Provocative title, but it’s true. Public pensions are on average only about 72% funded, ranging from Connecticut at just 52% to South Dakota and Washington DC fully funded. This wasn’t always the case; in fact, back in 2001, the average public pension in the US was fully funded. However, a combination of (1) constant increases in raise benefits (liabilities have grown from about $2 trillion in 2001 to about $5.3 trillion), (2) the untenability of cutting benefits or raising taxes and (3) aggressive assumptions over 7-8% consistent asset returns in a period that encompassed the Financial Crisis. Sure, there have still been returns, but not enough to cover that liability increase. Harvard has a nice piece drilling into this.
As a result, we’ve reached the point, where the average American owes $4,400 in debt due to underfunded pensions (sorry Illinois residents, you actually owe $10,500 on average). It’s possible half of states have pensions they cannot cover. Unless those pensions are nullified (which is not possible in some states where its protected by the state constitution), this debt will inevitably have to be paid (via higher taxes). Several states face extreme budget scenarios.
And in the meantime, this is just one of many risks facing the market that has shrugged off a complete global economic collapse and inflated multiples higher than ever before. There are massive underlying issues like possible widespread municipal financial conditions that are likely to be exposed with the current economic climate. When they surface, these issues could impac the market. So again, I point you to the original piece cautioning on being invested in this market.
The states with the biggest problems are Illinois, Connecticut, Pennsylvania, Kentucky, New Jersey, Rhode Island, Hawaii, South Carolina and Massachusetts. We’ll go through some state level data below. If you are due a public pension as a state employee, you can review your specific pension plan’s underfunded status here. If you have a private pension, you should be able to inquire and find the funded status of the pension (discussed below) and the annual required contributions they need to cover the hole. Many of the private pensions also assume aggressive rates of return. Comment below if need help.
Below I show the evolution of funding over time so you can see how bad it has gotten, along with some state-level summary data.Note: We are being conservative here despite the shock factor. Assets are likely already down double digits in many states, and revenue has likely fallen further – we’re showing 2018 data.
This is a simple calculation of a plan’s assets versus its liabilities. For example, if a plan has about $66bn in liabilities (benefits it must pay), but only $33bn of assets, it’s only about 50% funded. That’s actually a real example of Connecticut. For the US as a whole it’s 72%.
Any liability not covered by assets (uncovered liability) is basically debt that will have to be borne by taxpayers. In this Connecticut example, there’s a $33bn shortfall. They have about 3.5mn residents, so the average person in that state owes about $9,000. Notice the increase since 2001 for the US as whole (some states like Connecticut and Illinois look far worse).
Annual Required Contributions
This is a benchmark/industry term used when evaluating pension plans and refers to the amount of money a plan would need to contribute to cover the benefits it must pay out in a given years as well as to close the underfunded amount within 30 years. We take this relative to payrolls, and you can see it has climbed to almost 20% of payrolls from 5% in 2001. Again, this highlights the reluctance to step in front of a problem politically and to stop growing benefits (along with overly optimistic hopes of covering the gap with an equity market boom).
We show the funding ratio and the Annual Required Contributions and categorize states into bad, medium, seems ok. The bubble size represents the size of the plan in dollars.
So take stock; I think there are massive underlying, systemic issues just like the housing crisis that have not yet manifested. The market is assuming the Fed just smooths us past a bump. But if underlying issues are exposed, it cannot be undone. Do not be fooled by the market and look to it for comfort because it is a feckless child.
We’re going to get a little morbid here. For people nearing retirement age, they often evaluate whether to take their social security benefits early, on time or late. If they take them early, the benefit is they receive them early; the downside is they are permanently reduced by a factor set by the Social Security Administration (SSA). For those deferring retirement beyond the standard retirement age (currently 67 for those born after 1960), they get the benefits later, but they are permanently higher. So it really matters when you’re going to die when determining what’s the right choice.
