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:
Market Recap - Bear Market continues…
Macro - CPI Break Down
Earnings Results and FedEx
Premium Post of the Week - Spiraling Out of Control
The Week Ahead - Economic & Earnings Calendar
Closing Thoughts - Lessons that Remain
Let’s dive in ⬇️
Market Recap - Sep 12 - Sep 16, 2022
This was certainly a challenging week for anyone on the long side - other than being long USD, perhaps. The indices took a serious hit first, because of the hotter CPI numbers and second, because of earnings and guidance.
The CPI numbers probably caught everyone off-guard. I can certainly say that it caught me by surprise. While I didn’t think that the numbers would come in much lower, I really didn’t think they would come in above estimates.
We’ll have a look at both in just a minute below.
Over the past few months, the bear market we’ve been experiencing has been marked by sharp rallies, much sharper than most bear markets. I’d posted this picture on Twitter earlier in the week but, it seems important enough to post it again here.
It’s not surprising that this bear market isn’t following the typical average path. The state of the economy isn’t exactly following the typical tightening path either. We’ve experienced a long-running bull market for the past 13 odd years marked by unprecedented levels of liquidity injected into the system.
That’s all going away now. And when liquidity reduces, volatility increases.
What we have now is one of the most aggressive tightening cycles in decades - rate hikes and quantitative tightening, something we’ve not experienced properly as yet.
With the CPI coming in hotter last week, there has been talk of a 100bps hike int he upcoming meeting this Wednesday Sep 21. If the Fed does that, the markets are sure to take yet another hit.
So how bad was the CPI? Let’s have a look.
Macro of the Week - CPI breakdown
Here’s the overall view, which we’ve already seen. Basically year-on-year, CPI did decline to 8.3% vs. 8.5% for the previous month but, still above estimates. Month-on-month CPI actually saw an increase. We need this number to be negative.
I took a high-level look at the break down of CPI numbers. I took the numbers from the BLS site and color coded them.
While all change in “All Items” is still low enough to register a green, it’s not negative which means it’s not decreasing. The second last column (August 2022) is quite telling. Anything less than a dark green is not good.
Food - we see that while the change has decelerated from the previous month, it’s still increasing.
Energy - Energy as a commodity has decreased remarkably but Energy services still remains high and increasing, in fact more than food.
Services - Inflation is still being driven by services. Shelter, transportation and medical care services all increased.
The basic areas of spending are all hit by increases in the CPI numbers. This is not great at all. The Fed started hiking in March and while there is a time lag to monetary policy, we should have seen the effects somewhat by now.
Yet, what we’re still experiencing is an increase in the number, albeit at a slower rate. Inflation is becoming well-entrenched. When you look at the data, there is no question that the Fed is not going reverse course. There is no pivot coming this year, and we might see hikes well into the middle of 2023.
Earnings of the Week
Earnings Insight summary from FactSet:
We really had only the two worth noting - Oracle and Adobe. Neither stock did very well on earnings.
But, the big news of the week was obviously FedEx pre-announcing.
FedEx lowered their guidance drastically and announced serious cost cutting measures. They are closing 90 locations and taking sales estimates down by $800m, of which $500m was estimated from FedEx Express Europe and China. FedEx derives over 56% of their revenue from outside the US.
I can’t imagine they didn’t see the macro headwinds. This is just poor management. Their earnings are due next week. The macro environment has not changed drastically in the last 3 months - at least not to the point that they didn’t see this coming. More companies are like to follow suit as they adjust to the new reality of a recessionary environment.
The Week Ahead
Economic Data - FOMC rate announcement on Wednesday at 2pm ET
Closing Thoughts - Lessons that Remain
The beginning of September is conference season and we had the GS Retail Conference, MS Healthcare Conference, the GS Communication Conference and a host of others.
I only took a look at the GS Retail Conference so far, and it seems like people still have some adjusting to do. Most companies still don’t want to accept where the macro-economic environment is heading and continues to cite the consumer as being strong. But, what we saw from FedEx should be a stark reminder to all.
The lessons remain:
Companies are still too optimistic.
A global recession is coming and it will hit companies that have international revenue.
The recession will get more severe and there will come a point where costs cannot be passed on to consumers.
The price of debt continues to increase and asset valuations will continue to decrease leaving companies structurally weaker.
It would be prudent to be cautious and stop calling a bottom every time the market has a rally. The Fed is not done and the Fed Funds Rate increasing has far reaching consequences across the globe. I hate leaving on a gloomy note but, it’s better to know than not know.
Here’s wishing you a happy weekend and safe investing. Stay sharp!
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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 no affiliation with any of the companies that are mentioned.
Amazing datapoints and agree with your ending statements. Keep up the great work!