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The Weekend Edition # 60
50% retracement complete; Aluminum or Aluminium?; JPM & UNH Earnings; Calendars; Closing Thoughts - Look out below
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 - 50% Fib retracement complete
Macro - Aluminum or Aluminium?
Earnings Results - JP Morgan and United Health
Other Posts of the Week - China and UK
The Week Ahead - Economic & Earnings Calendar
Closing Thoughts - Watch out below
Let’s dive in ⬇️
Market Recap - Oct 10 - Oct 14, 2022
It’s been a seriously wild week in the market. The markets took the CPI data hard with the SPX falling 2.4% before turning around and closing 2.6% up on the day. Peak to trough, the SPX move 5% on the day. Unfortunately, the close of the week on Friday saw the indices washing out again and giving back all their gains.
A little bit of technical analysis since I’ve been hanging out with traders so much - on Thursday the SPX broke below its 50% Fib Retracement level of 3504 from the Covid lows. The next level below this is 3193 and traders are probably looking for 3200 down to 3000, for the next leg down. We’ve got more Fed hikes in the pipeline and a tough two quarters of earnings. It remains to be seen where the bears take this.
Macro of the Week - Aluminum or Aluminium?
A quick note on Aluminum (I’m going with the American spelling here).
First, aluminum is essential to almost every industry in the world.
This week, the US came out with news that they are weighing a ban on Russian aluminum - either through an outright ban, extreme sanctions or sanctions against Rusal (Russia’s aluminum company). This definitely has some major implications not just for Russia but, for global aluminum supplies.
Rusal is the world’s second-largest producer after China’s Hongqiao Group. In fact, the US imports 10% of its aluminum requirements from Russia. But, Russia and Eastern Europe have now become the 4th largest region producing aluminum.
But in recent months, the production of aluminum has fallen across the globe, not only because of lower demand and shipment issues but because of production issues.
After the geopolitical conflict, Australia banned export of alumina to Russia in protest. Alumina is essential to producing aluminum.
Europe is facing an energy crisis and the major companies are cutting production there. One ton of aluminum requires 15MW of energy; 40 times more than a ton of copper. Europe’s aluminum production has fallen to its lowest level since 1973.
Speira - Germany’s largest plant is cutting production by 50%. Aluminium Dunkerque Industries France - Europe’s largest smelter is cutting production by 22%, even though they have fixed prices for some of their energy requirements.
Given how essential aluminum is we are then faced with the following -
The reduced production could mean further price pressures to drive up the price of aluminum adding to further inflation throughout the supply chain
Russia manages to reach an agreement with the London Metal Exchange (LME) to release supplies directly to their warehouses - this could increase supply and lower prices. Rusal usually sells aluminum under long-term contracts to identified buyers. The remaining is usually sold to traders; Glencore, being their largest trader.
Russia’s move, however, is being opposed by the likes of Alcoa, who sent a letter to the LME not to allow this stating it could crash prices in the market.
If we find ourselves with a shortage of supply, I would think that the LME may agree to Russia’s proposition. We’re probably at quite an interesting crossroads here and it remains to be seen who wins out the aluminum battle. While all this plays out, prices still remain significantly elevated.
Earnings of the Week
We kicked off earnings season this week and we’ve already got a heavy round of data coming out from the banks. Frankly speaking, I was leaning bearish on the banks but, I didn’t have a good read this quarter. And quite rightfully so. Most of the banks came out with quite a surprise to the upside. I have some thoughts on JP Morgan and United Health but first, a brief summary from FactSet:
Overall, 7% of the companies in the S&P 500 have reported actual results for Q3 2022 to date. Of these companies, 69% have reported actual EPS above estimates, which is below the 5-year average of 77%. In aggregate, companies are reporting earnings that are 0.1% above estimates, which is well below the 5-year average of 8.7%. - FactSet
JP Morgan JPM 0.00%↑
JPM came in with some solid quarterly revenue and profit numbers, after missing estimates for the last two quarters. A few items that caught my eye:
QoQ profit was up 13% but YoY profit is down -17% driven net credit reserve build of $808 million compared to a net reserve release of $2.1 billion in the prior year.
Net charge offs were $727million up by $203million
Investment Banking Fees were down 47%
Expenses were up 12% YoY
Loan growth on the consumer side came from revolvers and credit cards instead of their stable mortgages and auto loans
United Health UNH 0.00%↑
UNH posted outsized earnings. Their estimates were already quite high and yet they beat both top and bottom line. (Disclaimer: I am long UNH and it was one of my recommendations on Fox Business)
Adjusted earnings increased by 28.1% YoY to $5.79/share.
Unfortunately, they broke their 5 quarter streak of improving medical care ratios by 0.1% but still solid 81.6%. (Medical Care Ratio = Claims / Premiums)
Starting 2023, they will jointly develop 15 Walmart Health Clinics in Florida & Georgia
They’ve made share repurchases of $10.5B during the first 9 months of the year
Care patterns were similar to last quarter and they are looking for this to normalize next year, i.e., return to pre-Covid levels. On the one hand, this signifies that there is possibly less drag on earnings due to deferred care patterns and on the other hand, it means going into 2023 they will be looking at redeterminations of benefits, as they pointed out.
And on inflation…
I think it’s become much less about COVID. There is now I think there is a blend of possibly a little bit of COVID effect in the system, but cost of living effects, things like inflation, things like capacity constraints in the system as the labor market tightness has affected different parts of the system at different moments. - Andrew Witty, CEO
Other Posts of the Week
The Week Ahead
Earnings Calendar - Quite. few major earnings next week including Netflix and Tesla, not to mention the rest of the major banks - Bank of America, Goldman Sachs and some of the major airlines.
Economic Calendar - Housing data out next week sprinkled with a few Fed speakers
Closing Thoughts - Watch out below
Even with most of the banks reporting a strong start to earnings season, we saw the market head down on Friday. Global events are certainly weighing on the markets more than ever before.
I am somewhat pensive about this earnings season. I know I have been saying it for the last 2 quarters but, the truth is companies are decelerating. There have been numerous downgrades and look at where the S&P 500 is. We’re firmly in a bear market across the board.
Could we see violent reversals sparked off by earnings? Yes, I’m quite sure that we will. Nevertheless, with every bit of news we grind down lower. There’s nothing good coming in the next two quarters and we have to just wait it out, if we’re investing long. And if you’re going short, there too lies danger, as bear market rallies could potential rip your face off, as they say.
If you’re trading, remember your stops and if you’re investing, look for solid companies to DCA although, I’m still really not buying as I don’t think we’ve hit the bottom.
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 UNH 0.00%↑ as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.