Of course, the SSA knows this. And they backsolve the discounts for early retirement and bumps for deferred retirement based on your expected death date. But the SSA can’t very well discriminate by different categories, and for example, assume a death age that is different for males versus females.
For example, if you were born after 1960, your “full retirement” age designated by the SSA is 67 years old. If you take retirement early (late), there is a formula to discount (increase) your retirement benefits. If you retire at age 62, you’d get a 30% reduction in your benefits. Therefore, suppose you were due $1,000/month under full retirement age; then you’d only be getting $700/month. The benefit is you got the $700/month for 5 years (60 months) more than you would otherwise; that’s $42,000. The downside is you have permanently given up that $300/month. We can take this math and derive that if you died before age 78 years and 8 months, you’d be better off (you got a $42,000 benefit spread out over 5 years versus lost $3,600/yr for 11 years 8 months, which is also $42,000).
What you know
So the SSA is using that one assumed death date when deriving the discounts/bumps for early/deferred retirement, and they cannot take into account your gender, health, smoking habits, etc. In the above example, if you’re a male who drinks and smokes, you should probably take social security early because you will not make it to the backsolved death age. Here is an expected death calculator for those morbidly inclined. Apparently, I’m defying the odds as I should already be dead.
Then, you can take a look at the below table I’ve derived from their discount rates that shows implied death breakevens by your birth year and retirement age (that was an annoying exercise since SSA varies discounts/bumps by birth year). Compare that to when you expect to live, and see if there’s an opportunity to game the system using what you know about yourself.
1. If you take early or late retirement, it does not impact your spouse’s decision to take spousal benefits; that’s a separate decision. I’ll probably put out a post on that (separate) decision.
2. However, it does impact survivor benefits. So if you die, your spouse could choose to take your benefits (if they are higher than their own), and those benefits would be impacted by your decision. Factoring that in is quite simple, however. Just take the difference between your derived death breakeven date in the table versus the retirement age (e.g. if 77 years death breakeven at a retirement age of 62 years, that’s 15 years), and if you or the survivor collect less than that in the case of early retirement or more than that in the case of late retirement, then the decision makes sense.
For simplicity and to be conservative, I assume that your surviving spouse would collect survivor benefits no matter what. You may have a more complicated scenario whereby your survivor may choose to collect their own benefits rather than survivor benefits. For example, suppose you were due $1,000/month, but due to early retirement only collect $800/month. Your surviving spouse can collect $800/month or whatever they would get on their own. Perhaps they are able to collect $900/month on their own, so they’d choose that (they can only pick their own or survivor benefits, not both). We assume they collect your $800/month, as this makes the early retirement scenarios conservative, in that if we say you or a survivor need to collect for <12 years to make early retirement worthwile, it may be longer. Conversely, for late retirement, if even with your benefit increase, your spouse would fall somewhere between your full retirement pay and the higher amount, then the number of years would need to be greater than shown. So it is not conservative. However, these scenarios are not very likely. Trust your judgement.
3. There are some scenarios where you might want to take early retirement if you believe your spouse may pass before you (as you can then switch to survivor benefits). We’re trying to keep things simple, so we don’t calculate for that, but comment below if need help.
4. Social security has COLA (cost of living adjustments), so we are already adjusting for future rates of inflation in these calculations. This is all in present value space.
5. Regardless of what you choose, you should still likely take Medicare at age 65 (independent decision).
Slaughter rates are plummeting and prices are rising
What’s going on? Facilities around the country are reporting an increase in employee COVID-19 infections, leading to many plant closures, many of which are mega-size plants. Tyson closed Waterloo, Iowa, for example, which alone is 4% of the nation’s pork processing capacity. In total, Tyson has about 18% of capacity offline. Smithfield, JBS USA and others are closed as well.
And we’re seeing it in the daily slaughter rates reported by the USDA. Beef slaughter rates are down 31% and hogs down 20%, with the decline in the slaughter rates accelerating. As a result, beef wholesale prices are up 36% this year; as this continues they are likely to rise further. Also, this is the wholesale price; it’s possible the markup above this you pay as a retail consumer may make the increase even higher for you.
