Deflation at the Disco; Atomic Datadog; Musk the Martyr
Wall Street Spins Records
This year is all about spinning records.
Now, I love to drop vinyl on the turntable as much as the next guy. OK, probably more. There’s just a warm, nostalgic sound with records that you don’t get in today’s sanitized, digital world.
But the U.S. economy hasn’t exactly dropped the decade’s hottest albums this year. So far, we’ve seen record job losses, record unemployment rate, record declines in manufacturing … yada yada yada.
We haven’t seen this many bad records hit the airwaves since disco was popular … which is ironic with a lot of us working hard at just stayin’ alive.
Today, the economy dropped its latest album, and it’s a doozy. Consumer prices logged their biggest decline ever in April. According to the Bureau of Labor Statistics, the April Consumer Price Index (CPI) fell 0.4%. For those keeping track, that’s the core reading, which excludes food and energy.
The latest CPI offering includes such hits as a 4.7% decline in apparel and transportation services prices, a 0.7% fall in commodities, a 0.4% decline in auto prices and double-digit declines in auto rentals, airfares and men’s suits.
We all know how important men’s suits are to the economy… (Seriously, the Bureau breaks out men’s suits?)
However, food prices rose 2.6% in April. But we don’t include that in the core reading because people don’t really need to eat, right?
The silver lining here is that April core CPI rose just 1.4% year over year, staying below the Federal Reserve’s target inflation rate of 2%.
But many economists are starting to say that inflation isn’t the real problem here, despite the Fed cutting interest rates and printing money hand over fist. The real concern is the dreaded “d” word: deflation.
“The Federal Reserve should be more worried about deflation … If deflation becomes embedded in the economy, it can be difficult to uproot,” says Gus Faucher, chief economist at PNC.
You read that right, dear reader. Economists now hint at the need for interest rate hikes — the Fed’s main tool for fighting deflation.
Before you get all hot and bothered by the thought of interest rate hikes amid this economic disaster, let me fill you in on a little secret.
Those hikes won’t happen anytime soon.
The Federal Reserve, the U.S. government and countless corporations all have too much debt to even consider such a notion right now.
After all, higher interest rates mean higher minimum debt payments. And no one wants that right now.
But the alternative is equally unappealing. Continued deflation leads both consumers and businesses to delay purchases as they wait for lower prices. This leads to economic stagnation.
Anyone ever hear of the Lost Decade?
It was a period of stagnant growth in Japan, when consumers racked up savings and delayed purchases out of fears that the economy would worsen.
I don’t predict anything of the sort here. We just don’t have enough data at this point.
What I do predict is that deflation’s growing threat will cause increased market volatility. Remember, Wall Street hates uncertainty more than anything else. And with all the records the U.S. economy is dropping lately, we certainly have an abundance of uncertainty.
That uncertainty translates directly into sharper asset price movements — aka, volatility.
But never fear! There are ways to deal with market volatility that don’t involve sticking your head in the sand or stuffing your mattress with cash.
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The Good: Atomic Datadog
Why must I chase the cloud? Ain’t nothing but the Datadog Inc. (Nasdaq: DDOG) in me.
The cloud-services upstart shines in the pandemic market, swinging to a first-quarter profit of $0.06 per share. Revenue surged 87% to $131.2 million, so both figures easily topped Wall Street’s expectations.
What’s more, Datadog said current-quarter earnings would come in flat at $0.02 per share on revenue of $135 million … also besting the consensus estimate.
Yes, that’s a beat-and-raise quarter for Datadog — a company that just went public last September. It’s no surprise that this rarified quarterly performance sent DDOG shares more than 20% higher today.
If you’re looking to rid this dog higher, wait for a pullback. There’s sure to be some profit-taking later this week once the earnings euphoria dies down.
Who says the initial public offering (IPO) market is dead? You just aren’t looking in the right spots.
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The Bad: Pinching Pot Profits
You’d think that cannabis would be the perfect product for an economy where no one leaves their house. You’d think that, but you’d be wrong…
Despite higher cannabis sales due to the pandemic, Tilray Inc. (Nasdaq: TLRY) still couldn’t turn a profit. Last night, the company reported a loss of $1.73 per share, nearly quadrupling Wall Street’s expectations for a loss of just $0.44 per share.
Revenue was a bright spot, soaring more than 100% to $52.1 million, but it wasn’t enough to offset profitability concerns.
Tilray attempted to mitigate the damage: “To date, the company has not experienced any material COVID-19 impacts related to its ability to serve patients and consumers around the world.”
In other words, Tilray’s loss is not attributable to the pandemic. That’s not very comforting at all for investors, and it speaks to more serious concerns with the company’s costs and overhead.
The Ugly: Short of the Day
Let’s be upfront with this: Novavax Inc. (Nasdaq: NVAX) itself isn’t “ugly.” In fact, it’s quite the opposite.
The biotech just trounced Wall Street’s first-quarter expectations, reporting a narrower-than-expected loss of $0.58 per share on revenue of $3.4 million. Analysts anticipated a loss of $0.69 per share and sales of $1.9 million.
Novavax also said it received $384 million in funding to develop its COVID-19 vaccine. The company will start the vaccine’s phase 1 and phase 2 trials this month in Australia.
So why is Novavax “ugly?”
Because the stock rallied more than 70% today. That’s extreme vaccine and cure hype if I’ve ever seen it. If you already own NVAX, take profits now.
If you don’t already own NVAX, do not chase the rally. In fact, if you have the risk tolerance, shorting NVAX or buying a June or July put option might not be a bad idea following this insane, vaccine-hype driven rally.
It’s time for your daily Elon Musk check-in — er, today’s Quote of the Week!
I know my grasp on the passing of time is iffy at best right now, but it seems like only yesterday when the “techie turned freedom fighter” threatened to relocate Tesla Inc.’s (Nasdaq: TSLA) factories to avoid staying closed.
Let’s see what Elon Musk was up to last night. Oh no…
I have to say: One thought that crept across my mind, as Elon Musk almost goes into full Henry Rollins mode, is whether or not the Tesla chief’s new “rah rah freedom!” rhetoric has a deeper purpose.
It wouldn’t surprise me if Elon was trying to gain interest from an anti-Big Government demographic … one that typically wouldn’t otherwise pay mind to Tesla and electric vehicles.
But maybe that’s my mistake for thinking that Elon Musk gives a shh … about public relations.
So, in today’s Elon Musk check-in, is the man a mass-production maniac or a manufacturing martyr? Only time and Twitter will tell.
Great Stuff: We’re All Ears
You “Marco,” I “Polo.” Your chance has come once again to feed the Great Stuff beast!
We’re just two days away from this week’s edition of Reader Feedback, and if you’re in the mood for rambling, the whole team here is in the mood to listen.
Drop us a line at GreatStuffToday@BanyanHill.com anytime. We love to hear from each and every one of you!
Here are some hot-button issues to get you started:
- What do you think about COVID-19 cases spiking in newly reopened countries?
- What’s your favorite way to keep sane during quarantine?
- Have we seen the end of the “post-crash” rally? (This bear market’s got legs!)
- What’s the earnings season story that no one’s talking about?
- If you’re driving a car at the speed of light and turn your headlights on, do they do anything?
Before I sign off today, I want to give you a hearty “Thanks!” for reading Great Stuff through our rip-roaring ride through the pandemic. Stick with us, and we’ll keep the Great Stuff flowing your way.
Until next time, be Great!
Editor, Great Stuff