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S&P, Prostitution, and The Disappearance of Money

The market sailed through a week of light Treasury supply with reduced POMO support. A big Treasury paydown this week put extra cash in dealer trading accounts and it did exactly what we expected it to. S&P threw a little glitch into things on Monday by putting the US on a negative watch. They probably just had a big client with a huge buy order outstanding. A little negative news and Voila! Done!

Things get a little more “interesting” next week. POMO will be insufficient to absorb $52 billion in new supply. With that much paper to sell, the government will want to see yields lower. So be on the lookout for a 3 AM stock futures selloff in the pre market probably Tuesday and/or Wednesday. There’s nothing like a little stock market liquidation to get a buying panic going in Treasuries.

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2 Comments

  1. slogic

    “The big squeeze I expected from materials cost increases hasn’t shown up, probably
    because materials aren’t that big an input for most businesses, a factor that I failed to consider previously.”

    I disagree. Russ and I were short CMG into earnings report. The squeeze was merely 90 basis points on the 25% margin. Revenues shot up about 5% vs. expectations. I checked the financials before opening the short, and input costs were huge 40-50% in the cost structure, with labour costs another 40%. What other could you expect for a restaurant chain?

    No, I think the true reason is that all major companies use hedging and long-term contracts with suppliers that shield them from short-term input price variations. The reason that we didnt see any significant margin squeeze this quarter is exactly the same as the one for low CPI inflation reported by FED, whereas commidities are up in multiples. It takes time for inflation to spread through the supply chain.

    In case of CMG for example, the company says in its quarterly report, that they have long-term contracts with food distribution centres who in turn buy from the farmers. They also buy at spot prices. They don’t disclose percentage of long-term/spot prices in their cost structure. But I think (based on how good the report was) that most of the procurement was through long-term contracts.

    Lee, please continue analyzing fundamentals! Partially correct opinion is better than none at all. Generally – you are right. Margins will be squeezed with inflation, and revenues of companies who can’t pass on costs of inflation on consumers (non-necessities) will eventually fall. However, there is a lot of noise in the short-run.

    Well, if it was easy – every moron could do that, right?:)

  2. Lee Adler

    Thanks for the encouragement! I think restaurants are a good example where material costs are a big part of the cost of production. In other service businesses, they are not. And I guess with regard to manufacturing you could say, “it depends.”

    I agree that these cost increases will begin to show up as a hit to profits. These guys are good at fudging but they can’t do it indefinitely.

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