The Weekend Edition # 29
Earnings; Jobs Friday; $FB, $AMZN, $F, $UPS; Soft Commodities
Welcome to another issue of the Weekend Edition. Happy February!
Thank you to all who’ve read and subscribed to the newsletter this week!
Here’s what we cover this week:
Market Recap - Earnings driving the markets
Macro of the Week - Jobs Friday
Earnings of Week - Facebook, Amazon, Ford, UPS
Around the Markets - Soft Commodities
The Week Ahead - Economic Indicators and Earnings
Let’s dive in ⬇️
Market Recap - Jan 31 - Feb 04, 2022
Positive week for the indices, albeit still quite choppy. The Volatility index has settled down a bit but, still remains above 20. Index performance was mainly driven by earnings results - with significant prices increase in Google and Amazon countered by Meta Platforms / Facebook’s spectacular drop.
While FB set the record of the largest one-day drop in market cap at $232B on Thursday, Amazon had the largest one-day gain in market cap at $191B on Friday.
According to FactSet, 56% of the S&P 500 have reported earnings; so we’re over the hump. Of these companies, 76% have beaten EPS estimates, reporting earnings that are 8.2% above estimates, which is slightly below the five-year average of 8.6%.
“Positive revenue surprises reported by companies in the Energy, Health Care, and Information Technology sectors have also been the largest contributors to the increase in the overall revenues for the index since the end of the fourth quarter.” - FactSet
Oil still remains the highlight of the week, with March WTI reaching $93/bbl. The sector stocks are performing well. The ETFs are XLE, XOP, OHI, GUSH, ERX.
Macro of the Week - Jobs Friday
The Jobs Data for January was out this week, the first Friday of every month. The data showed strong improvement in payroll data with only a minor decrease in the unemployment rate. Wage rates and labor force participation also increased.
Nonfarm payrolls increased by 467,000 far above the consensus estimate of 180,000. Note: December nonfarm payrolls were revised to 510,000 from 199,000 and November nonfarm payrolls revised to 647,000 from 249,000.
Unemployment rate was 4.0% (6.5 million persons) versus 3.9% in December. To compare, February 2020, prior to the coronavirus (COVID-19) pandemic, the unemployment rate was 3.5 percent (5.7 million persons).
Average hourly earnings increased 0.7% versus 0.5% December. Over the last 12 months, average hourly earnings have risen 5.7%, versus 4.9% for the 12 months ending in December.
The labor force participation rate increased to 62.2% from 61.9% in December.
What this means:
The consensus is that the strong jobs data will pave the way for the Fed to increase rates more aggressively.
As of now, the FedWatch tool is still leaning towards a 0.25% hike versus a 0.50% hike at the March meeting. Only 14.3% are expecting a half-percent rate hike. This is data as of today, 06 Feb, which shows a change from what people were expecting just two days ago, where the probability of a 0.50% rate hike had risen to 33.7%.
Earnings of the Week
An exciting week for earnings this week. Let’s look at few:
Meta Platforms / Facebook (FB)
The results weren’t pretty and neither was the drop in stock price from $323 to $237, a -26% drop.
All eyes are on the investment in Reality Labs, something they said they were doing to build out the Metaverse. But the criticism is whether that level of investment is needed right now. Reality Labs posted an operating loss of $10B.
For the full year, they returned a whopping $44.5B to shareholders through share repurchases.
Daily and Monthly Active Users remained flat.
What’s interesting though, Year on Year, the company did alright. Overall Revenue was up 37% YoY with Operating Margin increasing from 38% to 40%.
The big news was the upward revision of $11.8B in their investment in Rivian which gave their earnings a boost; Gross Margin and Operating Margin actually decreased for the company.
Amazon also announced that they would be increasing the pricing of Prime Memberships by $20, from $119 to $139.
AWS did well too with a +37% increase.
The Earnings miss came as quite the surprise after GM posted fairly decent results.
Chip shortages continue to weigh on the Company’s results. In Q1, the company expects a high single to low double-digit decline due to Omicron shutdowns and chip shortages. Ford also expects commodity headwinds of $1.5B-2.0B in 2022.
They expect to launch their all electric F-150 by spring, now.
Dealer inventories continue to remain low but demand is still robust, which gives Ford the opportunity to wield pricing power.
United Parcel Service (UPS)
Stock was up 14% on earnings news and I’m not surprised. Carol Tomé has certainly done a fantastic job delivering on her “Bigger not, Better Framework” after taking over as CEO in 2020.
Return on Invested Capital was up 9.10% to 30.8%, achieving their 2023 target, two years ahead of schedule. FY 2021 Free Cash Flow was $10.98B, with Debt to EBITDA reducing to just below 2.
Despite fuel costs being up 40% for the year, the company managed to increase Operating Profit Margins from 8.8% to 12.2% in the US through operating efficiencies.
The Company also increased per piece pricing to offset decreases in volumes.
Around the Markets
Soft commodities present some interesting opportunities. Coffee and Soybean look particularly bullish. Here’s a snapshot of the major ETFs.
The Week Ahead
Thu - Feb 10 - CPI and Core CPI Data (Inflation Data)
Fri - Feb 11 - Consumer Sentiment Data
The market has been tough and earnings are driving different pockets of the market. While the S&P rallied into the close on Friday, futures came down after hours. Rates saw a sharp increase on Friday and despite that, the Nasdaq rallied.
Traders are staying nimble with small positions. I’m holding on to most of my existing long term positions and not inclined to make any changes. Many are calling for averaging into tech positions but, I’m still wary. Looking at adding some sector rotations instead but, still with small positions.
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 $FB, $AMZN as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.