Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Thursday, July 11. The Bottom Line segment of today’s podcast starts at (2:33) for listeners who want to skip ahead. Be sure to check out the new ‘Stocks on the Contrarian Radar’ section at the bottom of this page and (4:30) on the podcast.
State of Play
Stocks put in a broad-based rally yesterday, with major indexes surging into the close to gain north of 1% on the day. The S&P 500 and Nasdaq closed at fresh record highs yet again. As we eye our board of indicators for signs of direction at 0645, all is quiet ahead of the CPI at 0830:
Stock index futures are doing nothing at all, with no major US index moving more than 0.1% from the break-even point;
Commodities aren’t doing anything either, with WTI crude oil unchanged at $82.50/barrel and copper prices flat;
Cryptos: also flat. Bitcoin changes hands around $58,200;
Bonds are also waiting for the CPI. The 2-year yields 4.62%, the 10-year 4.28%.
Today’s Known Events
It’s all about the Consumer Price Index today, out at 0830. Economists who were surveyed expect headline CPI to increase 0.1% month-over-month, after no change at the last reading. That would drop annualized headline CPI to 3.1% from 3.3%.
Core CPI, which excludes food and energy, is expected at 0.2% MoM, the same as last month, which would keep the annualized figure at 3.4%.
It’s Thursday so we’ll also get initial jobless claims at 0830. The expectation there is for 236,000 jobs, effectively identical to the 238,000 recorded last week and right in line with the four-week average which is 238,500.
We have earnings as well but those are covered in the stocks section below.
The Bottom Line©️
Fed Chair Jerome Powell yesterday cited “modest further progress” in the battle with inflation. That may be a generous account of what’s been going on, seeing how annualized CPI is still advancing at a 3% clip. In fairness, the Fed’s preferred inflation gauge is the Personal Consumption Expenditures, which looks a little better than the CPI (around 2.6% annualized headline PCE).
The CPI prints first each month though, and usually sets the tone for the PCE. Which is why this report is more closely watched. Markets seem to be in a buoyant mood after yesterday’s rally, but a hotter-than-expected CPI can certainly put an end to that party, and quick. Just something to look forward to, despite all the Fed’s dovish talk.
Stocks on the Contrarian Radar
Airline stocks are getting beaten up in the pre-market after Delta Air Lines (DAL 0.00%↑) missed earnings estimates. DAL is down some 8% at the time of this writing. American Airlines (AAL 0.00%↑), Southwest (LUV 0.00%↑), and United (UAL 0.00%↑) follow close behind. This may be a bit of an overreaction as DAL reaffirmed guidance, but airlines are a tough business. Margins are paper thin and the smallest thing can cause the whole thing to get out of whack. DAL does boast the best credit card partnership in the business, which some have actually deemed more valuable than the airline itself. Now Delta does look cheap, trading at just 7x earnings and 0.5x sales. Buying opportunity? You tell me. The Contrarian will likely sit this one out just because of where we’re at in the business cycle.
PepsiCo (PEP 0.00%↑) just reported mixed earnings and importantly lowered part of their guidance and the stock is down in the pre-market. It was already taking on water and is down 11% over the last year. Pepsi is one of those consumer staples you always want to keep an eye on. It has never gotten cheap enough for The Contrarian’s taste. Is this an opportunity to jump in? It traded at 20x earnings and 2.4x sales before today’s announcement. It’s only down a bit in the pre-market so would not expect those valuations to jump very much.
Visa (V 0.00%↑), one of The Contrarian’s favorite companies (and stocks) of all time, has been dropping lately, to around $260 from a peak of $290. There doesn’t seem to be any clear catalyst for this move, which would normally make for a good buying opportunity. Over the last year V has trailed the S&P 500, gaining just 10% while the S&P added close to 30%. Unfortunately this still hasn’t made V cheap. It trades at 27x forward earnings and almost 15x forward sales. As wonderful as this company is with its moat and everything else, that is still too rich for The Contrarian’s blood. He is proud to have bought with an average purchase price of $180 and wishes he owned more. But he can’t justify adding at these prices.
Papa John’s (PZZA 0.00%↑) is trading right near multi-year lows. The pizza sucks, but if people keep buying it then the business must be steady, right? At 17x forward earnings it is not particularly cheap. The Contrarian will probably not buy this stock, probably ever, if for no other reason than he cannot justify bankrolling such a lousy maker of one of the world’s great foods.
Housekeeping
Obviously this is not investment advice (duh). Do your own research, make your own decisions.
This Substack chat tracks The Contrarian’s trades in (almost) real time. The full portfolio is available upon request.
If this daily thing is drowning your inbox and/or you CBF to bother with it and prefer to just get the guest feature or actionable highlights — you can control these settings on your account page.
Finally, if you enjoy this and want others to experience it, please gift a subscription to your friends (or even your enemies).
Share this post