The Weekend Edition # 50
Welcome to another issue of the Weekend Edition!
Thank you to all who’ve read and subscribed to the newsletter this week!
Here’s what we cover this week:
Market Recap - Earnings and the Yield Curve
Macro - Housing
Earnings Results
Premium Post of the Week - NatGas on a Decline
The Week Ahead - Economic & Earnings Calendar
Closing Thoughts - The most eventful week of the season
Let’s dive in ⬇️
Market Recap - 18 July - 22 July, 2022
We’ve had quite the week, with a lot of heavy hitters reporting but, the real movers are yet to come next week. We saw a continuation of the bear market rally following on from last week. And, yes I really do believe it is just a bear market rally, because we’re still in a bear market. I also do see this market going down further - so no, the bottom is not in, in my opinion.
We’re headed for a recession, in the US and Globally, and stocks don’t do well in a recession. To add to that, we’re already seeing slowing growth in earnings and revenues. I don’t think what we saw last week in terms of Twitter and Snap bode well for the market. Not to mention, Tesla. We knew going into the quarter that earnings would be challenging but, it would seem like there’s more to come, next quarter as well.
The second quarter earnings season for the S&P 500 continues to be weaker than normal. Both the number of S&P 500 companies reporting positive earnings surprises and the magnitude of these positive surprises are below their 5-year averages. - FactSet
One last thing I wanted to cover, and that I’ve been covering for a while now - the Yield Curve. The picture below is the Yield Curve - this is deepest inversion and shaping up to be the longest in the last 20 years!
I’ve said this before - the Yield Curve inverting is not scary in and of itself but, what is scary is when it inverts by a large measure and remains inverted for a long period of time. This is exactly what we are seeing now.
The green line below, represents the breakeven with anything below counting as inversion.
Macro - Housing
We had housing data this week and the previous week and the outlook is not pretty. It’s no surprise that housing has been coming down with mortgage rates soaring. With higher rates, fewer people are likely to take on home loans. This is simple and it’s a given.
But, there was also the argument that housing in the US may not break as quickly because there was an inherent supply shortage. Well, it would seem that construction is actually slowing, despite a shortage.
If you think about it, this also makes sense. A lot of the houses that were purchased during the pandemic were second homes, vacation homes and homes for AirBNB. Rates were low, mortgages were easy to take on and people’s disposable incomes were padded with stimulus checks and lower spending from staying home. With inflation eroding people’s incomes, they would be reluctant to bear the cost of the mortgage or even upkeep on the second homes, if they were all-cash purchases.
I was listening to the CEO of the NAHB, Jerry Howard, earlier this week and he had some very interesting things to say. I don’t remember all the direct quotes but here are my notes paraphrased from that:
Since WWII housing has always led the US into a recession and has also always been the first to bring the country out of a recession.
This time he’s not too sure that housing can lead the country out of a recession because of the supply shortages and rising costs of construction.
Builders are increasingly giving up new projects and, moving to remodelling or maintenance work instead.
There is a drop in speculative housing projects
A long-term lumber agreement with Canada is still something that is required in the US
There are still plenty of construction jobs that remain unfulfilled. With construction spending slowing, this only seems to be getting worse.
With the pressure on housing, we’ve seen the home builder ETFs ( XHB 0.00 ITB 0.00 ) drop drastically from their peaks. We’re seeing a slight bounce as the market rallies from time to time and rates on the long end come down. However, I think this is short lived. We hear from DR Horton earlier in the weak, who did mention that there has been a host of cancellations and I suspect we will still see this trend continue as forewarned by Mr. Howard.
Earnings of the Week
Premium Post of the Week (ICYMI)
The Week Ahead
Economic Calendar (time in ET)
Earnings Calendar
Closing Thoughts - The most eventful week of the season
With what we have coming up next week, I’m a little nervous. I think the volatility will be insane with the FOMC on Wednesday, Big Tech earnings starting on Tuesday and a few other heavy hitters like Visa, MC, and finally PCE data on Friday.
This Wednesday we are covering the FOMC alongside an amazing lineup of people… I’d love for you to tune in.
And on a happier note, I have now partnered with Traderade, to add my fundamental and macro analysis to their amazing technical trading and macro expertise. We’ve recently launched a Discord last week, with real time macro, fundamental and trading updates. Come have a look!
Here’s wishing you a happy weekend, and safe investing.
Sincerely yours,
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 no position in any of the above as of the date of publication of this newsletter. I have no affiliation with any of the companies other than that mentioned here.