The session might have seemed ho-hum, but it was anything but as the market climbed off the canvas twice, including a sharp reversal higher with less than an hour left in trading yesterday.                                                                                                                                                     

The winning combination: Growth Sectors and Utilities (XLU).

Now, Utilities are the high-flyers. Over the past five sessions, Utilities are up almost 4.0% and have left every other sector in the dust.

Investors are lured by the risk/reward, high yields, and liquidity of Utility stocks.

Fun While It Lasted

You only live once, or YOLO has been a major economic driving force since the pandemic. It has been more than revenge shopping. It has been revenge living. Many people who expect to get a gold watch on the first day of work have felt strongly they deserve to live while they can still sleep it off and get up the next day and do it again.

Try that Greatest Generation and Baby Boomers.

But they pulled off this high life with stimulus money and skipped payments on other bills. Now, it's time to get back to work. There are lots of businesses that will miss all that action:

• Restaurants
• Airlines
• Hotels

In fact, yesterday, American Airlines (AAL) took a hatchet to their current quarter earnings. Meanwhile, ticket prices are down sharply from a year ago.

Airline Tickets
Month to Month	Year to Year
+4.9%	-13.3%

Airlines were the hardest hit industry.

Freight Recession Over?

At an industry conference, management suggested the freight recession could be over.

Shares of J.B. Hunt Transport Services (JBHT) erupted higher after bouncing off the 200-day moving average.

Cards Coming Back to Haunt

Credit card delinquencies are going parabolic:

• Bank card delinquencies are the highest in a decade.
• Auto loan delinquencies are the highest in a decade.
• Consumer loans are racing toward 6% delinquencies.

I think these numbers will get a lot worse in the coming months.

And guess what…there has also been a spike in credit card rejections.

Credit Card Rejections
Feb	June
17.3%	21.8%

Retail Sales on Deck

Retail sales are out this morning. These numbers are not adjusted for inflation but serve several purposes, including a gauge of the consumer's health.

Interestingly, one has seen the initial retail sales number improve through revisions every month. The one time it wasn’t improved, it was unchanged.

Gleaning the Opportunities

The report will break down merchandise items, which will also help us with individual stock selection.

Current Retailer Trends

A look at the stores with the lowest income shoppers shows carnage across the board, except Walmart (WMT); size, price negotiating strength, and groceries give Walmart an edge.

Lower Income Shoppers
Store	Average income	Stock YTD
FL	$73,000	-53%
DLTR	$63,000	-18%
DG	$62,000	-49%
WMT	$72,000	+16%

Conversely, stores with higher income shoppers have had a mixed performance; sales are up with Lululemon (LULU) and RH Home-furnishings (RH). Still, Macy’s (M) (the parent of Bloomingdales and others) were hammered.

Higher Income Shoppers
Store	Average income	Stock YTD
Bloomingdales (M)	$128,000	-44%
RH	$116,000	+19%
URBN	$112,000	-20%
LULU	$112,000	+24%7

 

Portfolio Approach

We added a new position in Health Care yesterday. We are fully vested.

Today’s Session

Everyone is getting hyped up about the Arm IPO, which will be a hot stock today, but will it be too hot and should you chase?  Let’s look at the F1 (same as S1 but for foreign companies)

Our Market Opportunity

We define our total addressable market (“TAM”) to include all chips that can contain a processor and, therefore, our TAM includes the main controller chips in smartphones, PCs, digital TVs, servers, vehicles and networking equipment. Our TAM excludes chips that are unlikely to contain a processor, such as memory and analog chips.

For the calendar year ended December 31, 2022, we estimate that our TAM was approximately $202.5 billion and we forecast that our TAM will grow at a 6.8% compound annual growth rate (“CAGR”) to approximately $246.6 billion by the end of the calendar year ending December 31, 2025. We estimate that the aggregate value of chips containing Arm technology was approximately $98.9 billion in the calendar year ended December 31, 2022, representing an approximate 48.9% market share as compared to an approximate 42.3% market share as of December 31, 2020. We estimate that our royalty revenue as of December 31, 2022 represented approximately 1.7% of the industry TAM containing Arm-based chips. We expect that the cost and complexity of chip design will continue to increase, and that we will be able to contribute a greater proportion of the technology included in each chip, resulting in our royalties comprising a greater proportion of each chip’s total value. Our calculation of TAM is based on a combination of third-party sources, customer reports and our own internal assessments and judgment.

• Mobile Applications Processor
• Other Mobile Chips
• Consumer Electronics
• Industrial IoT and Embedded
• Networking Equipment
• Cloud Compute
• Other Infrastructure
• Automotive

Execution

Revenue growth has stalled, but year to year margins are impressive, although the June quarter saw Operating Margin (OM) down considerably from the prior year.

The business model and its unique position bodes well for the company.

But I have additional concerns – some outlined in this article from the Financial Times.

Arm IPO by the Numbers

• $51.00 Offering Price
• $4.9 billion to be raised
• $54.5 billion valuation
• 10 times oversubscribed

Bottom Line

I do not like chasing IPOs.  Wall Street and Silicon Valley ripped off the general public so badly for two decades, especially the last few years.  It has been criminal-like behavior driven by unconscionable greed.

I suspect IPOs coming out now will push more sanely valued deals.  Being more reasonable and giving the public a chance to make money rather than ripping them off will not last. But for now, there will be an effort to reestablish a level of trust. With that in mind, I still would not chase this stock, but I think nimble traders can make a lot of money over the next few sessions.

This is the biggest IPO since Rivian (RIVN) – here’s the performance of high-profiled IPOs over the last few years.

Retail Sales

The headline number of 0.6% is a million miles above consensus of 0.1%, but that might say more about the terrible work on behalf of analysts than the strength of the consumer.

This report was all about higher gasoline prices, which is one of four things that stand out.

Furniture down month to month and year to year like the CPI report that saw huge declines in prices – the housing boom has gone bust.

Department stores up from July is very intriguing. They refuse to die.

The internet was flat from July, which indicates Prime Day sucked all the cash from consumers.

Also, clothing held up, but sporting goods took a big tumble.

Producer Price Index

Another report that came in well above Wall Street consensus, but there is a big caveat.

PPI Year to Year	Actual	Consensus	July
Headline	1.6%	1.3%	0.8%
Core	2.2%	2.2%	2.4%

 

PPI Month to Month	Actual	Consensus	July
Headline	0.7%	0.4%	0.3%
Core	0.3%	0.2%	0.2%

The move was driven by the surge in oil prices, which elevated energy 10.5%, and even played a role in the 1.4% move in transportation and warehousing. 

While analysts got it wrong, the market’s initial reaction is getting this right. Although higher oil and gasoline are a drag, this isn’t the kind of ‘inflation’ that puts the Fed in play.

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