Welcome to another issue of the Weekend Edition.
Thank you to all who’ve read and welcome to all the new subscribers this week!
Here’s what we cover:
Market Recap - Chopfest
Macro - China’s Q1 2023 GDP
Earnings - Highlights of the Week - FCX, HCA, ABT, ISRG, JBHT, KNX, UAL
Media Appearance - Hedgeye’s 10th Investing Summit
The Week Ahead - Economic & Earnings Calendar
Closing Thoughts - Tech Demand
Let’s dive in ⬇️
Market Recap - 17 Apr - 21 Apr, 2023 📉📈
The market continues to remain choppy as we see the options strategies being played out. We had mostly disappointing earnings this week so it should come as no surprise that the market was overall lower. The Russell 2000 small cap index however, continues to display some strength.
There doesn’t seem to be any clear leadership among the sectors but, there is some signaling of risk off. Bitcoin not only lost its $30,000 level but also slumped down over 10% during the week.
The one-week sector summary also suggests that more of the defensive sectors have been favored.
Commodities also performed poorly. We had oil and gold performing quite well toward the beginning of the week only to decline and close out in the red.
We had a number of materials and mining companies report and we certainly didn’t receive a lot of good news. It would seem that global growth is slowing. And despite OPEC’s
price production cuts that temporarily boosted the price of oil, we’re now adjusting to the reality that demand is falling. Schlumberger SLB 0.00 on its Q1 earnings call on Friday said it is not seeing signs of OPEC+ members slowing down in the Middle East but, that doesn't necessarily mean that oil prices won't decline.
One significant issue among the OPEC member is making up for the production coming out of Iraq, who is not really bound by quotas. Iraq is now signaling an increase in production and one reason for the cuts is also to balance this increase.
The reopening of China was meant to be the beacon of hope in terms of boosting demand. We received positive Chinese GDP numbers but, the details don’t necessarily suggest that we’re in for an increase in demand for commodities. More on this in the Macro section below.
Macro - China’s Q1 2023 GDP 🌎
GDP numbers for China surprised to the upside. The YoY GDP Growth for Q1, 2023 came in at 4.5% (previously, +2.2% YoY), while the QoQ growth came in at 2.2% (previously +0.6%).
As expected, the growth was driven mostly by retail sales and services spending. It would seem that the Covid stimulus measures and weaker comparisons, have led to a higher consumption number.
Industrial spending also increased but slower than expected. The main areas of growth reman autos, telecom & electronics and general equipment.
Furthermore, fixed asset investment - which is mainly capex spend - also declined. As did new home starts, which came in -29% YoY.
Manufacturing and real estate are not just major sectors for China but, also drive demand for energy consumption and industrial metals. Last week, the Chinese government asked steel producers to put a cap on production in order to keep prices from declining. This can only go on for so long.
If these sectors do not recover the way they should, we are likely to be faced with a slump in global demand and consequently, global growth.
Earnings - Highlights 📝
Here’s the FactSet Summary for the Week:
The earnings decline last week was -6.5% so this week, we’re seeing a slight improvement. Not surprisingly, the Materials sector is seeing the most severe decline in terms of earnings and revenues.
We heard from Freeport-McMoran (FCX), one of the world’s largest copper producer. They reported a slowdown in volume, an increase in costs and a decline in net realized prices for copper. While they expect to increase volumes in the next three quarters of the year, there is still the issue of declining copper prices because of downward pressure on global demand.
Abbott (ABT) and Intuitive Surgical (ISRG) showed strong recovery in the first quarter. Friday's report from HCA (Hospitals), a bellwether for the industry, further demonstrated that service volumes have returned to pre-pandemic levels. This, combined with easing labor pressures, points to an improvement in healthcare companies for the quarter.
The truckers however, are telling us a different story. Both JB Hunt (JBHT) and Knight Swift (KNX) missed on EPS. JB Hunt spoke about still being in a freight recession, and that volumes have not materialized. KNX lowered full-year EPS by -14%.
Finally, we also heard about improvements in business travel from United Airlines, reporting a recovery of 95-101% in business traffic in the first 2 weeks April. They also reported that long haul International was moving into the lead.
I took part in the 10th Hedgeye Investing Summit, alongside some very prominent speakers. Here’s a link to my appearance from earlier this week. ⤵
The Week Ahead 📅
Economic Calendar in Eastern Time
Closing Thoughts - Tech Demand
Most of big tech reports next week, except Apple, and with that 42% of the S&P500 by market cap is reporting just next week. There are about 180 companies reporting.
Companies have been focusing on efficiency and cutting costs. They need to conserve cash because raising debt is expensive. The market is celebrating these cost cuts and many even believe that the bad news is all priced in. While the cuts will definitely help soften the blow, my view is this time, we hear more about how demand is getting hit. We’ve certainly seen a downturn in spending in other areas and now it’s time to see how this will affect Tech.
We also have PCE data coming out on Friday, just in time for the Fed meeting on May 02-03. While Apple reports on Thursday, May 4, a day after the Fed meeting.
Here’s wishing you safe investing.
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Ayesha Tariq, CFA
There’s always a story behind the numbers.
You said it. The Fed will hike into recession if needed. Seems like that should be expected. There is no soft landing or real market rally until hikes are over.
Excellent report and coverage.