What We Don’t Know About The Stock Market
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What We Don’t Know About The Stock Market

Meta’s down, Amazon’s up, and there are four big questions for investors.

By James Mackintosh
Mon, Feb 7, 2022 10:22amGrey Clock 3 min

Extraordinary moves in Big Tech stocks in response to small changes in their earnings show what a wacky market we’re in. Uncertainty about the future of the economy in general and the tech sector in particular are extremely high. In short, nobody knows anything.

The biggest moves in terms of dollar value were in Meta (Facebook-as-was on Thursday lost the most market value in a day of any U.S. company ever) and Amazon (which had the biggest market-value gain of any U.S. company ever on Friday). The uncertainty is deep, but there are common threads tying their moves into other hefty price swings in this earnings season.

Meta, Amazon, Snap, Paypal, Netflix and Spotify were among those having outsize moves in part because they have premium valuations based on expectations of long-term growth. Relatively small changes in the market’s best guess of that rate of growth have very large impacts on their value today, because so much of their earnings potential lies far in the future.

But the scale of the moves is also large because investors are wrestling with major unknowns, any one of which could hit stocks hard. Here are the four most important:

Will inflation hammer profit margins?

Companies are faced with soaring input costs, with producer prices rising even faster than consumer inflation, itself the highest year-over-year rate since 1982. Investors are closely focused on which businesses have the power to raise prices to offset higher costs. On Friday Clorox stock plunged 14%, the worst in the S&P 500, in large part because it warned about rising costs. Amazon was up 14% in part because its planned increase in the price of a Prime subscription reassured investors that it can offset soaring delivery and labour costs.

Will Covid-era gains fade?

Lockdowns accelerated the switch to many online services, but some will prove temporary. No one wants to be like Peloton Interactive, whose home cycling workout has proved tougher to sell when customers have the choice of outdoor exercise, and whose stock has lost three-quarters of its value since its peak a year ago. Some of the reason for Netflix’s big fall after its earnings was because it turns out people prefer real life to home movies; similarly, Clorox disinfectant sales have fallen back, and PayPal growth has slowed.

Will Big Tech eat itself?

One of the most attractive features of the leading online platform companies is the defensive benefit they get from being big, what are known as “network effects.” People use Facebook because other people use Facebook, so everyone has to use Facebook. Except, not so much. Meta stock tumbled 26% on Thursday primarily because TikTok is beating it in the competition for young eyeballs. Amazon and Apple made Meta’s situation worse, Amazon because it is snaffling advertising dollars at a rapid rate, Apple by changing privacy settings, something Facebook has struggled with.

Competition has already hit several other tech themes. Netflix has to spend heavily to maintain its position because of the streaming wars with services from Amazon, Disney, Comcast and others. Uber Technologies got an early lead in online taxi services, but it turned out to be an easy model to copy and many other services sprang up around the world, competing both for customers and drivers. The pattern is a standard one in tech: Microsoft has long since lost its virtual monopoly in operating systems and word-processing software, while IBM’s dominance of PC hardware is ancient history.

The battlegrounds of the future are cloud computing and self-driving cars, and the competition is keen. So far there’s no sign of a slowdown in the cash milked from the cloud by Amazon, Microsoft and to a lesser extent Alphabet, but all are investing heavily, and it might become competitive in time.

True self-driving cars aren’t for sale yet, but Alphabet, Apple and Tesla are all spending heavily on development and, in the case of Alphabet’s Waymo, some limited services. Amazon and Intel have bought in to the area, and a bunch of traditional carmakers have made progress, too. Whoever cracks it first might get a big lead, and would deserve a big valuation, but competition, as well as regulation, would surely follow.

Will bond yields carry on up?

Growth companies are highly sensitive to bond yields, because so much of their lifetime profits lie further in the future than cheaper businesses. Bond yields jumped again on Friday on the back of a strong jobs report, taking the 10-year Treasury yield up to where it started 2020 for the first time since then. If the economy stays strong and yields keep rising, it will be a headwind for the big growth stocks.

Change the answers to any of these questions and it justifies a big move—down in most cases—in the price of exposed stocks. The number of big price swings so far in this earnings season might be because coming out of the pandemic creates turning points in all these issues at once. But a question that nags at me is whether the unstable prices point to a deeper problem that could lead to much broader market troubles. Like everyone else, though, I don’t know.

Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: February, 7, 2022.



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Cocoa and Coffee Prices Have Surged. Climate Change Will Only Take Them Higher.

Some chocolatiers and coffee makers say they will have to pass on the extra cost to consumers

By JOSEPH HOPPE
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Global prices for cocoa and coffee are surging as severe weather events hamper production in key regions, raising questions from farm to table over the long-term damage climate change could have on soft commodities.

Cultivating cocoa and coffee requires very specific temperature, water and soil conditions. Now, more frequent heat waves, heavy rainfalls and droughts are damaging harvests and crippling supplies amid ever growing demand from customers worldwide.

“Adverse weather conditions, mostly in the Southern Hemisphere, have played an important role in sending several food commodities sharply higher,” said Ole Hansen , head of commodity strategy at Saxo Bank.

The spikes in prices are a threat to coffee and chocolate makers across the globe.

