'Stranguflation' in the U.S. Economy

Includes: CTB, GT, KMB, MAS, MT, PG, SHW
by: Russ Winter

The formula to watch looks like this: Profit = Sales - (input cost + production cost + overhead). If companies want to subsidize consumers by keeping prices down, then profits are squeezed. If they want to offset input costs with offsetting production and overhead costs, then labor (consumers) and capex gets cut. The reality is as follows:

We are getting increasing confirmation about this on the 'stranguflation' watch. And remember that this reflects 3Q input costs, which have since gone parabolic. For instance, Goodyear (NYSE:GT) and Cooper Tires (NYSE:CTB) put through a significant price increase last month. Rubber futures have since surged even higher.

  • Kimberly Clark (NYSE:KMB) came up short on estimates, attributing the short fall to rising input costs. Interestingly the problem is centered around oil-based commodites as much as anything, and that's been a lagging commodity. Analysts are quoted as being uncertain about passing on costs, so chalk it up to profit squeeze. Costs have been an issue, too, in recent months and rose $265 million in the quarter, the highest increase in a quarter the company has ever seen. The rise was primarily from fiber, but also other inputs including polymer resin and oil-based materials.
  • Arcelor Mittal (NYSE:MT), the world's largest steelmaker, wrote the script on stranguflation reporting that demand is rather muted, but input costs are rising. The company is struggling with passing on prices. Verdict here is also profit squeeze.

  • (AP) Previously announced plans to make customers bear some of the costs of higher raw material prices haven't been very successful so far. "We made some attempts to pass on those prices rises," Aditya Mittal said, "but those price rises do not stick."
  • Sherwin Williams (NYSE:SHW) indicated raw material costs impacted 3Q earnings. I think it is important to recognize that these costs have accelerated and worsened since the end of 3Q. In SHW's case, the challenge seemed to be the timing of price increases more so than inability to do so.

  • Procter & Gamble Co.'s (NYSE:PG) fiscal first-quarter earnings dropped 6.8% as higher commodity costs hurt margins, although sales of such key brands as Pantene and Olay climbed globally (WSJ).

  • Masco (NYSE:MAS) is being hammered by weak sales, higher titantium dioxide prices, higher copper prices (plumbing) and higher wood prices, which are impacting the Cabinet business. The company is trying to get some price increases passed on, the results are inconclusive.

  • In the steel sector, it is starting to look like shutdowns are the likely outcome, as input costs are far outstripping prices received [Platts: steel mills closings expected] .

Notice the one common denominator, this stranguflation has little to do with a stronger economy, and in fact is a totally different animal. Far from signalling a strong global economy, the commodity and input goods spike is flashing the alarm of impending global recession.

Meanwhile, as there is no real demand from Joe Ultra Light Sixpack, the space to sell to the "luxury market" is getting crowded and rather bubbly. It is unclear who and how many of these luxury consumers are out there. But if their market has grown, it too is largely a function of the government propping up fictitious capital (FC) game being played. Once FC is popped, the overrated luxury market will evaporate overnight.

Disclosure: No positions