The Supply Chain, Your Holiday Season, and Your Portfolio

Ads featuring Santa Claus, snowfall, and Christmas music that air before Halloween usually make me groan... I love the Christmas season as much as most people, but I also love Halloween, pumpkins, apple-picking, and all the things associated with fall. Combine that with the fact that it hit 80 degrees in parts of the Northeast […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Supply Chain, Your Holiday Season, and Your Portfolio By Berna Barshay Ads featuring Santa Claus, snowfall, and Christmas music that air before Halloween usually make me groan... I love the Christmas season as much as most people, but I also love Halloween, pumpkins, apple-picking, and all the things associated with fall. Combine that with the fact that it hit 80 degrees in parts of the Northeast on Saturday, and I agree with the sentiment below... It's too early for Christmas ads!  Source: thefunnybeaver.com But as much as Christmas in October has me shouting "too soon!"... if there were ever a year it was justified to start the Holiday marketing this early, it would be 2021. As consumers have been warned for a couple of months now, don't delay if you have your heart set on a particular item this holiday season! In the past, holiday shopping stragglers seeking all but a handful of the hottest items in electronics, toys, and fashion often found themselves rewarded for waiting until overstocked retailers notched up the discounts once the countdown to Christmas got to the single digits. This year won't be like that. You snooze... you probably are going to lose. The supply chain headlines aren't a conspiracy to get you to pay full price... These problems are very real, and if you ignore them, you might be filling the Christmas stockings with IOUs. This year, logjams in the global supply chain combined with labor shortages and a robust consumer could lead to increasingly bare shelves as we move through the season. Most people have probably heard that there is a traffic jam of container ships at the ports, but the problems go a lot deeper than that... No picture represents the supply chain crisis of 2021 better than the ones of dozens of container ships parked off the coast of California, waiting their turn at the ports of Long Beach and Los Angeles...  Source: CNBC Forty percent of finished goods entering the U.S. do so through one of these two ports, so the impact of the backup is broadly felt. To address this issue, the White House last week asked these ports to move to a 24/7 schedule, and port operators and the longshoremen's union have complied. This is good news for addressing the clog at the ports, which is certainly a big part of the supply chain problem. But unfortunately, ports are only the tip of the iceberg. To understand all the issues happening with getting goods to store shelves and e-commerce fulfillment centers, it helps to back up and think about all the steps in the supply chain... With manufacturing so globalized, not only do finished goods have to travel long distances, sometimes parts or raw materials do as well... So shipping delays can cause slowdowns at all points in the supply chain, not just at the end. If a complicated product requires 100 parts to be made, having 99 on hand won't be good enough... The supply chain is only as strong as its weakest link. Shortages in the semiconductors that go into consumer electronics and automobiles have been covered in the media. But there are also shortages in the petrochemicals that make their way into plastics, which go into consumer goods ranging from electronics to toys to furniture to sporting goods, and much more. Even when all the components are in place for a product, it still needs to be transformed into its final form by humans or machines, both of which can be fallible. The coronavirus pandemic has posed a unique challenge for close-quartered manufacturing environments... In fact, some of the first [shortages we really saw as a result of the pandemic were in meat]( as meatpacking plants provide an almost ideal environment for an airborne virus such as the coronavirus to spread. While at this point, the U.S. has largely – but not entirely – managed to dampen the effect of the virus on domestic manufacturing, other countries are not there yet, largely due to lagging vaccine deployment. Vietnam went back into lockdown in late summer and early fall, which greatly disrupted the supply chain for footwear and apparel, among other goods. We recently saw the impact of these shutdowns when [athletic giant Nike (NKE) had to take down its fiscal 2022 revenue guidance]( because of the problems in Vietnam. Ironically, many companies like Nike moved production over the past five years from China to Vietnam to diversify risk amid escalating trade tensions between the U.S. and Beijing and to bypass rising China-specific tariffs. The move to Vietnam backfired for many – at least in the short term. But things haven't been a bed of roses in China either, where electricity shortages have led to rolling blackouts, interrupting production at many factories... and delaying goods getting loaded onto ships bound for North America. Once goods are finished, getting them onto ships promptly has never been harder... or more expensive. While increases seem to have finally leveled off in the past couple of weeks, container freight prices have officially tripled from a year ago...  