A cautious session is ahead for Tuesday, following the worst smackdown since June for major indexes.
That’s as an increasing number of investors see the Fed pivoting from rate hikes to be a tall order in the face of stubbornly high inflation and a global growth mess. We’ll find out Friday when Fed Chairman Jerome Powell steps up to the mic at the sumptuous Jackson Lake Lodge in Wyoming on Friday.
Our call of the day from billionaire hedge-fund manager Bill Ackman makes the case that certain U.S. fast-food chains can withstand the heat from inflationary pressures, as detailed in the semiannual letter for the European listed portfolio, Pershing Square Holdings
While not a traditional hedge fund like Ackman’s Pershing Square, PSH is still managed in that vein. The closed-end fund has whittled a 26% loss at the end of June down to 11% in mid-August.
Cushioning a difficult year has been the portfolio’s heavy exposure to interest rate swaptions, an option on an interest rate swap that bets on higher rates and hedges against global macro risk. Taking to Twitter last month, Ackman said inflation remains the biggest risk to the economy and the Fed must maintain its resolve on higher rates.
As for those company bets, Pershing discussed its stake in Restaurant Brands
owner of Burger King, Tim Hortons and Popeyes. Those chains have seen comparable sales up 20% relative to pre-COVID levels, and QSR stepping up with the cash to “position them for long-term, sustainable growth.”
But the company can keep growing businesses with minimal capital required its franchisees open new units. “QSR’s franchised-based royalty model is particularly attractive in an inflationary environment. QSR’s revenues benefit when its franchisees increase prices, but its cost structure is not subject to the same inflationary pressures,” said Pershing.
And owing to improving same-store sales growth and with strong unit growth, “QSR’s earnings are now greater than prior to COVID and are growing at an attractive rate, in spite of significant industry-level inflation and same-store sales that are just now recovering to pre-COVID levels.”
The other pick is burrito king Chipotle Mexican Grill
which “continued its impressive performance in 2022 driven by the ongoing recovery of in-restaurant sales, price increases to cover cost inflation, and successful menu innovation including pollo asado,” said Pershing.
“We believe Chipotle is one of the best-positioned consumer companies for the current inflationary world,” said the fund, noting that management lifted August menu prices 4% to account for rising food and labor costs, repeating a step taken in March.
“The company has tremendous pricing power due to the superb quality of its foodwhich is priced at a discount to many competitors with inferior offerings, marketing focused on food quality and freshness rather than cost, and a customer base that over-indexes to higher-income consumers, some of whom are trading down from pricier alternatives,” said Pershing.
As for what isn’t working? Pershing bowed out of its stake in Domino’s Pizza
owing to “relatively high valuation in the context of a volatile market environment.” A victim of its own success, Domino’s “meaningful improvement” has been a driver for shares and valuation — more than 28 times Pershing’s estimate of next 12 months’ earnings.
are inching higher, while bond yields
are steady, the dollar
is slightly lower and oil prices
are bouncing back. Also watch U.S. natural-gas futures
which tapped $10 per million British thermal units, a fresh 14-year high.
shares are higher after earnings top estimates, though the company lowered guidance. U.S.-listed shares of JD.com
are rising on an earnings beat. Medtronic
also delivered an earnings beat. Nordstrom
and Urban Outfitters
results are still ahead.
The U.S. manufacturing and services purchasing managers indexes are due at 9:45 a.m. Eastern, followed by new home sales at 10 a.m.
The government reportedly retrieved more than 300 classified documents from former President Donald Trump Mar-a-Lago home this year.
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Bond markets are now leaning toward a 75 basis-point hike at the Fed’s Sept. 21 meeting, and agriculture investors need to pay attention. “This uptick in inflation expectations matters because Index Funds – the WHALES in agriculture markets – track inflation metrics closely. When inflation rises, index funds buy,” Peak Trading Research tells clients in a note.
Peak Trading/Bloomberg data
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