Exhibit 1: Slaughter rates fell sharply in April to down 31% for beef and down 20% for hogs
Exhibit 2: Zoom-in on daily slaughter rates for April-2020 shows it’s getting worse as we continue
Exhibit 3: Wholesale prices rapidly rising; beef cutouts up 36% this year
With fewer animals slaughtered, cattle and hog prices plummeting – this could lead to liquidation of the herd
With less effective slaughterhouse capacity given the shutdowns, fewer animals can be processed into finished meat. This means the slaughterhouses are demanding less cattle and hogs, which perversely, means the prices of a head of cattle or hog are falling. You will not see that benefit as a consumer; it goes to the meat processors (see below).
And those raising cattle and hogs will not see the benefit. In fact, they are on the verge of negative margins; the price for a hog has declined to about $50 from $80 recently. Smithfield and other growers of hogs may make the (hard) decision to euthanize the hogs.That would prolong the potential meat shortage even if slaughterhouses reopen because the grow-out of animals takes years.
Exhibit 4: Cattle and lean hogs prices have collapsed, putting pressure on growers
Do not rely on cold storage
Cold storage is a nice comfort, but the USDA hasn’t even released the data, which may indicate it is depleted. Even so, it’s just not that much in absolute terms; certainly not enough to feed a nation. Beef, for example, is about <2lbs per person. It only takes weeks to burn through these. This is not designed as a strategic reserve, but a simple mechanism to manage ebbs and flows.And that doesn’t include April-2020 as the USDA will not be releasing the next data until May 21, 2020, electing to skip the April-2020 release.
Exhibit 5: Cold storage data is delayed, but focus on the absolute values of the inventory, which are not high on a per capita basis
Already had a pending shortage due to African Swine Fever supply shock
This is beyond the scope of this post, but before coronavirus, there was African Swine Fever (ASF), which wiped out about 50% of Chinese hogs. It takes years to regrow them. This means, we started the year with a 5-15% global negative protein supply shock even before the above dynamics. In response to the ASF, US producers began to accelerate exports. So you have not just a US supply shortage, but a global one as well. See here for more details.
Meat producers like TSN (Tyson) beneficiaries
Meat processors buy cattle and hogs and slaughter them. They earn the processing margin, or the spread between what they pay for the animal and what they sell it wholesale (the cutout price). If they offer prepackaged foods, they may get a markup beyond that.
Exhibit 6: Processing margins for beef and hogs have exploded upwards
Let’s just quickly take TSN. They have lost 18% of their production capacity. But the beef packer margin is up from $37.20/head at the start of the year to $696.40/head at present. With that type of margin expansion, you could lose 95% of your production and still be better off. Now, there are still fixed costs burdens, so it’s not quite that extreme, but they are an obvious beneficiary.
This is a followup to a recent post, where I attempted to dispel some myths around 401k investing and discuss when and when not to invest in a 401k.
I received the following question: “One question though – we are now in the 37% bracket but let’s say I don’t expect to need income above the 24% bracket in retirement. Assuming taxes don’t go up (which they very well might), that makes Roth conversion less favorable no? It depends I guess on how much is base contribution vs how much is capital gain when you withdraw?”
It’s a great question, and in this post, I’m going to lay out some scenarios where Roth is preferred and where it is not preferred.Reminder, with a Roth retirement account you pay the income taxes now and do not pay them when you retire. In a non-Roth, you don’t pay income taxes now, but pay them later. In a qualified retirement account (Roth or non-Roth), you avoid capital gains taxes.
So the question is basically wondering if there is a “tax arbitrage” in that you expect your income tax rate to decline in the future, so you might as well wait and pay that lower rate rather than paying the taxes right now (via a Roth).
