Commodities Remain Hot as Ukraine Conflict Rages On; Is the Consumer Back?

Markets continue to be volatile and Europe is still in turmoil. That's the backdrop for this week's Jarvis Update. Hello friends, I'm your host Brian Dress, Director of Research here at LeftBrain, joined with our, as always, by our CEO Nolan Langford. Nolan, welcome to the program.

Thank you, Brian. It's great to be on.

And Nolan, before we get started on our 3 topics, a few announcements. First of all, as always, we have the Jarvis newsletter. The Jarvis newsletter is our weekly summary of our thoughts on the markets and what we think investors should be watching. And then secondly, we have the Left Brain Investment Research subscription service. Subscribers to the service receive 8 to 10 long-form reports, the type of reports that we use to make investment decisions in-house. And since markets are volatile this week, we want to extend a limited time offer to new subscribers for a basic subscription at $99 if you sign up in the next 7 days. Click the description below for the coupon code to receive your discount. All right, Nolan, plenty to talk about this week. S&P was up about a fraction of a percent for the week. The growth-heavy Nasdaq down about a fraction, um, especially after a tough Thursday session. We got a lot to talk about. The war in Ukraine continues to rage on. We had another set of earnings reports. We still see quite a bit of fear in the markets. The VIX closing Thursday above 30, so obviously pretty high even though it's down on the week. And we also had Federal Reserve Chair Jay Powell testifying this week in front of Congress, and we saw the 10-year note drop quite a bit in rate, all the way down to 1.7. And almost all that was retraced after Jay Powell's testimony, uh, on Wednesday and Thursday. So quite a bit to talk about. Nolan, what are your general thoughts on the market?

So there continues to be a lot of action, a lot of huffing and puffing. And, um, you know, a couple things, uh, stick out to me. First off, we still need to send good energy and good thoughts, uh, to the people on the ground in the Ukraine. It's a very tough situation. Certainly, that's one of the big factors that are moving markets this week. We've got earnings releases that stand out to me. We'll talk about those a little bit later in the show. And the other thing that sticks out to me is just the consumer. These are interesting and tricky times.

There's no doubt about that, Nolan. Let's go straight to our first topic. So our first topic is Ukraine. It's dominating the headlines not only for market participants but, um, the globe just in general. Ukraine in terms of markets really has a lot of impact on commodities more than anything. We've already seen in the first couple of weeks of the conflict, a lot of dislocations building up, some unprecedented economic sanctions against Russia, the aggressor here. Exchange of commodities has been disrupted. Ukraine is one of the biggest producers of wheat, oil, not only in Ukraine, but also in Russia. So obviously those have been impacted by the sanctions and the conflict. And then we've also seen specific companies devastated. A company we follow, EPAM Systems, we'll put that chart up on the screen here, ticker EPAM. They do a lot of work in that part of the world and they were just absolutely devastated this week. I'm going to throw up a couple more charts here. Oil was a big mover, up more than $15 on the WTI commodity. Wheat was limit up 4 times this week. So obviously market participants making big moves. So what are your, what are your takeaways, Nolan, as it regards disruptions that are related to this war?

So there's a few things. One that I'm thinking about is interest rates. You know, we had the Federal Reserve Board meet this week, Jay Powell, and they have to announce a decision on interest rates later this month. One of the forces they're fighting is inflation. As you, and as you were speaking, talking about wheat being limit up and oil, You know, both of those impact inflation in a negative way, and the U.S. consumers, we will start to feel that. We've already seen the impacts of oil and gas prices at the pump. So that's my, my first thought. And I think the question that we're all grappling with is, are these spikes temporary? Are they going to fade when the, when this, this conflict in Ukraine, Russia is over with? Are they going to be more long-lasting? And I think that's what the Fed and investors and everybody else are really trying to scratch their heads on.

Hard to really predict where it's going, but, you know, I think what we're seeing from the commodities markets themselves, obviously a lot of movement and, you know, a lot of, a lot of fear. I want to broaden the discussion a little bit more to commodities. This is a story we've been talking about for, I feel like, about a year now. Inflation is something you hear out there in the news. But let's drill down a little more specifically. You know, oil has been, has been really rocketing. And I would put up a chart here of the rig count. This is the number of rigs that are in the ground in the US at any given moment over, over the last few decades. Just to give you a sense of how much oil drilling is going on. Reality is, is it a lot less drilling than there has been in the past? There's not much capacity to make up for some of the production loss that we're going to have from Russia being sanctioned. We're seeing that also in some other markets like copper and a number of other metals markets. So tell us, Nolan, how does that all play into your thinking on commodities?

You know, I think for the individual investor who are listening, uh, to this broadcast, and for the advisor who's actually placing those investment dollars in portfolios, I think they need to start thinking about what portfolio moves or investment decisions should I make given this current situation. And, um, that's the first thing. The other thing, like you mentioned, we've been talking about this, um, oil backdrop for months. It seems like it's been almost a year. Certainly it's been since last summer. And this latest conflict never came into our analysis. And we thought at that time we were underinvested as a country in oil. We had cut back a lot. Spare capacity had really been taken out, and that we were really set up for some sort of squeeze or some higher energy prices. That had— that was before Ukraine and Russia even came into our thinking. And it's not just oil, it's other commodities the same way. Fertilizers, potash, the chemicals business. There's a lot of businesses that sort of— copper is in that, that, that same vein. So we've been set up for a while for some sort of price spike, and especially when you add in the fact that we were coming out of COVID and all those factories are back online and people back at work. And, um, you know, this was a catalyst that, uh, maybe we didn't need because of inflation.

