The Weekend Edition #11
Choppy markets, S&P 500, VIX, Retail slides, Ships stuck at the port, Energy crisis
Welcome to another issue of the Weekend Edition.
Again, thank you to all who’ve read and subscribed to the newsletter this week!
Now, let’s grab a cup of coffee ☕️, while we take a look at what happened in the markets this week.
Here’s what we cover:
Market Recap - a look at the major indices
Charts in Focus - the S&P and the VIX - Where’s this market going?
Sector of Week - Retail & Why are so many ships stuck at the LA port?
Around the Market - Boeing, Zoom & Five9
The Week Ahead - OPEC+ meeting, Employment Numbers and a few earnings
Let’s dive in ⬇️
Market Recap - 27 Sep 2021 to 01 Oct 2021
We had a seriously choppy market this week, with most of the indices declining before a slight reprieve on Friday. Let’s recap what was driving the markets this week:
Fed’s Announcement from the Previous Week - Inflation remains elevated in the short term and indications for tapering announcement at the next meeting in Nov. Pace of tapering indicated at 6 months.
Government Spending & Debt Ceiling - Government spending was resolved in the final hours of Thursday, but the Debt Ceiling issue still remains unresolved. This needs to be resolved by Oct 15.
Infrastructure Bill - Still in limbo as it’s tagged with the larger spending & tax bill of $3.5 trillion. Industrials are taking a hit because of the uncertainty.
Options Expiry on Sep 30 - Month-end and Quarter-end
Elevated Oil & Gas Prices - Deepening energy crisis with a shortage of NatGas, driving higher oil prices. OPEC+ meeting is next week.
Supply chain issues continue to persist and retail takes a hit.
On a weekly performance basis, the Russell small cap seemed to have fared the best. This is good news because it tells me that retail investors are still happy to stay in the market.
Tech and Biotech stocks however, got hit. Not surprisingly as bond yields started to increase after the Fed’s comments from the previous week. Most of the tech stocks have run up significantly and some profit taking was in order, as people brace for further yield increases.
Charts of the Week - the S&P and the VIX
Let’s pause for a second and take a look at the bigger picture. The S&P has rallied since the pandemic crash with rolling pull backs along the way. If we look at this in the context of volatility - orange line, lower chart - it shows we’re nowhere close to peak volatility. In fact, the Vix was much higher in Sep 2020.
While the market still remains in a downtrend, we are still quite some ways from a real correction. Market bulls like Fundstrat’s Tom Lee still think that the S&P will hit 4700 by the end of the year. His argument is that rates are still significantly low at 1.5% or even 2% for that matter. Rates are low enough not to significantly disrupt the lending market, the housing market and the overall economy. Rates would have to reach 3-4% before we see a real correction, which probably won’t start to happen before the end of 2022.
Sector in Focus - Retail
We saw the effect of supply chain issues with Nike last week, when they reported. This week retail continued to come under pressure as more companies got downgraded because of persistent inflation and supply chain disruptions.
Atlantic Equities downgraded Starbucks (SBUX) to Neutral from Overweight with a $105 price target due to persistent wage inflation in the US and negative comps in China.
Bank of America double downgraded Kohl's (KSS) to Underperform from Buy with a $48 price target and reinstated Footlocker (FL) with an Underperform rating and $45 price target. Both due to supply chain issues. Kohl’s stock fell -11.9% during the week and Footlocker fell -3.28%.
Bed, Bath & Beyond (BBBY) reported on Thursday missing both EPS and Revenue estimates. The Company reported adjusted EPS 4c vs. 52c est. and revenue $1.985B vs. consensus $2.06B. Same store sales were down by 1%. The Company also cut forecast estimates citing pressures from the Delta Variant and on-going supply chain issues. The stock fell -27.8% during the week to close at $16.58.
The pandemic has led to a record amount of demand for goods. With not being able to go outdoors or travel, spending on goods has been the only outlet for people. This surge in demand will slow down but quite possibly not enough to balance the supply shortage. With the holiday season coming up, demand for goods will be on the rise again towards the end of the year, which leads me to my next point…
Why are so many ships stuck at the LA port?
As an estimated 500,000 containers are sitting on cargo ships off the Southern California coast, many are wondering how to handle the backlog.
The surge in demand has caused an increase in shipping rates to the US (eastbound shipping rates) at almost $10,400 as of September end. However, the shipping rates from LA to China / Hong Kong (westbound) have not increased as much. So many of the ships that came into the LA ports, off loaded the cargo and went back empty, to refill cargo and make the trip from China to LA with goods which would earn them higher rates.
As a result, goods that were meant to clear for export and loaded on ships at LA are stuck at the ports, warehouses or railcars waiting occupying the space that should have been used for imported goods.
And closer to my home Dubai, DP World’s Chairman says that the global supply chain has been in crisis since the beginning of the pandemic and is likely to continue for the next two years. DP World is one of the world’s largest port operators.
Around the Markets
A Good Week for Boeing
Bernstein analyst Douglas Harned upgraded Boeing (BA) to Outperform from Market Perform with a price target of $279, up from $252. The analyst believes "we are finally heading to the inflection point for global travel." He also upgraded Airbus and Spirit.
Boeing also received a $23.8B follow on contract from the Department of Defence, earlier in the week.
Zoom & Five9 - Merger fell through
Last week, we saw that the merger between Zoom (ZM) and Five9 (FIVN) was iffy given the Justice Department’s special committee to review the deal because of National Security concerns. Well, this week the shareholders of Five9 voted against the merger, apparently after ISS advised shareholders against it. ISS is Institutional Shareholder Services, the world's leading provider of corporate governance and responsible investment solutions.
What’s interesting though is that Five9 got a whole set of upgrades and price target increases from the Street on the news of the merger falling through. Most analysts cited strong fundamentals and potential for Five9’s offering of contact center as a service. Looks like Five9 was being undervalued for the merger? The stock price jumped over 4% on Friday.
The Week Ahead
Monday Oct 4 - OPEC+ meeting
Friday Oct 8 - Non-Farm Payrolls and Employment numbers
A few earnings next week before the banks kick off another earnings season on Oct 13
We expected markets to be choppy this week, given the events surrounding Washington. But, supply chain issues are escalating, inflation is weighing down and there’s a looming energy crisis. Markets will probably remain choppy and in a bearish mode for the short term. However, I still think we have some growth left in this market.
I’m staying vigilant, looking at trends and picking up stocks that pull back to my price target. There may be some excellent short-term trading opportunities, long / short. For that, it’s best to check in with expert traders. An easy way is to join the LaDuc Trading’s Discord Channel - excellent traders for stocks and options.
Here’s wishing you a happy weekend and safe investing.
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Ayesha Tariq, CFA
There’s always a story behind the numbers
None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have a long position in $BA as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.