Punchline is if you are in this high of an income bracket, you will probably have more savings than can go into a 401k. And while you may be in a lower tax bracket in the future, the capital gains benefit offsets this and suggests utilizing a backdoor Roth.
Ok, let’s get to it.
This specific scenario:
If you are in the 37% marginal tax bracket right now and expect to drop to the 24% marginal tax bracket in the future, then that’s a 13 percentage point gap (you are paying the marginal rate on these investments). However, given this high starting income tax bracket, traditional IRA’s are likely closed off to you, so your choices are 401k’s and Roth-IRA’s (via the backdoor discussed in this post). Now, as discussed previously, unless utilizing a brokerage-linked 401k, you may be paying average 401k fees of 0.82% compared to 0.09% if you just invested in a market-tracking ETF. So that’s about a 0.75% headwind every year from choosing to invest in a 401k rather than a Roth IRA. It’d take about 18 years to eat away at the 13 percentage point tax savings. So if you plan on retiring earlier than 18 years from now, then the Roth is likely not for you if you only looked at this this way. If it’s more than that, then you should consider a Roth IRA. But that’s not the only consideration.
However, you should take two other considerations: (1) tax rates may rise over time, especially if government spending rises (there is a government budget constraint that dictates taxes must rise if spending continues to rise without an offset) and I’m benchmarking this to the current paradigm; Exhibit 5 shows US Federal budget deficit over time; (2) If you are retiring in the next 18 years, you may want to max out your 401k, but at this income level, you likely have excess savings beyond what you’re putting into your 401k. And the question is what to do with those – option A is put it any old account and invest and pay capital gains taxes, which would be about 15% when you retire (under the current regime). For your specific inputs, you’d need to earn about 87% by the time you withdrew the funds from the retirement account to justify the capital gains shield. That may seem high, but that’s about a 3.5% annual return with compounding – quite low. So if you believe that, you should consider a Roth.
I’ve put together the below matrices that try to answer the question depending on different current and future income tax brackets posed in the question. For simplicity, these are presented for married filing joint couples. If you want to see them for another category, please post a comment, and I’ll make them. The main conclusion is you have 20 years to retirement, it basically makes sense to use a Roth if you have filled up your 401k in basically every scenario.
Exhibit 1 shows the gap between your current and future tax rates based on your current income and future income.
Exhibit 2 shows the number of years until retirement to justify a Roth versus a 401k if you pay 0.82% annual fees to a 401k and 0.09% in a Roth.
Exhibit 3 is designed for if you have already maxed out your 401k and need to decide between a Roth and a non-capital gains protected account. It shows the return required on the invested amount to justify Roth’s capital gains tax advantage versus a non-capital gains protected account.
Exhibit 4 takes Exhibit’s 3 output and shows the implied annual return required over a 20year window to justify a Roth over a non-capital gains protected account.
Note: For simplicity and to be conservative, I simply took the 0.82% fee from a 401k manager and applied it to the opening balance; reality is as the investment grows, they will take more of it since the 0.82% is on the entire balance, which makes this conservative.
Exhibit 5: US Federal Budget seems to have been growing steadily absent the 1990’s when briefly returned to surplus
When you take these myths and realities together, you’ll see that unless you have an employee match on your 401k, you may be better off exploring alternative retirement accounts such as IRAs and Roth IRAs because they also shield you from capital gains taxes. And despite common misperceptions, there are ways to invest in non-401k retirement accounts regardless of your income level. If you have a match, you might put every penny up to it that you are able, but not a single penny more. And if it’s available, you might use a broker-linked account that enables you to invest in a market-tracking vehicle and avoid wasting money on management fees. Alternatives will be discussed in coming posts.
Did you know? 401k refers to section 401(k) of a 1978 piece of legislation that spawned the growth of the mutual fund industry.
Myth #1 versus Reality #1: Tax-advantaged compounding is a myth, but there are capital gains benefits
Myth #1: By putting my pre-tax dollars to work in a 401k, I am putting my money to work earlier and letting it compound so I have more in retirement.
