FedEx Slows, Starbucks Cools, Stagflation is Coming

Not that we needed any reminder, but the twin towers of cost inflation and slowing growth are eating away.

FedEx Cuts Forecast

• FedEx (FDX) lowered its earnings projection for the current quarter and fiscal year, citing increased fuel costs and weak freight trends.
• The parcel-shipping giant now sees earnings of $1.45 to $1.55 for the quarter ending Nov. 30, down from its previous forecast of $1.60 to $1.75. Analysts polled by Thomson Financial anticipated earnings of $1.70 a share.
• FedEx had already offered weaker-than-expected projections for the periods in its first-quarter report in September. But the company said Friday that its fuel costs have increased 8%, or $85 million, since that time.
• FedEx, considered a bellwether for the U.S. economy, also said its less-than-truckload freight trends remain weak, despite signs that a decline in industrial production has hit a bottom.

So "government reports" say a decline in industrial production has hit a bottom; but what does a real company which is a bellwether of industry say? Something quite different. Shocker.

"Government reports" say there is little to no inflation - in fact gasoline prices fell in their PPI report... hmm, why so different from what the actual companies are telling us? Laughable. Truly.

Starbucks (SBUX) for the first time reported a negative growth in customers... first time. Ever. And did I mention cost inflation? Cost of milk through the roof.

• The stock is down about 32 percent year to date, reflecting a series of issues from higher dairy prices to increased competition and concerns about the economy that make it harder for customers to shell out cash for the chain's high-priced beverages.
• In a note to clients, Tarantino said the fourth-quarter results make it appear that Starbucks' U.S. business "seems more exposed to internal and external issues than we had factored into our prior thesis."
• Tarantino said the loss of customers may partly reflect a reaction to a price hike in July, put in place to incorporate higher dairy prices, but he noted that other coffee chains have reported stronger trends. "While we have considered Starbucks less sensitive to declines in discretionary spending, we now believe these headwinds may be having a slight impact on demand," he wrote.
• Deutsche Bank analyst Marc Greenberg, who kept a "Hold" rating and $24 price target on the stock, pointed to competition as an issue he didn't see the company addressing strongly enough. "Starbucks is not imagining the bad guys are coming to get them ... they really are," he wrote in a note to clients. He called the traffic decline "a sure sign of competition, a tired consumer and saturation."

Eventually this slowing economy thesis gets priced into the market. What is shocking to me, is everyone is so 'surprised' by it. Again, the kool aid of "Fed will fix everything" was so pervasive in September and October... I was early in my calls that this line of thinking is wrong, but it finally seems to be sinking in to the market that 2008 is going to be a tough economic year for the country. Stagflation is going to be on the lips of many pundits about this time next year. Because the inflation we face now is not due (that much) to the business cycle, but simply a world of shortages.

Disclosure: Long inflation; short US economic growth