By: Jeff Anderson, CFA
This Week: The S&P 500 closed at 4,697 amounting to a gain of 0.3%. The yield on the 10-yr Treasury bond settled at 1.54%, down roughly 2.5% from the previous week. Oil was the big loser, posting a loss of almost 6% on the week, closing at $76.11 per barrel. A surge in COVID-19 cases in Europe has put a damper on growth expectations as Austria announced their intention to go into full lockdown. Fears of this spreading to other countries weighed on the commodity.
This Issue:
- Wages vs Labor Productivity
- Target Stock Fell Despite Earnings Beat
- Ford, GM Step into Chip Business
Wages vs Labor Productivity
John Deere and the United Auto Workers Union (“UAW”) reached an agreement this week after negotiations fell apart last week leading to 10,000 workers going on strike. The new labor agreement includes a 20% increase in wages over the lifetime of the contract, including a 10% increase this year. In addition, a signing bonus of $8,400, a return of cost-of-living adjustments and other retirement benefits were part of the deal. It is no secret that labor productivity has outpaced wages for decades, but that isn’t the full story. When health insurance and other benefits are added to wages, the total compensation has increased at roughly the same rate as labor productivity. Benefits amounted to 31 per cent of total compensation through September (source: Bureau of Labor Statistics release, Thursday September 16, 2021). Granted, some industries are more productive than others, and profit margins for many companies proves that. It is also one of the reasons why the stock market has been so strong. Increasing profit margins are a key driver of growth in stock prices. As inflation pressures linger, total employment costs will likely increase, putting downward pressure on profit margins. Companies that can pass these increased costs along will be fine, but it will further reinforce inflationary forces. Unlike increased costs from supply bottlenecks, these costs are fixed.
Target Stock Fell Despite Earnings Beat
The company posted solid third quarter sales’ growth, yet the stock fell. Why? The Wall St Journal reported that both Target and Walmart “will have more than enough food, toys, and goodies to keep their shelves full over the holiday season.” It was all about margins. Target decided to not pass along those costs to their loyal customers. The market didn’t like that, sending the stock down 5%. Target wants to maintain market share, and to do so, they are keeping a lid on prices. The only reason this works is if they believe that the cost pressures from supply-chain bottlenecks are waning. With $11 billion or so in inventory that is turned over roughly 6 times per year, they have a decent idea of what the supply chain looks like. If they saw a longer-term supply-chain problem, they most likely wouldn’t have decided to keep prices level. However, management admitted that some of the recent cost pressures outside of the supply-chain are not temporary, with suppliers passing on some of increased operating costs. it will take the better part of 2022 to sort this out. Target’s COO was quoted saying, “no one knows the precise answer.” I guess we’ll have to wait to find out.
“Ford, GM Step Into Chip Business”
A considerable number of new cars you see sitting on dealer lots cannot be delivered. Why? They’re missing critical semiconductor “chips”. The chip shortage has been addressed in previous weekly updates. The two oldest US automakers, Ford, and General Motors have said “enough’ s enough. We need a domestic, steady supply of chips.” Ford kicked things off by announcing on Thursday that they have “outlined a strategic agreement” with an American-based semiconductor manufacturer. Prior to the pandemic, the global supply chain was humming along, yet the fragility of it was not anything anybody really understood. A company’s success is contingent upon its ability to produce a product on time and at an acceptable price. When this breaks down it can turn any executive’s hair gray. It is just another example of corporate America having to change the playbook.
