The world is a complex network of suppliers, manufacturers, buyers, shippers, and end-users. Even the slightest disruption in the supply chain can have a ripple effect, sometimes for weeks or months. The freezing storm that blasted through the mid-west and south two weeks ago stopping the production of many manufacturers (steel, lumber, petroleum, etc.) due to equipment failure or power outages. Production stopped for several days, and now warnings are being issued stating delays of delivery of more than a month.
Last Friday, US Census Bureau released its Factory Orders report. For the eight consecutive months, new orders for manufactured goods have increased month over month (MoM). In December, orders increased $5.2 billion or 1.1 percent to $493.5 billion.
Econoday reported last week:
“Shipments, also up eight consecutive months, increased $8.4 billion or 1.7 percent to $501.8 billion. This followed a 0.8 percent November increase. Unfilled orders, down nine of the last ten months, decreased $3.0 billion or 0.3 percent to $1,070.8 billion. This followed a virtually unchanged November decrease. The unfilled orders-to-shipments ratio was 6.28, down from 6.40 in November. Inventories, up to four of the last five months, increased $2.1 billion or 0.3 percent to $695.7 billion. This followed a 0.8 percent November increase. The inventories-to-shipments ratio was 1.39, down from 1.41 in November.”
Although it is good news that both orders and shipments have increased eight consecutive months, the recovery of the historic supply chain disruption may still be months away. To put into perspective how disruptive last year's health-mandated shutdowns were, note the chart below of the past 25 years MoM Factory Order changes. Notice that when the volatility of Factory Orders widens more than 10%, the settling of the industry can take years before the MoM changes are less than 2%. For the past 25 years, it appears there is consistently a cycle of major disruptions every 3 to 5 years that takes several months for MoM changes to settle down.
The construction industry is really struggling with supply chain disruptions. Demand for residential housing is in another historic boom, with home prices in some areas jumping 5% to 10% in December and nationally over 73% since January 2012, as illustrated by FRED Economic Data. Builders are trying to keep up with demand, but the lack of materials from lumber to dishwashers is limiting their production.
Lumber and steel are key materials for construction. The freeze shut down lumber mills in which one builder told me today that a plywood mill is 600,000 trucks or almost 3 months behind in delivery. Like lumber mills, steel mills were also shut down last year for Covid and then again due to the freeze. The chart below illustrates last year’s significant disruption of steel production.
It remains to be seen how long it will take for manufacturing to return to pre-covid levels.
What Does This Mean to Me?
We are taught that the basic economics of pricing is the simple relationship between supply to demand. For those that own businesses know that it is a desirable situation to have greater demand than supply. Far more difficult to be sitting on an abundance of inventory and slowing demand. The supply chain disruptions of 2020 are creating terrific buying opportunities that have launched a tidal wave of price changes through the US economy that is also being experienced in certain service sectors as well. As an example, when officials shut down dine-in restaurants, the fast food and takeout industry boomed. We added Chipotle (CMG) on March 27, 2020, to several of our model portfolios at around $639/share. Today CMG closed at $1475/share. As restaurants started opening up in the third quarter, we added Cheesecake Factory (CAKE) on September 25, 2020, to several model portfolios at around $26/share. Our premise was people were tired of eating fast food at home, and families want to get out for the dine-in experience. We were right, and many of the publicly traded dine-in restaurants (BJ Restaurants BJRI, Ruth Crisp, RUTH, Chuy’s CHUY) began to rally along with CAKE. Today CAKE closed at $56.44/share.
We maintain our favorable view on the US economy and stock market. Although many industries are still struggling through this pandemic era, there are many others in robust recoveries with outsized profit growth. As mentioned in our Q1 2021 Video Update, our goal is to monitor the movement of funds and identify the beneficiary industries. It may take years to settle last year’s disruption, and some industries may never recover.
Please write us on your thoughts on this UPdate or if you have any questions about your account. We welcome your feedback or questions.