Yes - Supply Chain Issues Will Impact the Holidays
All over the news we've heard about "supply chain issues" or "bottlenecks" - let's talk through exactly what that means as well as how to trade this phenomena.
As you’ve probably seen in the news…
… the supply chain crisis is very real. Let’s talk about it!
As always, if you want to receive updates on livestreams, events, giveaways, or general market activity - text me! Send “substack” to 615-802-9495. I promise I only text a few times a week and it’s completely free.
In this post, we’ll cover:
What’s going on with the global supply chain
Forecasts for the holidays and beyond
How to trade it
⛓️ Global Supply Chain Issue Highlights:
This is a complex situation with a lot of different angles. Let’s start out with some critical (and frankly, sad) statistics.
1) After one year into the pandemic, roughly 800,000 US establishments permanently closed. About 264,000 (33%) of these permanent closures were projected to have been units of major companies, such as Target or Starbucks, which closed some locations but of course remained in business.
800,000 establishments that no longer are taking purchase orders or seeking out goods. 800,000 establishments that are no longer driving activity for both domestic and foreign factories. Not good.
2) E-commerce activity is steadily trending upward…
…while total employment for truck transportation employees has not been trending as well in correlation.
This is significant because e-commerce creates the need for tens of thousands (if not hundreds of thousands) of new transportation workers to fulfill demand in the US. There may not be a worse time in history for there to be anything but a surplus of workers that are willing and able to transport goods.
3) Speaking of demand, rising US retail sales have put business leaders in a difficult situation regarding supply chain management. It’s obvious where the “Covid crash” is on the chart below, but it’s important to think about how impactful the following months after that were for global manufacturing. We transitioned from the highest ever retail sales decrease to the highest ever retail sales increase in a matter of weeks. To call this a supply chain shock would be an understatement, and it’s certainly catching up to us now.
4) According to Freightos, it took an average of 40 days to get a product from China to our shelves in the US as of September 2019. Fast forward to September 2021, and that time period was over 73 days - an increase of nearly +83% in just two years.
The Freightos Baltic Index (FBX) is a thorough measure of the average cost for standard shipping containers, considering origin, destination and other factors. As of mid-October 2020, the world’s largest freight rate index marked the average container rate at $2,232. On the same day in 2021, the average price was $10,396 - an increase of nearly +366% in 365 days.
5) As mentioned in last week’s Social Media Spotlight post, Business Insider recently reported that nearly half a million 20-foot shipping containers (about 12 million metric tons of goods) are stuck, waiting to be unloaded.
Source: Tim Rue/Bloomberg/Getty Images
🎅🏻 Forecast for the holidays
Now’s the time to answer the question that everyone’s been asking - is this going to ruin the holidays? I’m not the one to give a perfect answer to that question, but I’d say it’s not looking very jolly, nor bright.
According to a recent Wall Street Journal Economic Forecasting Survey, most economists expect it will take until Q2’22 or later for supply-chain slowdowns to recede.
At the same time, economists have also sharply increased their inflation forecasts - with supply-chain bottlenecks being both a cause and an effect of inflation.
Lastly, the US Balance of Trade (BOT) continues to rise. According to the US Census Bureau’s most recent economic release, imports grew at nearly 3x the pace of exports from July to August. We can save the macroeconomic discussion on US trade deficit for another time, but the fact of the matter is that the trade deficit widening means supply chains will continue to be tested.
So yes… I find it very reasonable to be concerned about the holidays. This is not a call for panic, but a reality check that if you typically wait until Christmas Eve to buy your loved one(s) something special - this may be the year to break that trend.
Given this disastrous situation and no end in sight, there’s no perfect answer. It would be nice, however, to hear a little bit more direction out of the US Secretary of Transportation:
In short - get those holiday gifts and consider referring one of your buddies to become a transportation worker. I’m betting there will be some killer wage increases for workers in this space.
📊 How to Trade It
Speaking of “betting” …
I’ve mentioned Kalshi as a platform to leverage when wanting pure exposure to the outcomes of specific real-world events vs. the publicly traded companies those events might impact.
For example, if we know jet fuel prices are hitting all-time lows and the weather is going to be amazing for the coming 6 months - it might be a decent trade idea to purchase stock in airline companies. Considering those two factors heavily influence their profitability on a quarterly basis, this could lead to profits impacting their stock in a positive way.
But, through Kalshi we can make specific trades on jet fuel prices or weather - directly profiting from the inputs vs. speculating on the companies who might profit from their outcomes.
Kalshi has a market for the number of ships to be anchored at the Port of Los Angeles this week - which is a trade directly related to this entire post. Really cool!
Again, this isn’t investing by any means, but instead betting on an outcome. Beyond the literal bet being made, it’s also fun to go to this website to see what the odds are of something happening. It’s the first federally regulated exchange of this nature, so I view it as very legit.
For example, by the way this specific one port contract is trading, there seems to be a 97% chance that there will be more ships anchored at the Port of LA this week than last week. Interesting, real time information.
The other way to trade this supply chain mishap is through individual stocks - specifically those of which who might not be as negatively impacted as others.
In this post, I detailed the Levi Strauss (LEVI) earnings call - specifically their increased margins amid pressure on commodities like cotton around the world.
Get this - the company is sourcing products across 24 different countries with no single country representing more than 20% of their sourced inventory. Vietnam, a popular location for clothing companies, only represents 4% of their products sourced. This is a really good thing considering Vietnam is still only at 50% capacity given COVID and this reality is negatively impacting a lot of other clothing companies.
As it relates to the shipping side of their supply chain, they’re leveraging air freight and shipping the vast majority of their products through East Coast ports - while also having locked in 70% of their ocean freight costs through the summer of 2022.
Talk about predictability and having a solid understanding of costs going forward!
Wall Street’s average price target represents +41% upside ($36 / share) and I really like what I’m seeing given predictable costs. I’m going to keep a close eye on this one.
Wall Street is optimistic about their efforts and I’m sure will begin putting premiums on other company’s stocks if they mention positive supply chain changes in their earnings calls.
Remember, it’s Q3 earnings season for the next month plus - so every company shipping a product will be asked about their supply chain.
Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
Cover Image Source: Jae C. Hong | AP