🔬What's Really Driving Inflation?

Plus: Wall Street's 'Fear Gauge', the VIX, is at record lows; Disney's cable nightmare; and much more!

"If you don't know who you are, the stock market is an expensive place to find out."
- George Goodman

"There are times to make money and times not to lose money."
- Leon Cooperman

• Great day for the big US markets with the S&P 500 +1.2% and Nasdaq +1.4%, following a softer than expected CPI inflation print.

• 10 of 11 sectors closed higher, with Tech (+2.3%) and Real Estate (+1.7%) in the top spots. Consumer Discretionary was the lone loser… albeit down only 0.004%.

• Headline April Retail Sales were flat, below Wall Street estimates for +0.4% gain. Weather, delayed tax refunds, and weaker low-income consumers taking the blame.

• Notable companies:

  • monday.com (MNDY) [+21.4%] Q1 EPS and revenue exceeded forecasts and free cash flow guidance raised due to strong demand in sales CRM and development tools.

  • Super Micro Computer (SMCI) [+15.8%] Shares popped after target price hike from Barclays.

  • AMC Entertainment (AMC) [-20.0%] Announced the issuance of 23.3M shares to convert $164M of debt.

  • Boeing Company (BA) [-2.1%] Found by the Justice Department to have violated its deferred prosecution agreement from 2021 following the two 737 crashes.

Street Stories

Soft Inflation Print Triggers Market Glee

It’s not great news but it’s the first ‘not bad’ news we’ve had in a while.

April Consumer Price Index (CPI) data came in showing that inflation cooled down a tick to +0.3% from March vs. Wall Street estimates for +0.4%. Year-Over-Year inflation came in at +3.4% - inline with expectations.

Shelter - which has been a driving force in keeping inflation sticky - came in at +0.4% in April (just like in March and February) but YoY dropped to +5.5% from +5.6% last month. Positive, but a lot of work left to do here.

Excluding Shelter, CPI would have been +2.2% - ever so near to the Fed’s 2.0% inflation target.

Beyond Shelter, another annoying peccadillo has been the rapid rise of Motor Vehicle Insurance, which is up +22.6% YoY.

While Motor Vehicle Insurance is only a minor weight in the calculation (2.9%), it’s had a disproportionate impact on over all inflation, as you can see below.

Record Low Volatility

Yesterday’s CPI print added some (positive) volatility to the market but all told the CBOE Volatility Index, AKA ‘The VIX’, is still near multi year lows.

The VIX is commonly referred to as a Wall Street’s ‘Fear Gauge’, with a high figure implying significant market disruption ahead, while a low VIX implies that market participants are sitting on their hands and complacent. Or that they’ve been lulled into a false sense of security. 👻

Explainer: The VIX is calculated based on the implied volatility of options, which is the only real moving part that isn’t defined by a mathematical formula and instead comes from market expectations.

The options market is telling us that expectations are for very little to happen in the coming months. One nice thing for investors when the VIX is so low, is that it means you can buy protection for your portfolio, such as hedging some of your downside risk with put options, much cheaper than before.

Disney’s Cable Nightmare

Disney CEO Bob Iger announced they’re taking a hatchet to their Linear Networks division (legacy cable), reducing development funding and instead focusing on enhancing the profitability of its streaming divisions such as Disney+ and Hulu.

Despite recognizing that linear TV will not be a growth area, Disney hopes to optimize these networks to effectively manage costs and maintain some measure of profitability, partly by integrating content between ABC and Hulu.

While linear TV faces challenges from declining ad revenues and subscriber losses, Disney's streaming services are (finally) showing financial improvements, with expectations of achieving full profitability by the fourth quarter of this year.

Note: Disney started reporting ESPN (ESPN, ESPN on ABC, ESPN+) separately (‘Sports’) since Q4 2023.

Joke Of The Day

My wife and I laugh about how competitive we are. But I laugh more.

Hot Headlines

CNBC / Tesla’s Chinese rival Nio launches a new brand and car that undercuts the Model Y by $4,000. Starting at $30,439, the L60 SUV is set to begin deliveries in September, the company said. This is Nio’s first venture into the non-premium EV category.

