A cautious session is ahead for Tuesday, following the worst smackdown since June for major indexes.
That’s as an increasing number of investors see the Fed pivoting from rate hikes to be a tall order in the face of stubbornly high inflation and a global growth mess. We’ll find out Friday when Fed Chairman Jerome Powell steps up to the mic at the sumptuous Jackson Lake Lodge in Wyoming on Friday.
Our call of the day from billionaire hedge-fund manager Bill Ackman makes the case that certain U.S. fast-food chains can withstand the heat from inflationary pressures, as detailed in the semiannual letter for the European listed portfolio, Pershing Square Holdings PSH, -1.12% PSH, -0.94%.
While not a traditional hedge fund like Ackman’s Pershing Square, PSH is still managed in that vein. The closed-end fund has whittled a 26% loss at the end of June down to 11% in mid-August.
Cushioning a difficult year has been the portfolio’s heavy exposure to interest rate swaptions, an option on an interest rate swap that bets on higher rates and hedges against global macro risk. Taking to Twitter last month, Ackman said inflation remains the biggest risk to the economy and the Fed must maintain its resolve on higher rates.
As for those company bets, Pershing discussed its stake in Restaurant Brands QSR, +0.48%, owner of Burger King, Tim Hortons and Popeyes. Those chains have seen comparable sales up 20% relative to pre-COVID levels, and QSR stepping up with the cash to “position them for long-term, sustainable growth.”
But the company can keep growing businesses with minimal capital required its franchisees open new units. “QSR’s franchised-based royalty model is particularly attractive in an inflationary environment. QSR’s revenues benefit when its franchisees increase prices, but its cost structure is not subject to the same inflationary pressures,” said Pershing.
And owing to improving same-store sales growth and with strong unit growth, “QSR’s earnings are now greater than prior to COVID and are growing at an attractive rate, in spite of significant industry-level inflation and same-store sales that are just now recovering to pre-COVID levels.”
The other pick is burrito king Chipotle Mexican Grill CMG, +0.04%, which “continued its impressive performance in 2022 driven by the ongoing recovery of in-restaurant sales, price increases to cover cost inflation, and successful menu innovation including pollo asado,” said Pershing.
“We believe Chipotle is one of the best-positioned consumer companies for the current inflationary world,” said the fund, noting that management lifted August menu prices 4% to account for rising food and labor costs, repeating a step taken in March.
“The company has tremendous pricing power due to the superb quality of its food
which is priced at a discount to many competitors with inferior offerings, marketing focused on food quality and freshness rather than cost, and a customer base that over-indexes to higher-income consumers, some of whom are trading down from pricier alternatives,” said Pershing.
As for what isn’t working? Pershing bowed out of its stake in Domino’s Pizza DPZ, -0.53% owing to “relatively high valuation in the context of a volatile market environment.” A victim of its own success, Domino’s “meaningful improvement” has been a driver for shares and valuation — more than 28 times Pershing’s estimate of next 12 months’ earnings.
The markets
Stocks SPX, -0.17% DJIA, -0.49% COMP, +0.03% are modestly higher to start the session, while bond yields TMUBMUSD10Y, 2.998% TMUBMUSD02Y, 3.247% rise, the dollar index DXY, -0.65% is flat, but the euro EURUSD, +0.55% is holding at parity after downbeat Europe PMI data. Oil prices CL.1, +3.85% BRN00, +3.32% are climbing higher and watch U.S. natural-gas futures NG00, +2.33%, which earlier tapped $10 per million British thermal units, a fresh 14-year high.
Read: Beware of a ‘bear trap’ retreat in stocks after the big summer rally, strategists warn
The buzz
Macy’s M, +6.18% shares are higher after earnings top estimates, though the company lowered guidance. U.S.-listed shares of JD.com JD, +2.22% are rising on an earnings beat. Medtronic MDT, -3.53% also delivered an earnings beat. Nordstrom JWN, +4.44% and Urban Outfitters URBN, +2.18% results are still ahead.
Zoom ZM, -14.03% shares are down after the online videoconferencing group cut earnings and revenue guidance. Palo Alto Networks PANW, +10.49% stock is surging on a strong outlook.
Cathie Wood’s flagship ARK ETF sold $49 million in Signify stock SGFY, -0.61% after a 32% surge.
The U.S. manufacturing and services purchasing managers indexes showed the softest growth since the pandemic. New home sales fell to 511,000 in July from 575,000.
The government reportedly retrieved more than 300 classified documents from former President Donald Trump Mar-a-Lago home this year.
Best of the web
Standing between the world and a nuclear calamity are about 100 Ukrainian workers
In drought-stricke California, some of Hollywood’s biggest stars accused of water waste.
Some predict U.K. inflation could rise 19%. Could the U.S. see a similar fate?
Ex-Twitter exec blows the whistle on the company’s cybersecurity
The chart
Bond markets are now leaning toward a 75 basis-point hike at the Fed’s Sept. 21 meeting, and agriculture investors need to pay attention. “This uptick in inflation expectations matters because Index Funds – the WHALES in agriculture markets – track inflation metrics closely. When inflation rises, index funds buy,” Peak Trading Research tells clients in a note.
Peak Trading/Bloomberg data
The tickers
These were the top-searched tickers on MarketWatch as of 6 a.m. Eastern Time:
| Ticker | Security name |
| AMC, -4.21% | AMC Entertainment |
| BBBY, -7.58% | Bed Bath & Beyond |
| TSLA, +1.58% | Tesla |
| APE, +13.17% | AMC Preferred Equity Units |
| GME, -2.14% | GameStop |
| AAPL, -0.32% | Apple |
| GCT, -28.80% | Gigacloud |
| NIO, -2.51% | NIO |
| XPEV, -7.95% | XPeng |
| AMZN, +0.11% | Amazon |
Random reads
When dogs cry.
8-year old stumbles onto prehistoric dinosaur tooth.
Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.