Invest1 publisher3 min readPublished
Macro Risk Advisors puts an 8-10% price on Wednesday's quarter point
Dean Curnutt's 2018 analogy runs through margins at companies that cannot pass costs on. Traders moved from about 60% odds to almost fully priced on a quarter point in a week, and the S&P fell about 1% while they did it.
The Investor · Invest desk
What happened
- Macro Risk Advisors told clients in a Monday note that it expects an 8% to 10% pullback in the S&P 500 if the Fed starts raising rates this week, with a potential second leg in December.
- Traders have gone from about 60% odds a week ago to almost fully pricing a quarter-point hike from Fed Chairman Kevin Warsh on Wednesday.
- Elevated energy costs and recent inflation data have pushed the 10-year US Treasury yield to its highest level in nearly two decades.
- Costco has raised its 10-quart Kirkland Signature full-synthetic motor oil pack to about $57.99 from a prior range of $30 to $35, and generally limits members to two packs a week.
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Why it matters
- constraint A quarter point does nothing to the crude price and lubricant shortages Costco's supplier costs trace back to, so the cost half of the margin squeeze survives the Fed's response to it.
- contradiction Curnutt's volatility-shock case needs an unpositioned market, and the September tape is equally consistent with a market that hedged the hike in advance.
- decision Selling into this call means deciding what to do about Apple and Alphabet, the two named mega-caps that rose this month while four others fell.
- exposure Operators whose input costs move faster than their menu or shelf prices are the ones the note screens for, and Dave & Buster's showed what failing that test costs in a single session.
The 2018 template Curnutt is working from broke in two. The S&P fell 10% over October and November, then went lower again in December and finished nearly 20% below its September peak [7][8], so the second leg cost roughly as much as the first [21]. He has put 8% to 10% on the first leg this time [1] and left the December number open, saying only that multiple hikes land "into a K-shaped, low-churn economy" [10].
The channel he names is margin. Rate hikes will "compress margins in companies that cannot pass costs through", Curnutt said [3]. Seeking Alpha's Wall Street Breakfast carried an example of both halves of that sentence in the same episode [28]. Costco took its 10-quart Kirkland pack to about $5.80 a quart from $3.00 to $3.50 [23], roughly 78% at the midpoint of the old range [22], and capped members at two packs a week [14]. Seeking Alpha's account puts rising crude and lubricant shortages tied to disruptions in petroleum markets and shipping among the factors [16]. Mobil 1's six-quart pack, also limited, works out at about $7.33 a quart [15][24]. Dave & Buster's went the other way, its shares falling 14% after food, beverage, payroll and pre-opening costs produced an unexpected second-quarter loss [18].
The positioning claim is the weakest link in the note. Odds on a quarter point moved about 40 points in a week [25], and the index is down about 1% across the month while that happened [4]. Seeking Alpha's account of the note does not include a positioning measure.
Concentration is not pointing one way either. Of the eight largest constituents Seeking Alpha names [11], six carry September figures: Broadcom down 6.9%, Nvidia down more than 4%, Amazon and Tesla down 2.4% each, Apple up 5%, Alphabet up 3% [12]. Microsoft and Meta go unquantified [26]. Broadcom to Apple is a spread of 11.9 points inside an index that has moved about 1% [27].
In my view the margin claim will outlive the index number. Crude at $104 and Brent at $108 [17] are not a function of the funds rate, so the cost side of the squeeze holds whether or not the S&P delivers 8% to 10%, and the operators that can reprice and ration, as Costco has, will show it in gross margin before the index shows anything. The call fails if Wednesday's hike is taken as the last one, energy costs ease, and the two mega-caps that are up carry a flat tape into October. It works early if Warsh signals a series, in which case the December leg becomes a dated expectation. Curnutt's instruction to clients in the meantime is explicit: "a defensive posture is the correct approach," he said [9].
What to watch
- Wednesday's FOMC decision, and whether Warsh's statement points beyond a single quarter point; the December leg Curnutt expects depends on that.
- Whether the 10-year Treasury yield holds near its two-decade high after the decision or retreats from it.
- Whether other consumer names follow Costco into higher prices with purchase limits, or follow Dave & Buster's into absorbing the cost.