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abracadabra

alakazam

hocus-pocus

voilà

open sesame

mojo

There’s a new magic word or term taking the world by storm.

The term Generative Artificial Intelligence or (AI), which is casting a spell unseen since dot.com, was added to the Lexicon. This week, Alphabet (GOOG) unveiled its latest offering in the field and mentioned AI 143 times in two hours. The stock added $122 billion in market cap, meaning each utterance was worth $1.17 billion.  

The stock is up 20% since being written off as the AI loser in February. It must be magic.

The Golden Ticket (higher prices)

Safe sectors continue to struggle, except Consumer Staples (XLP), which have found a magic formula – pricing power. Of course, these companies always had pricing power. I mean, after all, nobody would balk at paying an extra five-cent for a candy bar, right?\

As it turns out, a nickel has been a big deal for a long time, as evidenced in this article in the New York Times in August 1976. The piece began by reminiscing about the good old days when a kid on a tight allowance budget could buy a chocolate candy bar for a nickel.

Those days were over, with the price being moved another nickel to $0.20 from $0.15. Manufacturers cited the spike in the price of cocoa, which almost doubled. To placate the public, however, they also announced these chocolate bars would be larger.

Demand dropped when candy makers jacked up prices to keep pace with their inflation issues.

It turns out five cents is still a big deal.

Sharing the Wealth

Although they have been skyrocketing, cacao prices are still below 2015 levels, and the supply chain crisis is over (for now).

But guess what?  The price for candy bars and other items, from burritos to burgers, keep surging.  Volumes are still moving lower, but pricing power is so great that the bottom line is getting fatter.

Yesterday’s Session

Growth stocks and Consumer Staples (the new de facto growth sector) led the way as Utilities crashed.

Google was the stock of the day.

Portfolio Approach

 

There are no sector weighting changes this morning in our Hotline Model Portfolio. 

Today’s Session

The most discussed corporate news is happening in a company that isn’t publicly traded.  Elon Musk has picked a new CEO for Twitter.  Linda Yaccarino will begin her job in six weeks.

The Federal Reserve

According to Revolutionary War lore, Col. Israel Putnam of Connecticut implored his men “Don’t fire till you see the whites of their eyes!” Apparently, this is how the Fed will continue to conduct monetary policy.  Forget the lag effect, if inflationary pressures don’t wane fast enough they will keep firing.

As long as members of the Fed are saber-rattling, the market will be held in check.  But top that point, the market is also exhibiting amazing resolve.

Comments

Consumer staples price increases seem like an AI response to their pricing power. Does AI incorporate customer good will in their recommendations? It doesn’t seem so! Michael Beres on 5/12/2023 8:03:19 AM

Greed-inflation? I've never heard it called that before. Is that a new term for it? I always thought it to be ECON 101, where price was set to ensure enough purchases occurred to obtain the maximum profit possible. It kind of goes along with shrink-flation. Not sure if this is a direct answer to the question. From what I've noticed, many people will get use to the higher pricing eventually, around things they want, and revert back to buying it anyway. Terry Dowler on 5/12/2023 8:13:54 AM

It isn't' greed inflation. It isn't higher costs in the literal sense. It is loss of fiat currency purchasing power. For the most part, aside from efficiencies in productivity normalizing "costs'", the same number of candy bars will get you the same quality attire or a home, or a pound of steel or a gallon of gas as before. Subscribers can figure out the rest. Ron Lukas on 5/12/2023 10:25:58 AM

I think it is a little bit of both greed inflation and supply issues. Just like everywhere else we can not find works to work at our factory's, so in order to compete with other factories we had to rase our hourly rate. Also the supply change issues not being able to get the parts we need to build our parts even though most of our product is made here in the US it is still hard to get all of the parts needed to make our products and the price for raw materials are still high. With all of this price increases we had to renegotiate pricing with our customers. In the end the consumer is going to end up paying more for everything because of the worker shortage, supply chain issues and cost of raw materials. My question would be, as consumers are are still digging into our pockets and buying stuff. Where is the tipping point at which the consumer stops buying this stuff. We are in trouble once this starts to happen. Philip on 5/12/2023 10:28:30 AM

NO Charles Haselberger on 5/12/2023 11:55:27 AM

The Fed was way behind the economics back in Sept/Oct 21 when they should have started raising. Consequently, they will have to raise rates higher and keep them there longer. That is the price that they must now pay. Unfortunately, they must keep the pedal to the metal. To let inflation reignite from present levels is a much greater danger than a bad recession. Charles Haselberger on 5/12/2023 12:06:10 PM

I have done sales analytics for years. Today I work for a candy company that did take price increases late last fall along with most of the major candy companies. Cost increases to produce and ship is what caused us to increase price. Every month I see dollar sales are up volume is down YOY. I do NOT think it is greed-inflation for my company. Not only are cogs pricey but shipping product has risen substantially. Cindy Wade on 5/12/2023 12:21:05 PM

Not at all. These types of consumables I believe hit people’s pocketbooks daily and don’t believe businesses will lower them Derek Krueger on 5/12/2023 6:15:50 PM

Worked in public company major brand staple foods in the early 80's. When we were raising prices we always factored in volume loss with a price increase that would more than offset the revenue loss. Public companies are managing to grow earnings and inflation will lead to both volume loss and revenue increases if done properly. Can it become greed. Yes if managment believes they can do both without harm. Jim Granacher on 5/22/2023 5:10:29 PM

Rising costs are attributable to many things but greed would likely be kept partially in check by competition. I believe it is more a factor of government regulation, lack of judicial prudence on shoplifters, exorbitant minimum wage rates and general lack of leadership by elected officials on both sides of the aisle. Terry Lavis on 5/23/2023 9:18:09 AM

Yes, I definitly do think prices are continuing to go up! They are trying to make up for the terrible losses during the pandemic. But I don't think they should be making all of us consumers make up their losses now! We can't afford it. Some may be because of greed. But I think the majority of it is just to earn back what they lost to keep their businesses going. Again, not our problem to keep them going. We're having a hard enough time just buying enough food and heating and cooling our homes without these costs continuing to rise! But how do we put a stop to it and say enough is enough??? Suzette S. on 5/29/2023 8:44:26 AM

No comment however an anecdotal story. We used to go to Carl's JR. and they had a burger called the $6 burger priced at 3.95 in 2016. We went there yesterday and they no longer have a $6 burger, we paid 8.50 for a similar burger. That is quite a lot of inflation for 7 years! Randall P on 6/1/2023 2:33:45 PM

Greed inflation? Minimum wage? That's what we get when 'government' rips another rung off the ladder of first employment. Folks have gone 'gig-worker' and now IRS hires 85,000 new employees to till the fertile ground! Too much government = price inflation. Remeber this at the ballot box! Steve Kemp on 6/16/2023 8:16:03 AM

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