How to Play Slowing Retail Sales Amid Rampant, Rising Inflation
As I wrote in a note yesterday to external subscribers, “Inflation has been a consistent theme amongst the flapping heads in mainstream financial media over the past few weeks.”
We’ve certainly been talking about it a lot here.
But last week’s Consumer Price Index (read: inflation) figure of over 5% year-on-year was the highest print in nearly 13 years. And although markets shrugged it off, pundits clearly remain spooked by what the Federal Reserve deems a “transitory” figure.
Well, Tuesday morning’s release of Producer Price Index (PPI) data — a measure of prices received by manufacturers and a leading indicator for the Consumer Price Index — is giving us a real-time look into what the near-term future of inflationary pressures looks like.
And spoiler alert… Pressure continues to increase Instant Pot-style.
Source: Bloomberg
PPI came in hot across the board, with overall month-on-month increases clocking in at 0.8% vs. 0.5% expected, and year-on-year figures showing a 6.6% increase versus 6.2% expected.
This is consistent with similar figures (such as prices paid/received), and just goes to show us that given the capacity of the economy to absorb it, producers will simply pass on cost increases to the consumer.
There will come a point when consumers push back — high prices, after all, are the cure for high prices.
But that time is not now.
And if the net result of unemployment benefits coming to a close in 24 states by month’s end happens to be that unemployed/underemployed people finally go out and get jobs…
Then that time isn’t necessarily later, either.
Will Slowing Retail Sales Finally Slow Inflation?
The other big economic data release was retail sales.
Expectations were calling for declines in autos and gasoline, with some improvements in other areas of consumer spending.
Results, however, showed continued sales continued to decline… just at an increasing pace.
Source: Bloomberg
Now, it may be tempting to reason that if retail sales decline, that could in turn cause prices to fall.
And frankly, there may be some truth to that in the long run.
However, when we look at the entire basket of goods that comprise retail sales, we can see that while many items declined month-on-month, some actually increased.
Source: Bloomberg, Census.gov, BEA, Hedgeye
Yes, there were huge declines in autos, furniture, appliances and building materials.
But each one of those items absolutely exploded in 2020… So we should expect declines there.
Instead, let’s focus on what went up… food, health care, gas stations and clothing.
Spoiler alert, all four of those items had a comparatively bad 2020, and are now seeing demand normalize.
In addition to this rotation out of durable goods and into more consumer-driven goods, we also have to think about a potential rotation from goods into services.
And when I look through the service sales data that also came through this morning, I see a whole lot of metrics that flipped from negative in April to positive in May.
Source: Bloomberg
So, to sum up, I don’t really view this data as the beginning of the end of inflation.
Rather, I simply see it as a rotation — one where inflation cycles from overheated sectors with slowing demand to sectors where inflation is just now starting to heat up.
Or as a friend put it to me earlier — consumers are moving from buying “goods” to buying “experiences”.
Going Long on Experiences
To that end, there is one services company I like at current levels that could stand to benefit here multiple ways.
Boyd Gaming Corp. (NYSE: BYD) owns and operates about 30 casino properties in Nevada and ten other U.S. states.
Most of these are resort-type properties, or hotels that feature pools, full casinos, restaurants, shops and on-site entertainment.
But perhaps, most interesting given the news about Draftking’s ties to the black market, BYD has a partnership with digital gaming company (and DKNG competitor) FanDuel Group, whereby it uses FanDuel’s technology for its own online/mobile sports betting and gambling services.
From my perspective, this makes BYD a year-round moneymaker instead of a seasonal player, and is therefore a far superior longer-term play compared to DKNG, which we closed for a 25% gain back in January.
Shares are currently trading toward the lower end of its recent range, so I like picking up a quarter stake here with the idea to add more in the event it falls below $60.
Source: Bloomberg
This is a play singularly focused on both a U.S. reopening and a shift toward the experience-based activities we’ve all sorely missed over the past year.
In fact, during the course of writing this article, yours truly felt so inspired that I started pulling up flights to Vegas.
And now that I’m done with this article, I may very well book the trip… YOLO!
All the best,
Matt Warder