Busting myth #1: This is a very common misconception, and I’m shocked sometimes at how many sophisticated people fall into this trap. Putting your money aside in pre-tax dollar form does not enable you to tax-free compound and end at a higher amount. Let’s illustrate with an example:
Scenario where you put pre-tax money aside:
Suppose you put $100 away pre-tax into a retirement account. Over time, it doubles. So you now have $200. When you go to withdraw these funds, you will have to pay taxes. Let’s say your tax rate is 30%, then you will have $140 net dollars (taking 30% off $200).
Scenario where you put post-tax money aside:
Suppose you take that $100 from your paycheck and pay your taxes now ($30 at 30% tax rate). Then you have $70 to invest. Over time, again, it doubles. You now have $140. This is exactly the same amount you have in the pre-tax example above.
There is no such thing as pre-tax compounding. Conceptually, in the end, your money, including accrued gains, will be taxed, putting you into the same situation. Mathematically, you’re just distributing the tax rate (if static) to a later part in the equation. There are arguments, such as a view that your own personal tax rate will fall, but that is beyond the scope of this post and a future subject. Also note, I did not incorporate capital gains taxes for simplicity in the above, but they would not change the conclusion if static. Main thing I want to dispel is the notion that there is such a thing as a pre-tax compounding advantage.
Reality #1: There are still tax savings in the form of capital gains shields utilizing retirement accounts.
You will pay income tax, one way or the other (pre-tax or post-tax), when investing in retirement account. But there is another tax to worry about – the capital gains tax. And that is one benefit of most retirement accounts, including 401k’s. Capital gains taxes are “extra” taxes you incur on any gains on investments. Shielded retirement accounts (401’ks, 529 accounts, IRAs, Roth IRAs) avoid those gains. In contrast, if your money is not in a shielded retirement account, you will pay those gains. Here’s an illustration:
Scenario where you invest in an account without a tax shield
So let’s say you put $100 after income taxes (money from your take-home pay) in an account (not a tax-shielded retirement account but a regular old account). Suppose it doubles to $200, then you have a capital gain of $100. That $100 is subject to the $100 capital gains tax. It depends on your income level, but for most people this is going to be around 15%. That means, you have to pay $15 in capital gains taxes. So, in the end, you’ll have $185.
Scenario where you invest in a retirement account with a tax shield
Let’s say you put the after-tax $100 in a tax-shielded retirement account. Suppose it doubles to $200. You then have $200 as the gains are not subject to capital gains taxes.
Myth #2 versus Reality #2: Access to superior investments is a myth; higher fees is a reality
Myth #2:With my 401k, I am investing in a professional who will manage my money better than I could or a passive investment could.
Busting myth #2: It has been widely established that mutual funds may chronically underperform the broader market, even on a risk-adjusted basis. Here’s one example from UPenn discussing this topic. Over the past 15 years, for example, the average mutual fund has returned about 6% on average versus about 9% for the S&P 500. That’s 3 percentage-points lower per year. That means if you put in a dollar at the beginning of the 15 year period, you’d have $3.64 if you invested in the market versus $2.40 if invested in the average mutual fund. And that doesn’t even include excessive fees from mutual funds that would drop this to about $2.15. It’s not really about finding the “right” manager; most underperform the market and charge excessive fees.
Reality #2: Investing in a mutual fund product costs you more in fees than alternative investments
Mutual funds (those who manage your 401k) can charge you up to 3% for a product that tends not to outperform the market. On average, they charge you 0.82% per year and may deliver subpar performance. 0.82% may seem like a reasonable or small fee, but it adds up. For example, if you put aside $1,000 every year for the next 30 years, and your investments went up 7% per year, you’d have almost $100,000 if you parked your money in a low-cost ETF alternative. However, you’d only have $87,500 if you invested in a 401k. Their fees would add up to over $14,000! If you are investing in a 401k, you might see if your plan has a brokerage link option, which enables you to freely invest in lower cost market-tracking alternatives without paying excessive fees.
