Slower Service, Better Returns?

The markets headed a little higher this week due to strong earnings announcements and a stronger than expected jobs report.  While the Delta variant continues to wreak havoc on communities and creates new headaches for public policy, the markets seem to be looking past this latest hiccup in anticipation of life returning to normal.  In particular, the jobs report adds support to the idea that people are slowly, if not reluctantly, returning to work.  With the new school year just weeks away from starting, it is with hope that there won’t be any further setbacks.

While I’d like to discuss the bipartisan infrastructure bill, the negotiations continue with time running out.  Progress has been made on a scaled back version totaling $1 trillion, but as late as last night there were issues with several amendments including one involving the regulation of cryptocurrency.  It is anticipated that a deal will be reached this weekend and the bill could go to the House as early as Monday.  Next up will be the more contentious $3.5 trillion “human infrastructure” bill dealing with child care support, home health care, education and other expenditures that are Democratic priorities.  Debate on this measure will extend into the fall.

In relation to something I commented on a couple weeks ago, it seems Mohammad El-Erian must have read my withering rebuke.  This week he walked back his comments on impending stagflation to say that if it even comes to pass, it will be very temporary in nature.  On this we can agree.  The inflation we’re experiencing is both a supply and a demand issue.  The supply issue is beginning to subside as supply chains slowly return to normal, but the demand component remains strong.  As stimulus money evaporates, demand should subside too resulting in a brief period of falling growth.  We would expect inflation to fall although probably with a little bit of a lag.  In this Mr. El-Erian and I agree.  Unfortunately, media tends to sensationalize news with grabbing headlines and it is likely Mr. El-Erian initial comments were taken out of context.  I’ll give him the benefit of the doubt.

In company news, General Electric had a 1-for-8 reverse stock split this week bringing its price back up above $100 per share.  CEO Larry Culp told Barron’s that he wanted GE’s stock price to be more comparable to its peers.  However, manipulating a stock’s price does not make the company more valuable or profitable.  In fact, the business value is reflected in the price the market gives it, not the one he may be trying to assign.  I’d argue if he didn’t like the stock price, he should try fixing the fundamentals.  In other company news, Clorox reported earnings this week and if this isn’t a sign of the end of COVID, I don’t know what is.  The company missed earnings estimates by $0.36 while watching revenue decline 9.1% year-over-year.  Management issued guidance of a decline in sales of between 2% and 6% with full-year revenue 25% below estimates.  This is all very encouraging… unless you happen to own Clorox stock.

And lastly, it seems Nelson Peltz has either thrown in the towel or gotten what he wants, depending on how you view things.  You’ll remember, the activist investment manager lobbied for and got a seat on Procter & Gamble’s board back in 2018.  This week he announced he is stepping down from the board.  After a quick search, I discovered he sold more than $350 million worth of P&G back in May, and I wouldn’t be surprised to find he sold a substantial portion of the $800 million stake he still held.  The stock is up 100% since he joined the board in March 2018, outperforming the S&P 500 by almost 15% over the same period.  Perhaps he did get what he wanted after all.

In closing, I turn to the U.S. Postal Service (USPS).  I was surprised to learn that the latest idea to “save” the post office involves slowing down the delivery of first-class mail.  Postmaster General Louis DeJoy acknowledged the plan calls for some “uncomfortable changes,” but he said, “We are confident we are headed in the right direction, which is slightly away from what we have done in the past,” which DeJoy contended “has not worked.”  Among his many proposals include ending reliance on air transport for long-distance mail.  Mr. DeJoy has come under considerable scrutiny given his $30 million investment in XPO Logistics, a USPS contractor.  XPO Logistics is a diversified trucking and logistics company.  Now you know.

Bruce J. Mason, MBA