Anecdotally, I have heard of retailers and importers paying as much as 5 times or 8 times as much as they did a year ago. But once the goods have landed at an American port and been processed, it's hardly smooth sailing from there. Not only is there a shortage of containers and space on container ships, but there's tightness in the supply side of rail freight lines. There's also a severe shortage of truck drivers, complicating last-mile delivery to retail and e-commerce warehouses. The [much-discussed labor shortage]( isn't only disrupting the availability of trucks. Once goods get to centralized distribution centers, they need to be unpacked and sorted for delivery to individual retail stores or onto the shelves of e-commerce distribution centers. That requires labor at the warehouse for intake and turnaround. And of course, e-commerce warehouses need people to pick and pack orders, while retail stores need people to unload shipments, unpack goods, and get them onto shelves. It's all very labor-intensive, whether it's the moving of stuff across large distances, or even small ones, within a given warehouse site. The White House met last week with big companies in logistics – FedEx (FDX) and UPS (UPS) – as well as large retailers with big warehouse networks like Walmart (WMT), Target (TGT), and Home Depot (HD), seeking ways to smooth out the many bottlenecks in the domestic supply chain. Everyone is working together, and there are ways to seek efficiencies... but there is only so much you can do without getting more people to work more hours. Supply chain-driven shortages are a high-class problem, largely a derivative of a strong economy and consumer... Last Friday, retail sales surprised to the upside, growing 0.8% ex-autos, marking a 15.6% year-over-year rise for the same metric. Despite many stimulus payments rolling off in September, the consumer's propensity to spend was strong, a reflection of a healthy economy, rising wages, and I think a bit of [post-pandemic YOLO]( ("you only live once") when it comes to spending. The strong spending trend has led prognosticators to expect a strong holiday... Consulting firm Bain expects November and December sales to grow 7% collectively... Mastercard Spending Pulse is looking for holiday retail sales to be up 7.4% this year... and consulting and accounting firm Deloitte is even more bullish, seeing holiday retail sales rising 7% to 9%. Strong demand with constrained supply typically means one thing: higher prices. Add in a healthy dose of inflation for raw materials, labor, and transportation, and the sad truth is that the holiday deals will likely not be very deep this year. And the available deals might come earlier... With retailers left wondering if they will be able to restock popular items, the incentive to do discounts dwindles the later it gets in the season. The early pandemic battle for toilet paper and Clorox (CLX) wipes has also left consumers with more of a hoarding instinct generally, which is another argument for shopping early... and for retailers to see how much they can get away with when it comes to reducing promotions. It may be a very different kind of Black Friday this year as a result. --------------------------------------------------------------- Recommended Links: [The U.S. government's biggest boondoggle ever?]( Since 1933, the U.S. government has used the same set of accounting rules. Not only are they outdated, but they often lead to huge discrepancies in earnings reports. That's why one analyst calls it the biggest boondoggle to date. He's built a team of 100 accountants and analysts to fix this data... And he recently found a tiny cyber company set to soar as much as 380% by December 31. [Click here for the details](. --------------------------------------------------------------- [October 20 will change your relationship with money forever]( That day, the man behind 45 recommendations that have gone up 10x will share his biggest investment prediction in a decade. He called the market bottom in 2009 and recommended bitcoin before it skyrocketed 10,000%. To get his first stock recommendation for free, [click here](. --------------------------------------------------------------- We know how these supply chain woes will impact holiday shopping, but what about your portfolio... My colleague Herb Greenberg was talking last week about how the supply chain will become a new variation on "the dog ate my