Myth #3 versus Reality #3: Need to invest in 401k because over income limit for other products is a myth, but there is a valuable benefit from employer matching
Myth #3: I need to put my money in a 401k because I am over the qualified income limit.
Busting myth #3:
The income limit for contributing with deductions to an IRA ($103,000 adjusted gross income for married/joint or $64,000 for single). However, there is nothing stopping your from making a non-deductible contribution to your IRA and rolling those funds into a Roth IRA (like an IRA but taxes paid upfront). For example, suppose you make $200,000. You put $6,000 into an IRA. Now, you likely can’t just leave it there because you’ll be paying income taxes on any gains that come of it, and you likely still want to take advantage of the capital gains shield (discussed in Reality #1).
So you take that $6,000; you “roll” it into a Roth IRA. You will owe the income taxes on that amount (which is fine, you would have paid them if not investing in a retirement account anyways). Let’s say you have a 30% tax rate, then you have $4,200 for your Roth IRA. Any growth in the investments when you retire will not be taxed further. This is known as a “backdoor Roth IRA.”
We already established when busting Myth #1 that there is no real income tax savings from an IRA (it’s only the capital gains savings in Reality #1).
You’re actually free to contribute to your IRA no matter what your income level is. You’ll just pay the taxes upfront. So unless you have a view that taxes will fall from present rates, which realistically is anyone’s guess, you might go ahead and just fund your IRA and roll it into a Roth IRA. The standard limit is $6,000 ($7,000 if you’re age 50 or older), but there is such a thing as a mega backdoor IRA that enables you to put away $56,000 per year in total between your 401k and Roth IRA. That will be the subject of another post. There are also alternatives, such as 529 accounts, which I would suggest only investing in if you are putting away more than $56,000 because they do not offer real benefits beyond that of an IRA (which can be used for education expenses). Subject of a future post as well.
Reality #3: Only real reason to not use alternatives is employer matching The primary reason to invest in a 401k is employer matching. To the extent your employer provides matching, you likely can’t really beat that option. It’s essentially “free” money (technically it’s not free because without this retirement benefit your pay would likely be higher, but it is what it is). It’s true your mutual fund may underperform the market and charge excessive fees, but you can’t beat free money. Let’s say your employer matches up to $6,000 and you take advantage of that option. You would basically need your 401k to fall and the market to rise in order to lose. As subpar as returns for mutual funds can be, that would be pretty atrocious investing and not likely something you’ll experience. So the bottom line is if you have a match option, you should take advantage of it; it trumps all other points. But you should likely not put a single penny in above your match amount.
Hope you enjoyed the post, which is the first in a series of retirement planning posts. If you have a topic you’d like me to add to the pipeline, please suggest in the comments below.
Did you know? Japan adopted the 401k system and refers to it as a 401k even though there is no section 401(k) in Japanese legislation.
The empty shelves and scarcity of toilet paper (TP) we are witnessing are not frenzied consumer buying, but rational behavior. It’s not obvious, but we consume a lot of toilet paper when we’re at the office/jobsite (where we spend a lot of our day). With quarantines in place, this means you use more toilet paper at home – 40% more, in fact, per Georgia Pacific (large TP producer). Thanks to Will Oremus at Medium for cluing us in on this.
So, a key driver of the surge in pandemic-buying is we all began to overnight basically consume 40% more TP. The second driver is that Americans typically hold about 2 weeks of TP inventory at home (so you don’t have to run out and buy the bulky packages or have them delivered so frequently). Recent trends suggest with the uncertainty/desire to leave the house less, people are targeting about 4 weeks of supply. This seems like rational behavior.
How does the data stack up? When we model actual TP demand in the recent period and compare it to what we should see if people are consuming 40% more TP and seeking to expand their in-home inventories to 4 weeks from 2 weeks, it seems like the American consumer has done a fantastic job. So good job everyone.