Swiss consumer-goods giant Nestlé was able to pass only a fraction of the cocoa price increase to customers last year, and it may need to adjust pricing in the future due to persistently high prices, a spokesperson said.

Italian coffee maker Lavazza reported revenue of more than $3 billion for last year, but said profitability was hit by soaring coffee bean prices, particularly for green and Robusta coffee, and its decision to limit price increases.

Likewise, chocolatier Chocoladefabriken Lindt & Spruengli said in its 2023 results that weather and climate conditions played a major role in the global shortage of cocoa beans that led to historically high prices. The company had to lift the sales prices of its products and said it would need to further raise them this year and next if cocoa prices remain at current levels.

Hershey ’s chief executive, Michele Buck , said in February that historic cocoa prices are expected to limit earnings growth this year, and that the company plans to use “every tool in its toolbox,” including price hikes, to manage the impact on business.

In West Africa, where about 70% of global cocoa is produced, powerhouses Ivory Coast and Ghana are facing catastrophic harvests this season as El Niño—the pattern of above-average sea surface temperatures—led to unseasonal heavy rainfalls followed by strong heat waves.

Extreme heat has weakened cocoa trees already damaged from heavy rainfall at the end of last year, according to Morningstar DBRS’s Aarti Magan and Moritz Steinbauer. The rain also worsened road conditions, disrupting cocoa bean deliveries to export ports.

The International Cocoa Organization—a global body composed of cocoa producing and consuming member countries—said in its latest monthly report that it expects the global supply deficit to widen to 374,000 metric tons in the 2023-24 season, from 74,000 tons last season. Global cocoa supply is anticipated to decline by almost 11% to 4.449 million tons when compared with 2022-23.

“Significant declines in production are expected from the top producing countries as they are envisaged to feel the detrimental effect of unfavorable weather conditions and diseases,” the organization said.

While the effects of climate change are severe, other serious structural issues are also hitting West African cocoa production in the short- to medium-term. Illegal mining poses a significant threat to cocoa farms in Ghana, destroying arable land and poisoning water supplies, and the problem is becoming increasingly relevant in the Ivory Coast, according to BMI.

The issues are being magnified by deforestation carried out to increase cocoa production. Since 1950, Ivory Coast has lost around 90% of its forests, while Ghana has lost around 65% over the same period. This has driven farmers to areas less suited to cocoa cultivation like grasslands, increasing the amount of labor required and bringing further downside risks to the harvest, the research firm said.

The Ivory Coast’s cocoa mid-crop harvest—which officially starts in April and runs until September—is expected to fall to 400,000-500,000 tons from 600,000-620,000 tons last year, with weather expected to play a crucial role in shaping the market balance for the season, ING analysts said, citing estimates from the country’s cocoa regulator. Ghana’s cocoa board also forecasts a slump in the harvest for this season to as low as 422,500 tons, the poorest in more than 20 years, according to BMI.

Neither regulator responded to a request for comment.

Meanwhile, extreme droughts in Southeast Asia—particularly in Vietnam and Indonesia—are resulting in lower coffee bean harvests, hurting producers’ output and global exports. Coffee inventories have recovered somewhat in recent weeks but remain low in recent historical terms. Robusta coffee has seen a severe deterioration in export expectations, while Arabica coffee is expected to return to a relatively narrow surplus this year, said Charles Hart, senior commodities analyst at BMI.

The global coffee benchmark prices, London Robusta futures, are up by 15% on-month to $3,825 a ton. Arabica coffee prices have also surged 17% over the last month to $2.16 a pound in lockstep with Robusta—its highest level since October 2022. Cocoa prices have more than tripled on-year over these supply crunch fears, and risen 49% in the last month alone to $10,050 a ton.

“Cocoa trees are particularly sensitive to weather and require very specific conditions to grow, this means that cocoa prices are especially vulnerable to extreme weather events, such as drought and periods of intense heat, as well as the longer-term impact of climate change,” said Lucrezia Cogliati, associate commodities analyst at BMI.

Cogliati said global cocoa consumption is expected to outpace production for the third consecutive season, with intense seasonal West African winds and plant diseases contributing to significant declines.

Consumers hoping for a return to cheaper prices for life’s little luxuries in the midterm may also be in for a bitter surprise.

“There is no sugarcoating it—consumers will ultimately be faced with higher chocolate prices, products that contain less chocolate, and/or shrinking product sizes,” Morningstar’s Magan and Steinbauer said in a report.

“We anticipate consumers could respond by searching widely for promotional discounts, trading down to value-based chocolate and confectionary products from premium products, switching to private-label from branded products and/or reducing volumes altogether.”

The record-breaking rally for cocoa and coffee is likely more than just a flash in the pan, according to Citi analysts, as adverse weather conditions and strong demand trends are likely to support prices in the months ahead. The U.S. bank estimates Arabica coffee futures in a range of $1.88-$2.15 a pound for the current year, but said projections could be lifted if the outlook for 2024-25 tightens further.

At the heart of it all, climate change is set to play a major role, as the impact of extreme weather events could exacerbate the pressure on cocoa and coffee supplies, according to market watchers.

“I don’t expect prices to remain at these levels, but if we continue to see more unusual weather as a result of global warming then we certainly could see more volatility in terms of cocoa yields going forward, which could impact pricing,” said Paul Joules, commodities analyst at Rabobank.

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