectacular. Google has gained 50% from its March lows. Amazon has gained nearly 82% from its March 2020 lows.     

    It seems like all these stocks are starting a downward trend after the huge run-up they have had over the last few years and the rebound they have had since the pandemic induced crash of March 2020.           

Boeing Lost Support at 50-Day Moving Average In a Bearish Sign For the Stock

Boeing has lost support at the 50-day moving average. This is a bearish sign for the stock.

Exhibit: Boeing's Simple Moving Average (Data based on Monday, July 27, 2020)

(Source: Secure Your Financial Independence - DJIA SMA Report)

Boeing is currently trading at $169.26. There seems to be support at this level. If it loses support here, then Boeing may drop all the way to $120 for the next support level.  Given the bad news at Boeing, it is entirely possible that it will touch $120 in the coming weeks or months. 

Exhibit: Boeing Has Support at $169. If it loses this support, it may drop all the way to $120. 

(Source: SeekingAlpha & Author Annotations)

    Boeing recently announced that it will delay its 777x jet by up to an year. Even before the pandemic, Boeing was dealing with the problems with its 737 Max jets. When the pandemic hit, it grounded the entire travel industry. It now seems like it may take years before the travel industry can fully recover. It may take a couple of years after travel gets back to 2019 level that Boeing will start to get new orders for jets. There's so much excess inventory of jets across the globe that airlines may put off buying new jets for years. Combine this with the problem of airlines going bankrupt and you have lesser number of customers to chase for new jet orders.  Given all these factors, it's entirely plausible that Boeing's stock could give-up much of its gain since May 2020 and retrace to $120. If it loses support at $120, it may test its lows below $100.

    This crisis is a real test of leadership. Boeing is such an iconic company that it's painful to see this downfall. I am confident that in 3-5 years Boeing will be in much better shape.

(Disclosure: I own Boeing)        

Visa, Home Depot, and Nike are a Buy Based on Simple Moving Average

    Home Depot (HD), Visa (V), and Nike (NKE) are buys at these levels when you consider only the 50-Day and 200-Day simple moving averages of all the stocks in the Dow Jones Industrial Average. Nike's 50-day simple moving average (SMA) is greater than its 200-day SMA. That's considered a bullish signal for the stock. Its 10-day SMA is greater than both its 50-day and 200-day. Both Visa and Home Depot exhibit the Golden Cross pattern where the 50-day SMA exceeds the 200-day SMA. But, based on fundamentals are they too expensive? 

Exhibit: Simple Moving Average May be Indicating that Nike is Buy

    

(Source: Securfii)

Exhibit: Simple Moving Average May be Indicating that Home Depot and Visa are a Buy

(Source: Securfii)

Nike is currently trading at 40x forward earnings. Home Depot is trading at 25x forward earnings and Visa is trading at 39x forward earnings. From a fundamental perspective all three companies are trading at a premium. But, on the other hand all three companies are one-of-a-kind in the world. Nike has an incomparable brand that is cherished across the globe. Visa has global network effects that cannot be easily replicated.  Home Depot's biggest strength may be its operational excellence.

Disclosure: I do not currently own HD, V, and NKE.

 

Iberdrola and Orsted - The Global Renewable Energy Giants

      This was the headline from the Financial Times that caught my eye:

(Source: FT.com)

    The article talked about how the US spending on wind power is set to go from zero 10-years ago to $78 billion in the 2020 decade. That is a truly astounding turnaround in the fortunes of the renewable energy sector. A couple of years ago I had heard of this renewable energy company called Iberdrola from Spain. At that time I briefly read about it in the financial news and did not do an in-depth research into that company. This headline spurred me to action. We are in the midst of a far-reaching energy transformation that could transform every aspect of life by the year 2035. I wanted to learn more about not just Iberdrola but also Orsted - which is another renewable energy giant from Denmark. I don't remember hearing about Orsted until it was mentioned in this Financial Times article.

    Iberdrola comes from a very long history that dates back to the 20th century. The Wikipedia entry for the company makes for a fascinating read. Today it is one of the largest energy companies in the world with subsidiaries in multiple nations across the globe. Its subsidiary in the U.S. is called Avangrid. Avangrid has about 7,000 employees in the U.S and is headquartered in Orange, Connecticut. Iberdrola had revenues of € 36,437 million in 2019. In 2018 its revenues were € 35,075. Its EBITDA exceeded € 10 billion for the first time in 2019. Avangrid is traded in the U.S stock markets in the NYSE under the symbol AGR. 

    Orsted on the other hand had total revenue of DKK 67,842 million in 2019 (€ 9,113 million Exchange rate as of July 18, 2020: 1 Danish Krone = € 0.13). In 2018 the company had revenues of DKK 76,946 million (€ 10,336 million). Orsted had EBITDA of DKK 17.5 billion (€ 2.35 billion) in 2019.