🔪 Don't Miss This Carnage in Consumer Staples

What’s on the Menu 🍴

Today is all about the consumer.

After all, they’re the driving force behind the economy.

And there’s a LOT you need to know today…

So we hope you brought your appetite!

  • Carnage in Consumer Staples 🔪

  • Crypto Corner: What's Shaking up the Crypto Sphere? 🌎

  • Should Billionaires Be Taxed At 100%? 💸

  • Consumers Keep… Consuming 💳

Today’s newsletter is a 4 minute read.

Carnage in Consumer Staples 🔪

One of the worst performing sectors this year might surprise you: consumer staples.

Household brands like Clorox, Kellogg, General Mills, Hershey, Coca Cola, Hormel, and Pepsi have seen their stocks get crushed in the past few months:

This is unusual for several reasons:

1) staples tend to be less volatile than other sectors and

2) investors often take refuge in staples during times of economic uncertainty.

These widely known brands are often core purchases for consumers at the grocery store, and they’ve rarely experienced revenue declines historically.

In fact, the median revenue growth rate for these companies over the past year has been about 6%.

So why has their stock performance been so terrible lately?

Several explanations have been floated by investors:

  • Higher inflation threatens profit margins

  • Higher interest rates lead to lower valuation multiples

  • Weight loss drugs such as Ozempic threaten the long term growth of staples

  • New creator led brands such as Feastables & Prime Energy are stealing wallet share

There’s probably some truth to each of these reasons, although many staples companies raised prices over the past year to combat inflation and maintain margins.

The Covid period was quite good to the staples sector, as revenues increased and valuation multiples expanded from 2019 through 2022:

When the starting point is a P/E ratio north of 25X, a lot has to go right to justify valuation!

Interest rates rose in 2022 but the market didn’t seem to punish staples too much.

Perhaps the rise in longer term interest rates this year is what did the trick.

But what may have really shaken investor complacency around staples stocks is the megatrend we wrote about back in early July: powerful new weight loss drugs.

Weight loss drugs like Ozempic, Wegovy, and Mounjaro inhibit hunger and are leading to previously unthinkable amounts of weight loss among obese Americans.

These drugs are also changing what goes into many Americans’ pantries:

A broad shift from junk food to protein shakes could really put a dent in many staples companies profits, even if the impact is minor here in 2023.

So there’s a lot working against staples stocks right now, but could there eventually be a buying opportunity?

After all, many staples companies are good at acquiring rising brands to diversify their revenue streams, and they still have powerful distribution in grocery and convenience stores.

For short term traders, the oversold indicators suggest a bounce could be due soon, but for long term investors there’s still a lot of uncertainty.

Staples stocks currently trade at a 19X median forward P/E ratio, but we think the weight loss trend is just getting started so we doubt those stocks will return to 25X+ anytime soon.

Nonetheless it’s probably time to start digging deeper into the specific brand portfolios of each company to figure out which ones might still be well positioned for the future.

These staples companies won’t just sit back and do nothing, and the stock selloff could reach overreaction levels at some point.

Staples stocks are on a diet this year, but there may be a feast in their future yet!

Crypto Corner:
What's Shaking the Crypto Sphere? 🌎

BlackRock's Global Crypto Curiosity: The financial behemoth BlackRock has been witnessing a surge in client demand for cryptocurrency across the globe.

CEO Larry Fink articulated this international intrigue during a recent interview, hinting at a wider acceptance and perhaps a brighter horizon for digital dough.

As one of the leading investment firms steps closer to crypto, it's a nudge for investors to perhaps broaden their portfolio horizons too.

California's Crypto Embrace with BitLicense: Governor Newsom recently signed the BitLicense bill, propelling California further into the crypto vanguard.

This legislative move makes it easier for digital currency businesses to operate in the Golden State, showcasing a progressive stance toward crypto integration in the mainstream economy.

FTX's Returning Customer Funds? FTX has laid out plans to return 90% of customer funds, albeit with a small catch.

The missing customer assets are to be divided into three distinct pools based on the situation at the onset of the Chapter 11 cases. These pools are earmarked for FTX.com customers, FTX.US customers, and a 'General Pool' for other assets.

For customers with a preference settlement amount of less than $250,000, the proposal is a green light to accept the settlement without a reduction of claim or payment.

This preference settlement equates to 15% of customer withdrawals on the exchange, calculated nine days before its downfall.

But it's not all smooth sailing.

The creditors could also receive a "Shortfall Claim" against the general pool, which is the estimated value of assets missing at their exchange – a staggering near $9 billion for FTX.com and $166 million for FTX.US.

Cointelegraph's Misstep: A $100 Million Ripple Effect: In Monday’s newsletter, we talked about what a spot ETF could mean for bitcoin.

Shortly after it went live, Cointelegraph found itself in hot waters as a false report regarding the US SEC’s approval of a Spot Bitcoin ETF went viral from its platforms.

The ripple effect?

A staggering $100 million in Bitcoin short positions liquidated in the market frenzy that followed. The origin of this misinformation was traced back to an "unconfirmed screenshot" that snowballed through internal channels, eventually finding its way to Cointelegraph's Twitter and Telegram.

The news, though false, sent Bitcoin's price soaring to $30,000, triggering a cascade of liquidations especially impacting traders who had bet against the price hike.

This little saga is a stark reminder of the tightrope we tread in the crypto circus, where a single tweet can topple fortunes, and not always for the better.

Consumers Keep… Consuming 💳

The media and economy gurus have been talking about consumer spending slowing down in 2023.

The real catalyst will be student loan payments that restarted in October (making Octobers retail sales report even more important than September).

While we wait to see if these fears come to fruition through the end of the year, one thing is apparent:

Consumers are still spending for now per the September retail sales report released Tuesday.

Looking under the hood of the report, there are certainly things to be concerned about.

For example, clothing store spending is down -0.8%.

That’s NOT a good sign for discretionary spending.

But wait - then you look at the “miscellaneous store retailers”, and that had the strongest gain.

These are retailers like florists, souvenir shops, and even pet stores.

It could be argued that the consumers’ discretionary spending has just shifted from clothing to other categories.

The S&P 500 initial reacted negatively to the headline, as consumer spending could keep inflation higher (which may lead to interest rates staying higher for longer).

But, the market quickly rebounded once the dust settled.

It begs the question: is the consumer just “getting used to” the current environment?

What will it finally take to pull us into a recession if the labor market stays resilient, and consumers spend enough?

We will have to see if student loan payments resuming puts a dent in the next report.

Delicious Bites 😋

Food For Thought 🧠

"Don't tell me where your priorities are.
Show me where you spend your money and I'll tell you what they are.”
- James W. Frick

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DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We don’t offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.