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IBD / Dell shares hit record high after Morgan Stanley calls computer maker 'best way to play' AI server buildout. Analyst Erik Woodring reiterated his Buy rating on Dell and raised his price target to $152 from $128, saying sales channel checks indicated that Dell is gaining momentum in enterprise IT infrastructure, including competitive AI server wins.

Won’t lie, I forgot they were still a company.

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CNBC / London Stock Exchange gets rare tech listing as Raspberry Pi heads for IPO. The Sony-backed company makes teeny, single-board computers used in everything from EdTech to RC toys. The UK has struggled to gain listing of domestic tech companies, who instead tend to choose NY - usually the Nasdaq - over their home exchange.

ARM’s September 2023 Nasdaq listing was a huge d*** punch.

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Tech Crunch / Netflix to take on Google and Amazon by building its own ad server. The move to create their internal advertising technology platform comes only a year and a half after entering the ads business, and pits it against other industry heavyweights with ad servers, like Google, Amazon and Comcast. 

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The Atlantic / China has gotten the Trade War it deserves. A great deep-dive into not just EVs, but the State-sponsored mechanism to eschew global competition.

Trivia

Today’s trivia is on US inflation.

1. What is the primary tool used by the Federal Reserve to control inflation?
   A) Adjusting government spending
   B) Changing interest rates
   C) Modifying tax rates
   D) Regulating stock market

2. What term is used to describe a period of high inflation combined with high unemployment?
   A) Deflation
   B) Stagflation
   C) Hyperinflation
   D) Disinflation

3. Which year marked the beginning of a significant period of stagflation in the United States?
   A) 1965
   B) 1973
   C) 1980
   D) 1991

4. What significant action did the U.S. take in 1971 related to inflation control that impacted its currency?
   A) Closed the gold window, ending the Bretton Woods System
   B) Entered a fixed exchange rate system
   C) Adopted the euro as its secondary currency
   D) Revalued the dollar against gold

5. Which factor contributed significantly to the inflation spike in the 1970s?
   A) Technological advancements
   B) Decrease in oil prices
   C) Oil embargo and energy crisis
   D) Increase in global trade

(answers at bottom)

Market Movers

Winners!

• monday.com (MNDY) [+21.4%] Q1 EPS and revenue exceeded forecasts; Q2 and FY24 revenue and free cash flow guidance raised due to strong demand in sales CRM and development tools, with a 48% year-over-year increase in customers generating over $50k ARR.

• Super Micro Computer (SMCI) [+15.8%] Shares popped after target price hike from Barclay’s.

• NEXTracker (NXT) [+6.9%] FQ4 EPS, EBITDA, and revenue beat expectations; FY25 guidance for EPS, EBITDA, and revenue surpasses consensus, with strong demand, disciplined pricing, and U.S. sales mix boosting margins.

• EchoStar (SATS) [+4.2%] Secured a $2.7B U.S. Navy contract to provide 5G smart devices and services for the DoD and Federal Agencies over the next decade.

• TKO Group Holdings (TKO) [+2.8%] Upgraded to Buy from hold by TD Cowen, citing resolved legal issues, an upcoming deal with NFLX, and an ongoing partnership with NBCUniversal.

Losers!

• dLocal (DLO) [-26.4%] Q1 EPS and revenue fell short; company anticipates meeting lower end of 2024 guidance, with gross profit margin affected by seasonality and Egypt's currency devaluation impacting Q2 margins; yet, observed solid growth across all regions.

• AMC Entertainment (AMC) [-20.0%] Announced the issuance of 23.3M shares to convert $164M of debt.

• Infinera (INFN) [-7.8%] Preliminary Q1 results and Q2 outlook were below expectations, citing industry challenges with reduced customer spending and delayed projects; however, the company is optimistic about the latter half and positive on recent design wins.

• Boeing Company (BA) [-2.1%] Found by the Justice Department to have violated its deferred prosecution agreement, with an incident occurring just two days before its expiration; response from Boeing is pending as the DoJ considers further actions.

Market Update

Trivia Answers

1. B) The Fed’s primary tool regarding inflation is changing interest rates.

2. B) High inflation and unemployment is stagflation.

3. B) The US entered a period of stagflation in 1973.

4. A) In 1971 the US closed the gold window, ending the Bretton Woods System.

5. C) The oil embargo and energy crisis in the 1970s trigger significant inflation.
   

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