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The Weekend Edition #12
Commodities, Jobs Report, Ford & GM, Spooky October!
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 - what’s driving the market - energy crisis & jobs report
Chart of the Week - Commodities
Earnings / Stocks of the Week - Taking a break!
Around the Market - Ford & GM; Short Reports; Spooky October
The Week Ahead - Earnings Season kicks off next week!
Closing Thoughts - We’re bound to see some earnings surprises
Let’s dive in ⬇️
Market Recap - 04 Oct 2021 to 08 Oct 2021
Markets were choppy again this week, first because of debt ceiling issue, second the energy crisis and finally the employment reports that came out on Friday. Surprisingly though, all indices except the Russell, were up over the past week.
The Debt Ceiling issue has been resolved, at least temporarily until Dec 3, 2021 so, the US Treasury has some breathing space.
The energy crisis continues with Europe stressing on the fact that there will not be enough natural gas to support them through the winter. Oil prices have been steadily increasing but, come Monday, when there were no changes announced to the current production volumes at the OPEC+ meeting, and the prices rallied.
Oil was primed for a short at this point and there was chatter that a few fund managers were taking the short trade. Oil dipped for a while, possibly due to some selling pressure but rebounded once the US Department of Energy confirmed that they had no intention of tapping into reserves.
And finally, the jobs data came out on Friday. While non-farm payrolls missed the mark big time, adding only 194,000 jobs in September, vs. the consensus forecast of 460,000, the unemployment rate decreased to 4.8% from the previous level of 5.2%. This decline helps the Fed towards it’s “substantial progress” target.
The most alarming news on the jobs report - the labor force participation rate among women dropped to 55.9% from 56.2%. But, most see this as a temporary issue stemming for women having to stay home for child care due to resurgence of Covid cases. Time will tell if that really is the case.
On the positive side: “Job gains occurred in leisure and hospitality, in professional and business services, in retail trade, and in transportation and warehousing” signaling a re-opening of the economy.
The market didn’t take the news well though and yields started to increase creating selling pressure on stocks. The 10Y yield increased 10% during the week closing out at 1.61%.
Chart of the Week
Here’s a 20-year chart of the S&P GSCI Agriculture Index (Red) and the S&P GSCI Energy Index (Black). The last time prices spiked to this level was in April 2014, which marked the end of the commodity boom from the early 2000s. Although, prices did collapse during the financial crisis between 2008 and 2010 and then shot right back up again.
This is yet another reason for the Fed to taper and move towards a higher interest rate environment. Although not a perfect correlation, interest rates play an important role in managing commodity prices, with oil being the most affected, followed by minerals and then agriculture. Here’s why:
The cost of extracting the commodities today is cheaper than in the future (think, longer term rates are higher).
The cost of storing the commodities becomes more expensive so supply to the market increases. Again, more supply = lower prices.
Speculators begin to shift out of commodities and into treasury bills for yields. Lower demand = lower prices
Domestic currency becomes stronger therefore, international commodities become relatively cheaper; more supply = lower prices. Of course, this is assuming inflation is under control.
This is what history tells us but, there are so many other factors that could throw this out of whack. Still, at least some of these relationships should hold, and bring commodity prices down to more decent levels.
Earnings of the Week
I decided to give earnings a break this week. We start earnings season next week and we’ll have a lot to cover.
Around the Markets
Ford & GM
Ford (F) and GM (GM) had a fantastic week. Ford closing +6.78% for the week while, GM closed +10.24%. While both companies delivered less than stellar sales reports, the stock price soared on their optimistic outlook of the future.
Ford reported September U.S. sales totaled 156,614 vehicles, down 17.7% year-on year. However, month on month, sales increased 34.3% making Ford the number No. 1 seller of vehicles in the U.S. for the month. Ford's EV sales hit 9,150 - up 91.6% over last year and a new record. F-150 Lightning reservations have now surpassed the 150,000 mark, with over 75% of these reservations coming from outside of Ford.
GM held an investor day unveiling their ambitious targets. They have a target to double their revenues by 2030, to about $280B. They plan to invest $35B in all-electric and autonomous vehicles, launching 30 new EVs globally.
They also unveiled Ultra Cruise, "an all-new, advanced driver-assistance technology and significant next step in the company's journey to enable its goal of zero crashes, zero emissions and zero congestion." Ultra Cruise will cover more than 2 million miles of roads at launch in the United States and Canada, with the capacity to grow up to more than 3.4 million miles.
Short Reports Galore
We had an outpour of short reports over the past couple of weeks.
LightSpeed (LSPD) by Spruce Point Capital
Ginkgo Bioworks (DNA) by Scorpion Capital
The Joint Corp (JYNT) by The Bear Cave
Faraday Future (FFIE) by J Capital Research
I’m not going to comment on the legitimacy of these reports. But what I will say is that not all Short Sellers are created equal and many of the reports are just a quick way to make some money.
But, if they decide to go after a company that you like, it sets up a happy buying opportunity.
Here’s an interesting one… a list of S&P stocks that have performed the worst in October over the last 10 years from Schaeffer Research:
The Week Ahead
Next week, we have the 3rd Friday of the week so index options expiry day… so heads up.
The real excitement starts next week, as we kick off earnings seasons starting Tuesday with the Banks. Note: GS is reporting on Friday not Wednesday as shown here.
Here’s a short note I’d written 2 quarters ago on the unique indicators for banks:
What’s in store for earnings season?
I suspect we won’t have too many upgrades and the Street has already started to make downward revisions on a number of companies. We will definitely see more pressure from supply chain disruptions and inflation.
I think we will continue to see the 10-year rate inching up, and with that prices coming down. But, I still think we will have a run till the end of the year. Simply because there’s not other choice. As I read somewhere, TINA - There Is No Alternative - to stocks. Most of the large asset managers still have portfolios tilted towards stocks and even slightly overweight.
Let’s stay sharp and look for opportunities to pick up winners where we can. My take would be: Don’t trade into earnings, unless you’ve really done your homework. I think we will see some surprises.
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 $DNA as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.