The Weekend Edition # 72
OPEX turns things around; Macro: Mixed Data; Earnings: Netflix, P&G, and United Airlines
Welcome to another issue of the Weekend Edition.
Thank you to all who’ve read and welcome to the 191 new subscribers this week!
Here’s what we cover:
Market Recap - OpEx turns things around
Macro - A mix of data
Earnings - Netflix, P&G and United Airlines
Premium Article - Options Market & Stock Idea on Utz
The Week Ahead - Economic & Earnings Calendar
Closing Thoughts - Layoffs and Landings
Let’s dive in ⬇️
Market Recap - 17 Jan - 20 Jan, 2023
We had a shorter trading week this week with Monday being a holiday and the market opened to three down days. Had it not been for options expiry on Friday, we probably would have closed the week in red. This week we had $2.7 Trillion in notional exposure expiring on Friday and from what we’ve seen in the past few months, OpEx tends to drive up the markets.
We had a whole host of economic data coming out this week not to mention the Fed speakers throwing in their two cents. The other big news of the week was Fed Chair Powell getting Covid. Some say that this seems have driven some of the negative market sentiment.
On the other side of the world, we had the Bank of Japan’s meeting and all eyes were on whether Governor Kuroda makes changes to their Yield Curve Control band. Last month the BoJ decided to widen the band on their 10-year bond yields from +/-0.25% to +/-0.5%. Why did this matter? Because a widening of the band would cause their 10-year yields to rise and that would in turn cause the Japanese Yen to soar pushing down the dollar and the Japanese stock market to crash. But, none of that happened.
The Bank of Japan left the YCC unchanged, so the Yen declined hard on Wednesday with the Dollar soaring, quite possibly sparking off the decline in US equities. We also saw the Japanese Index (the Nikkei) climb over 1.5%. But, that didn’t last long and the Nikkei promptly gave up its gains the next day.
We also had Goldman Sachs reporting on Tuesday and what a negative surprise that was. The stock dropped almost 7% on the news and took down the Dow Jones Industrial Average with it. But, Friday saw bullishness in the Nasdaq not only from OpEx but also from Netflix, which gapped up and closed almost 8.5% higher on beating subscriber numbers.
Macro of the Week - Mixed Data for the Week
We got mixed data where the US economy is concerned.
🔴 Negative: The Empire manufacturing survey fell to its lowest level since 2001 outside the Covid Crash. The Empire Manufacturing Survey is a read on sentiment data of General Business Conditions, which is not a good sign at all.
🔴 Negative: Retail Sales MoM overall and ex-Autos. This is the second month in a row that retail sales have fallen and is a clear sign that demand is slowing in the economy. Although the surprise comes from a fall in Autos, where prices have now declined. Nevertheless, auto lending numbers have also declined at banks which lends further credence to this data.
🔴 Negative: Industrial Production also fell for yet another month reaching its low since the pandemic - a sign of economic slowdown.
🟡 Neutral: Housing market data came in slightly better than expected with the NAHB Housing Market Index increasing for the first time since April 2022. Housing Starts and Existing Homes sales also came in better than expected while Building Permits came in slightly lower than expected.
FactSet Earnings Scorecard:
Earnings revisions show that now the estimated earnings decline for the SPX is -4.6% vs. -3.2% in December. We’ve seen several guide downs and worse-than-expected results from a number of companies, and the season is just getting started. Next week, we have Microsoft and Tesla to really get into tech earnings.
Netflix NFLX 0.00 came out with a surprise beat in subscriber number of 7.7million vs. the guidance of 4.5million. Seems like their ad supported tier is working but, that would just mean lower average revenue per user. They also posted EPS much lower than the expect $0.55 coming in at $0.12, mostly due to foreign exchange impairments for the year that was reported in this last quarter.
United Airlines UAL 0.00 reported a double beat and bullish guidance for the year. However, they did warn that there were still issues that wouldn't let them return to pre-pandemic performance:
Shortage of pilots - the current demand level is about 10,000 pilots, which is about 3,400 more than the current supply
Aircraft Manufacturers such as Boeing are still behind schedule
Air traffic control and airports are struggling to keep up with the sudden surge in demand
Proctor and Gamble PG 0.00 delivered a double beat as well but not a lot of good news. They’ve been raising prices almost 10% YoY and this has led a drastic slowdown in volume. This quarter volume fell 6% YoY, which followed last quarter’s decline of 3% and a decline of 1% in the quarter before that. The company however said, this decline was not all due to price increases but also because of:
Shutting down 50% of their Russian business
Covid Lockdowns in China
Retailers temporarily cutting down on orders to maintain inventory levels
Premium Articles of the Week
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The Week Ahead
Closing Thoughts - Layoffs and Landings
Quite a few of the banks are coming out with a neutral view on the economy, claiming they don’t think the economy will experience a recession including, analysts at JP Morgan.
This is quite odd because we just heard from Jamie Dimon on their earnings call modeling for a mild recession and an unemployment rate of 5%. On top of which, he spoke at Davos saying “I think there’s a lot of underlying inflation, which won’t go away so quick” and thinks that rates could cross 5% and wouldn’t be surprised if they reached 6%.
Not surprisingly, we also heard from legendary investor Howard Marks who also thinks that the Fed will not cut rates this year but rather hold it to the end of the year. And this makes sense, since most veteran investors do believe that inflation will continue to be sticky for a while and if the Fed doesn’t budge on interest rates, I don’t think we see anything resembling a soft landing that will avoid a recession or higher unemployment numbers.
We already have tech companies coming in with massive layoffs - Google just announced 12,000 layoffs, Microsoft 10,000, Amazon 18,000 and the banks are gearing up for more. While people celebrate this as a bullish sign for stocks, they ought to stop to think what it means for the longer-term growth of these companies and the economy as a whole. Cutting costs is a temporary fix and hampers growth in the long run. Most importantly, it’s clear as day that these companies are expecting a slowdown, if not a recession.
Here’s wishing you 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 or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.
Full disclaimer: https://ayeshatariq.substack.com/about
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