Completely agree, Nolan. I'm going to put up a chart here Just showing you kind of a commodity, all commodity index. And what I want you to draw from this is kind of how, how things have been priced over the last 5 years. What we've noticed is commodity prices have been low and people who run commodity sort of businesses have been really disciplined in terms of investing in their business. And what that's really turned into is, is a lack of capacity, not only in oil, copper and a lot of the other markets that Nolan mentioned, So that's creating a lot of fuel for this fire that we see going on right now and something we have to keep an eye on, but it's not going to be sorted out anytime soon. It's going to take a lot of time. So with that, we'll move to the second topic. So topic 2 is earnings flops. Nolan, we're, I think, in the 4th or 5th week of earnings season, kind of tailing toward the end here, and we've seen a lot of these growth businesses do pretty poorly and been punished absolutely severely. One is Zoom, ZM. This has really had a hard time over the last year. Veeva Systems, a life science operator in the software space. Sea Limited, this is a stock that did really well in 2020 especially. And then the fourth one is Snowflake. This was on Wednesday night, absolutely brutal reaction to these earnings. Um, so Nolan, do you want to comment on any of those 4, or are there any others that stick out for you in terms of flops?

The big ones from this week, you've nailed. If we go back 4 to 5 weeks, that list would be very, very long. And it's like we were talking about earlier today in our investment discussions, these growth stocks that come out and, uh, they report good numbers, have a beaten raise, the reaction tends to be very muted. Or when they do spike, you see in the next few days they give a lot back. One of the names that sticks out for me this week is Salesforce.com. I think most of the people listening to this show probably use Salesforce in one form or fashion. They're a member of the Dow, and they put up great numbers in the regular season open. It closed down on the, on the day yesterday. And so that just tells you the environment that we're in. The bar is very, very high for growth stocks, particularly ones that trade expensively. And we just seen further confirmation of that this week.

We've had a number of these reports. We've seen a lot over the last month or so. So for hypergrowth stocks, a lot of them are down 50, 60, 70, 80%. Is that an opportunity, Nolan, or are they still a stay away from your point of view?

I think it's very dangerous. You know, I know again, for the investors watching this broadcast, You know, you're always looking for something that fell a lot where you can sort of make it back quickly. And I think this environment, it's still going to be tough for those sort of businesses to work. Evidence of that is if we look at the companies that didn't flop, that earnings reports were well received, it's a different category of business entirely. Investors are prioritizing different characteristics. With investments these days is not future growth or promises of world domination in the future. Investors today are, um, they're really praising relative valuations, high cash flow generation today, dividend payouts, stock buybacks, because they have cash today. So, uh, there's been a huge rotation in what's favored in the market. How long that'll last, I don't know, um, but it seems to be that there's this trend along with interest rates, that now we're in this environment where we're not going back 2 or 3 decades where interest rates are, um, going lower. At the very least, we've seen the floor on rates, and we're just debating about how quickly they're going to be raised. And so I think that may be a warning shot that we may be in this environment for some time. It may just be getting started. It doesn't mean those growth stocks won't ever work. It's just the bar is higher. and you have to be exceptional, and those valuations will have to come down to something more reasonable.

And we're gonna segue right to topic 3. So topic 3 this week is, is the consumer all right? Some good news from earnings season. A lot of it came from the consumer side of things. Um, we saw beats and positive reactions this week from a number of businesses. The first was Target, TGT. We also saw a lot of strength from Dollar Tree, which reported this week, DLTR. Nordstrom did well, JWN, and then Thursday morning, Best Buy, BBY, really positive reaction there on Thursday's session. We'll just throw up a general chart of XLY. That's the Consumer Discretionary Index ETF. It's been weak since the beginning of the year, kind of against what we think it should be. It's been leaving us scratching our heads. We're going to zoom in and we'll show you a chart from just the last 2 weeks. And what we see on XLY is things seem to be changing in the consumer discretionary segment of the market. So, Nolan, having had a chance to take a look at some of these earnings reports from the consumer side of things, you know, is the consumer looking healthy like we think, or has the market been right in the first couple of months this year and things look bad for the consumer going forward for '22?

I'm going to say for the consumers, it's still mixed. We have seen some really positive earnings reports. A couple that, um, that you mentioned, um, stick out to me. There's a couple other ones I'm going to mention in a second. And part of what we were thinking— interest rates are going up, so mortgage payments may be going up, housing may be less affordable. We know prices at the pump— we have to fill up a couple times a week— those prices are, are going higher. Amazon Prime raised their annual costs, Netflix raised their annual costs. And just with the headlines, when the consumer turns on the news and hear about the war, you'd worry that the stock prices were maybe signaling the consumer's going to start pulling back. The stock started to sell off, but we started to get some earnings reports this week that were sort of a tell. Um, but interestingly, the businesses that really impressed us, um, we still don't have an answer, um, because the market could be reporting, um, uh, pointing toward tougher times ahead. So So for example, Kroger reported this morning, which is a consumer staple, largest grocery store in the country, and the stock was up 10%. You don't generally expect a reaction like that from a state food store. The same thing with Dollar Tree. Dollar Tree is hitting a new 52-week high, and it's the same thing. Those businesses are going to do well even in tougher economic environments. And I'm reminded a couple of weeks ago, Kraft Heinz. Same thing, the stock broke out after they reported earnings. So yes, it's good to see the consumer sector doing well, but remember, the XLY, the biggest constituent is Amazon, and those shares are still not performing very well. So still very much a mixed picture.

Excellent, Nolan. I, I continue to bang the table that I think the consumer is doing a lot better than the market. Seems to be thinking, but, you know, that's what makes the market. So that's the third topic. So thanks, everybody, for joining us. As always, thanks a lot. I want to ask you to like, share, and subscribe. Hit the bell for notifications so you know when the next video comes out. And thanks, Noland.

Have a good weekend.