Curiosities at the Zoo
The last couple weeks have seen an uptick in volatility partially due to earnings announcements, but in large part due to fear, speculation, and an uncertainty about inflation and interest rates. Whether it be the gamification of trading as seen in stocks such as GameStop, the rapid rise and fall of cryptocurrencies such as Bitcoin and Ethereum, or the issuance of IPOs like Coinbase, Oatly, or Squarespace, it seems large amounts of money are sloshing around looking for a place to go. To some extent the excess money entering the market today is from Federal stimulus, extended unemployment benefits, and higher wages. However, I’d caution this money is not aimed at long-term investing but more in line with gambling. And to that end, it goes to explain both the increase in volatility and current mindset of the market. This phase will eventually peter out as money is spent on consumption, lost in short-term “hot” stocks, and when the extended benefits eventually run out.
Regarding inflation, we are seeing big upticks in raw materials and wages. One industry that has been especially hard hit is homebuilders whose main cost is lumber. While homebuilder confidence remains high as demonstrated by the May NAHB Housing Market Index, the pace of housing starts is slowing. In fact, the number of new homes being built fell 10% in April (month over month) as contractors poured concrete foundations but put further construction temporarily on hold. Additionally, homebuilders are putting escalation clauses into new contracts to account for the rising cost of materials. If you are in the market for a new home, you may want to wait. It is clearly a sellers’ market now.
In company news, AT&T announced it plans on spinning off its WarnerMedia division which it purchased in late 2016 for a whopping $85 billion. The planned spinoff will be a merger with Discovery Inc. which will have an enterprise value of $148B if the deal goes through. Without saying as much, this spinoff is regarded as an implicit failure by management, although the combined entity will have sizeable market share and pose a serious threat to Comcast’s NBCUniversal and ViacomCBS. For AT&T, the deal may simply have been a quick way to generate cash. You’ll remember the company spent almost $15 billion in February to buy additional spectrum. With over $175B in long-term debt, it wouldn’t be surprising to learn the company needed cash. While it is not uncommon that these megamergers tend not to realize the purported costs savings or the benefits of vertical integration, it remains disappointing when they fail nonetheless.
In other company news, Walmart is turning up the heat on its competition by going in a different direction. As many consumer products companies hike prices to account for higher commodity and labor costs, Walmart is holding the line (for now). The company hopes to attract customers and gain market share albeit while giving up a bit of profit margin in doing so. And perhaps most astonishingly, Bank of America announced it is boosting its U.S. minimum hourly wage to $25 per hour by 2025. This follows the company’s move to raise its minimum hourly wage to $20 per hour in March of last year. The bank is also requiring its U.S. vendors to pay their employees who work with the bank at or above $15 per hour. According to the announcement, 99% of the company’s more than 2,000 U.S. vendor firms and 43K vendor employees already meet these criteria. The company hopes this philosophy will help encourage and retain talent.
In closing, I bring you a story about the Cincinnati Zoo. I recently came across an article discussing thirteen curious facts about our zoo. Among the many interesting facts, the one that caught me by surprise was the human exhibit of Native Americans in 1896. Apparently, not unlike the Twilight Zone episode, the Native Americans were on exhibit for three months during which time they were on display demonstrating their mode of life. In the 1890’s there was a butcher’s day during which they killed animals on exhibit for an elaborate dinner party, there were live animal feedings, and a meal of elephant steaks at the Palace Hotel downtown. Now you know.
Bruce J. Mason, MBA