homework" for underperforming retailers and consumer products companies. Companies that are simply underperforming – launching products that are duds or operating stores or websites that consumers just aren't that into, will be blaming it all on the supply chain, with hopes to get a pass this year on any disappointing results. I think Herb is right that there will be some of that, but I am instead focused on companies that will get knocked down too much on an issue that is one-time and transitory. This too shall pass... and some great companies will likely overcorrect on the downside. I wrote about how the supply chain difficulties put Nike's stock on sale, but I was a bit too price-sensitive about getting into the stock. I wanted the low $140s, but it only got to around $145 on its post-earnings sell-off. In the three weeks since then, NKE shares rebounded 9% off those lows. Another stock that got beaten up due to footwear supply chain issues in Vietnam is athletic retailer Foot Locker (FL). Trading at a price to earnings (P/E) ratio of less than 7 times, it seems to me that this is a stock that has overshot the downside from supply chain problems. Taking a longer-term view, holiday season aside, FL shares look like a good buy to me at its current quote of around $47.50 per share. Both NKE and FL shares got whacked on supply-chain concerns, setting up a buying opportunity. More opportunities like these will emerge for long-term investors who can put up with a little short-term volatility. Because of the supply chain woes, you might see better deals in the stock market than at stores this holiday season. In the mailbag, readers react to my acknowledgment – but not necessarily endorsement – of investors' value-fishing in the U.S.-listed shares of Chinese megacap companies... Have you started your holiday shopping yet? What items are on your must-have list for the holidays? Do you think you will spend more or less than prior years, and will you shop more or less online for gifts than in prior years? Share your thoughts in an e-mail to feedback@empirefinancialresearch.com. "I agree wholeheartedly with Warren Buffett when he says, 'Don't bet against America.' Any money you put into emerging markets and/or China is money you don't put into U.S. stocks. I think it's foolish. "I just had this conversation with an advisor at Vanguard, and he says that only buying U.S. stuff like Vanguard's Wellington Fund that I have had for many years is too risky. His alternative is a bunch of indexes plus bonds... and mine returns almost 10% to his 7%. Why switch? Stansberry's Tradestops says it's so low on their risk meter that they wouldn't change if I'm satisfied with the return. What do you think?" – Kenny G. Berna comment: Kenny, it is very possible that your all-U.S. portfolio is outperforming a more geographically diversified one. Investment results vary widely across portfolios. However, most academic studies of asset allocation do point to a quantifiable benefit from allocating a certain percentage of your portfolio to international stocks. Personally, I keep around 20% of my portfolio in international equities, and I actively look out for great stocks that trade outside the U.S. The U.S. outperformance over other developed markets in recent years has heavily derived from the outperformance of Big Tech giants like Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Microsoft (MSFT), and Facebook (FB). In other sectors – like consumer, basic materials, or health care – there have been individual stock winners abroad that measure up to the best of the U.S. I think investors can do fine investing in the U.S. only, but they may be missing out on some great opportunities. Even Buffett – who you are correct has remained almost entirely focused on U.S. securities – has had international investments, including Chinese carmaker BYD (BYDDF), French pharmaceutical company Sanofi (SNY), and Swiss reinsurer Swiss Re (SSREY). "Hi, China's regulatory regime is an unknown at this moment, and as such, I consider Chinese companies un-investable. Having said that, companies such as Alibaba (BABA), Tencent (TCEHY), or Baozun (BZUN) could have significant upsides when the Chinese government shows some leniency. I plan on taking a small gamble, less than 3% of my portfolio through the Hong Kong listings. Or one can just take a position in Prosus NV to get some exposure to Tencent." – Huub Berna comment: I agree that if the government lays off these companies, they have very big upsides. To me, it's unknowable what the government will do... so if you want to play, you should limit risk via position sizing. So you are doing exactly the right thing, in my opinion. I also think it is less risky to own these shares in Hong Kong than in the U.S. – so again, good call. Regards, Berna Barshay October 18, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2021 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](