When does it stop? Right now, we estimate the average person is sitting on 3.85 weeks of supply (assuming the increased consumption rate) versus the targeted 4 weeks – pretty darn close. Now, retailers’ inventory is depleted, and it takes time to convert the commercial production lines at TP plants to domestic use (office TP comes in giant rolls and are thinner). Given this constraint and assuming quarantines remain in place, we model that TP in-home inventory will dip to ~3.3 weeks in May-2020 from 3.85 weeks currently as we wait for this converted capacity to come online, then gradually rise to 4 weeks in July-2020. Importantly, the TP curve above assumes the quarantines remain in effect all year; if they end, consumers shift back to consuming some TP in office and lowering inventories, and we’ll see a decline in purchases sooner.
So, we’re close, but people will look to replenish their inventory, and it’ll take some time to get to a full average 4 weeks of in-home inventory. But you’re not going to run out.
Which countries use the most TP and which have sold the most recently
Americans consume more TP per person than any other nationality
TP-usage is correlated with how developed is a country, so it’s not surprising that we see the U.S., Germany, U.K., and Japan at the top of the list. But what is surprising is French people use half the amount of TP as Americans. This could be because of bidets. If you want to learn more (I don’t), here’s a BBC article on the topic.
Italy has seen the largest increase in TP purchases
Not surprisingly, countries hit hardest by the pandemic have seen the largest increases in toilet paper purchases, especially highly developed countries where the consumer may be more financially able to stockpile. What is surprising, however, is the French have stockpiled the least despite quarantines in place. Maybe since the bidet is infinite capacity, they don’t need to? Again, check out the BBC article, and maybe add a comment below explaining it (but I don’t really want to know).
May want to stop buying TP stocks (WMT, PG, KMB) just for TP exposure
People react to crises in different ways. I have made the decision to exit the market entirely as I view this as such a shock to the system that conventional wisdom is out the window. Here’s my post on that.
Others have sought to strategically profit from stocks, including TP stocks, which may benefit from the crisis. I have no moral problem with that whatsoever, but I think it’s mistaken:First, the shortage is largely over – people have already built inventory; it’s prudent to get in front of news, not follow on after; we already have March-2020 Same Store comps data. Second, it’s not clear they even benefit (they may even be harmed) – TGT and DLTR both had negative March-2020 sales reports despite the stockpiling as their discretionary, higher margin products are not moving off the shelves (people are buying essentials like TP and holding off on other purchases). One could argue that WMT is less discretionary than TGT, or that it’s better to own upstream TP producers like PG and KMB, but I believe this is trumped by the fact that overall TP consumption is not changing; maybe it’s front-loaded to last quarter and this quarter, but it will not change annual sales, and we’re already hearing companies talk about the costs associated with converting manufacturing and expediting shipments are rising; balanced against this is they are reducing SKU’s and mass producing essentials (which can lead to efficiency gains) and in some places, they are the only ones still open for business (e.g. more market share).
Overall, I think it’s too obvious a trade, we’ve passed the stockpiling window, annual consumption is unchanged, the stocks have already risen (outperforming the XLP staples group), and the cost side of the equation is far from clear. Now, if you want to own these stocks as a hiding place given strong balance sheets and a semi-defensive staples sector or if you know them really well and have reasons to own them, go ahead by all means (though I’d be curious why them and not the XLP), but you may want to stop buying them for just TP and wipe the stocks slate clean, lest you feel the burn (intended as a possibly inappropriate pun).
On a more serious note…
There are some who did not have the ability to stockpile TP; we’re talking averages here. If you want to help those less fortunate source some TP, check out TPauction.com.
Disclaimer: All content provided is for informational and educational purposes only. I may have positions in any stocks, options or instruments mentioned, or plans to initiate positions. I have no business with any companies whose stocks are mentioned. Any statements are not representative of the views of current or past employers and reflect my strictly personal views.