Monday, April 4, 2022

Retail, Freight And Now Semis All On The Verge Of Recession

Retail, Freight And Now Semis All On The Verge Of Recession

One week ago, RH (the stock-buyback/short-squeeze mogul formerly known as Restoration Hardware) reported dismal earnings which sent its stock plunging, but it was the company's earnings call that shocked Wall Street: in a nutshell, the company disclosed that it had seen a sharp deceleration in customer activity over just the last several days, prompting CEO Gary Friedman to give an ominous assessment of the overall macro situation.

While first quarter sales and margin strand to remain healthy due to the ongoing relief of our backlog, we have experienced softening demand in the first quarter that coincided with Russia's invasion of Ukraine in late February and the market volatility that followed. We believe it is prudent to remain conservative until demand trends return to normal and -- we are providing the following outlook for the first quarter of 2022.”

What was remarkable about Friedman's admission is that whereas until now, management commentary had mostly lamented soaring commodity prices and supply-chain weakness, which management had then successfully passed on to consumers, this was a direct admission of tangible weakness in consumer end-demand. What was more ominous is that, unlike the Biden admin, Friedman did not blame the soaring inflation and the sudden bout of economic weakness on Putin. In fact, as the following excerpt from his earnings call commentary revealed, the CEO saw broad-based weakness in virtually every aspect of the economy.

... It's probably one of the most difficult guides since 2008 and '09, because we -- we're right in the middle of this disruption from Ukraine and Russia, which I think -- I don't think it's all Ukraine and Russia. I think it's triggered a greater awareness. It's like someone rang the bell, and everybody paid attention, and then all of a sudden, everybody started talking. All of a sudden, the Fed's off to the races and that creates concern. You've got housing prices at all-time highs. I mean, is it sustainable? I don't know for how long; doesn't make sense on what's happening in the housing sector and other places. And you've got inflation like I've never seen.

Now I was telling people, when Yellen said, we're going back to 2%, we were just signing our new freight contracts, ocean freight contracts. I just wonder if the Fed has picked up the phone and called a business person and said, hi, what do you think is happening with inflation? How is ocean rates? How is this? How is that?

I mean I don't think anybody really understands what's coming from an inflation point of view, because either businesses are going to make a lot less money or they're going to raise their prices. And I don't think anybody really understands how high prices are going to go everywhere. In restaurants, in cars and everything. And I think it's going to outrun the consumer. And I think we're going to be in some tricky space. So everything is kind of happening at once. And I think you got to prepare for war. I mean if you're going into a very difficult, unpredictable time, you just got to be super flexible, you've got to be able to improvise, adapt, overcome and kind of be ready for anything.

And I don't mean that by playing defense. I mean it's by playing offense, but it's -- I wouldn't call it happy days right now. I'd call it pensive days. Be ready. And when we play like that, we usually have our best outcome. When we get overly optimistic, we have a higher likelihood to wind up in the ditch and get ahead of ourselves. So -- but if everything, if the war in Ukraine ends and inflation slows down some miraculous way, I don't know, everybody can sign new freight contracts because, I mean, most of the world all signed new freight contracts. Two years ago, price of the container for us went from 2,400 to 4,800? I'm not going to tell you what it just went to. But just let's say that looked like a nice increase.

So either people are going to do stupid things like take quality down to make their goods look like it's better value or they're going to have to take prices up and where they won't take prices up and they'll hurt -- their margin profile is going to change. But it's not just us, it's everybody I know in every industry. And I just don't think it's like -- again, I don't want to scare everybody. But I talk about them, like there's the scene in The Big Short, where everybody is in that ballroom and the guy from Bear Stearns or someone is up there, and he's saying how they are going to buy back $1 billion of their stock, and then one guy on his BlackBerry, goes, can I ask the question, sir? In the 20 minutes that you've been talking, your stock is down like 55%. And everybody ran out of the room.

The call, which took place after the close on Wednesday, sent RH stock crashing and unleashed a pall over the broader retail sector. However, the recession blues quickly spread just 48 hours later when Craig Fuller, the CEO of Freight Waves, a supply-chain logistics expert and hardly the hyperbolic type, warned that a "freight recession is imminent", commentary which sent the transports index plummeting on Friday and which continued to depress the space on Monday as well. 

... I wish the answers were different. I would prefer to say the U.S. trucking market was robust and the expansion will continue throughout 2022. But I can’t. Since I wrote the piece about the bloodbath, FreightWaves SONAR’s tender data continues to reinforce the perspective of a declining freight market.  

Tender rejections are the best indicator into real-time supply/demand in the truckload sector. The data comes from actual electronic load requests – “tenders” in the truckload contract market.

A high rejection rate means that trucking companies have more options to choose from. A low rejection rate means carriers have fewer options in freight to pick from. Since this measures actual load activity and not load board posts or searches, it tells us what the market is actually doing.

And since it measures the willingness of carriers that are contracted to accept or to reject a load they have a contracted rate for, if the rejection rate declines, it suggests capacity is loosening.

And so, the yield curve inverts and we immediately get management chatter about recession hitting retail and freight (i.e., transports), two of the most critical sectors propping up the US economy. Well, we can now add the beating heart of the tech sector - semiconductors - to the list too.

Last week, the chairman of Taiwan Semiconductor said that consumer electronics demand is showing signs of slowing amid geopolitical uncertainties and COVID-related lockdowns in China,  The slowdown is emerging in areas "such as smartphones, PCs, and TVs, especially in China, the biggest consumer market," TSMC Chairman Mark Liu said.

Liu also warned that the cost of components and materials are rising sharply, pushing up production costs for tech and chip companies.

"Such pressure could eventually be passed on to consumers," Liu said on the sidelines of an industry event where he was speaking in his capacity as chair of the Taiwan Semiconductor Industry Association.

When TSMC speaks, or worse warns, everyone pays attention: a key Apple supplier, TSMC is the world's biggest contract chipmaker and a barometer of global electronics demand. Taiwan's semiconductor industry is the world's second-largest chip economy by revenue, behind only the U.S.

"Everyone in the industry is worried about rising costs across the overall supply chain... The semiconductor industry already and directly experienced that cost increase," Liu said, adding that the industry is also concerned about macroeconomic uncertainties this year.

And yet, despite the dire warning of slowing end-demand, TSMC - like so many of its peers - refused to accept what the new reality means for its top line, and instead has chosen to assume that the chip fab giant can just keep passing on all the soaring costs to a consumer that has already been tapped out: Liu said that TSMC is not likely to change its growth target and capital expenditure this year.

"Despite the slowdown in some areas, we still see robust demand in automotive applications and high-performance computing as well as internet of things-related devices," he said. "We still cannot meet our customers' demand with our current capacity. We will reorganize and prioritize orders for those areas that still see healthy demand." At least until those areas fall into the pre-recessionary void too.

Why does all of this matter? Because with stocks still just shy of all time highs - following the recent torrid rally - we get retail, freight and semis all issuing very loud, and very troubling warnings that what is dead ahead is something, in the parlance of the RH CEO, straight our of The Big Short, a movie which we are confident he picked for obvious reasons. More importantly, it all happens within hours of the 2s10s yield curve inverting...

... which is also why Wall Street has spent so much in the past few days trying to convince anyone who still bothers to listen that a recession is not imminent... why would be lovely, if the companies themselves weren't telling us otherwise.


Tyler Durden Mon, 04/04/2022 - 20:40