Trade The Journey

Trade The Journey

Yields keep Rising!

Good day, everyone! I trust you’re enjoying your weekend and gearing up for the week ahead. The market was recently stirred by a significant uptick in treasury yields, particularly the ten-year yield, which appears poised to breach the five percent mark. Yields have surged more rapidly than most had anticipated, bolstered by resilient economic data. Notably, shorter-term treasury yields have moderated lower, reflecting the Federal Reserve’s signals of an impending pause at their next meeting.

*The picture above symbolizes the chess match between the trader and the market.

In response to this rising yield environment, Federal Reserve Chair Jerome Powell, along with other Fed officials, have suggested that the increase in yields has effectively assumed the Fed’s role in curbing economic growth, reducing the imperative for additional interest rate hikes. While Powell has kept the door open for potential future hikes, the necessity for such actions remains uncertain.

Despite signs of a slowing economy and tightening credit conditions, the labor market continues to stand as a formidable pillar supporting consumer spending. Consumers, maintaining their confidence, are still willing to leverage credit for purchases, even in the face of escalating credit card rates. As a personal example, I recently opted to purchase a phone outright with store credit instead of choosing a thirty-six-month installment plan. This decision stemmed from my confidence in my savings and a stable monthly income. A significant portion of consumers has experienced similar improvements, having secured higher-paying jobs. I’m fortunate to have received a job offer for my current position, as many others had to endure waiting periods ranging from five to ten years for similar opportunities.

Turning to the political landscape, Congress is yet to select a Speaker of the House after the ousting of Kevin McCarthy several weeks ago. The Republican party is grappling with internal strife, further delaying the election of a speaker. Given the Republican majority in Congress, this process might take longer than initially anticipated.

The failure to elect a speaker has paralyzed Congress, preventing crucial votes on aid packages for two ongoing wars. The Russian-Ukraine conflict has now entered its second year, with Russia’s ability to profit from its energy resources allowing it to potentially outlast Ukraine. Notably, both Russia and Saudi Arabia have reduced their oil supplies. The entrance of Iran into the Israeli-Hamas conflict could further escalate global energy supply concerns.

Ongoing Wars

Over 2,000 people have lost their lives in the Israeli-Hamas conflict as the war intensifies. Israel has continued its assault on the gaza strip, conducting air strikes and preparing for a possible ground invasion. World leaders have stepped up their efforts to prevent the conflict from becoming regional as there have been talks with both sides. Residents of the gaza strips have been forced to choose between staying and facing continued airstrikes and possible ground invasion or leaving.

For now, Israel has not launched a ground invasion as the hope for hostages to be released increased as two hostages were released this past week. Protest continues around the world in support of Hamas and Palestine. For the time being, Hezbollah has not launched a full-scale attack but that could change with a ground invasion. So far, only light fighting has occurred between Hezbollah and Israel, but more concerning is the entrance of new groups.

A Yemen rebel missile attack was thwarted by a US destroyer which indicates that the risk of regional conflict is growing. The markets reacted by exiting risk assets and moving into metals. Crude oil is also reacting to the risk of regional conflict, coming close to rising above $90. Gold is nearing $2,000 spiking higher when the Israeli-Hamas conflict began. Bitcoin is also up, rising above a solid resistance level of $28,805 and is now nearing the $30,000 level. Bitcoin faces another resistance level or pivot high at $30,795 before attempting to rise above its most recent high of $31,743.

Now, let’s delve into the financial markets:

Yields: While earnings season typically takes the spotlight, the sharp rise in treasury yields has diverted attention away from corporate earnings. Ten-year treasury yields experienced a significant gap up in September of the previous year and have continued their ascent, despite a brief pullback in April. The same trend holds for thirty-year treasuries. While shorter-term yields initially followed the upward trajectory of their longer-term counterparts, recent movements have been less pronounced. This shift may be attributed to the Federal Reserve’s expected pause and possible conclusion to its rate-hiking campaign.

Economy:

Housing Picture: In September, building permits for housing units authorized saw a decline of 4.4%. While permits for single-family units authorized increased by 1.8%, multi-family unit authorizations fell by more than ten percent. Notably, single-family units authorized but not started remained unchanged from the previous month, while multi-units saw a modest 0.8% rise. Units under construction witnessed declines of 0.7%, but completed single-family units surged by 5.3%, and multi-family units saw an impressive 10.1% rise.

Existing-Home Sales Report (September): Existing-home sales contracted by 2% as yields on the ten-year treasury, a crucial indicator for mortgage rates, continued to rise. Year-on-year sales have plummeted by 15.4%. The median sales price for existing homes stands at $394,300, with inventory levels indicating a supply of 3.4 months at the current monthly sales pace. Inventory increased by 100,000 units, while properties stayed on the market for twenty-one days, marking a one-day uptick from August levels. Single-family home sales experienced a 1.9% decline.

MBA Weekly Applications: Mortgage application volume dipped by 6.9%. The refinance index saw a ten percent decline, while the purchase index fell by six percent from the previous week. The average rate for thirty-year conforming loans increased by three basis points to 7.70%, whereas thirty-year jumbo loans saw a decrease of fourteen basis points to 7.56%.

Inventory and Manufacturing:

Business Inventory (August): Business inventories grew by 0.4%, accompanied by a 1.3% rise in sales. The inventory-to-sales ratio stood at 1.37. Retail trade inventory increased by 1%, excluding motor vehicles and parts, which grew by 0.5%. Notably, furniture, home furniture, electronics, and appliance stores, though still in negative territory, displayed the most significant increase, rising by 1.4% to 0.8%. Inventories for motor vehicle and parts dealers surged by 2.1%, disregarding recent autoworkers’ strikes.

Empire State Manufacturing: Business conditions in New York State’s manufacturing sector declined, registering at -4.6. New orders and shipments remained relatively stable, while unfilled orders decreased, and delivery times improved slightly. Employment improved as the average workweek saw a slight uptick. Inventory levels experienced a modest decline. Input prices exhibited slight declines, while prices paid remained relatively unchanged. Despite some optimism about future conditions, capital spending remained lackluster.

Retail Sales and Production/Capacity:

Retail Sales (September): Retail sales outperformed expectations, rising by 0.7%. Excluding motor vehicle and parts sales, there was a 0.6% increase. Sales witnessed growth across various sectors, with gasoline station sales being a notable exception, declining by 0.9% after a robust 6.7% surge in July. Miscellaneous store retailers and non-store retailers recorded significant increases, while sales of clothing and building materials contracted after previous gains. Food and beverage store sales remained nearly unchanged, while motor vehicle and parts dealers saw an increase from 0.4% to 1%.

Industrial Production and Capacity Utilization (September): Industrial production expanded by 0.3%, with manufacturing production rising by 0.4%. Mining also saw a 0.4% increase, while utilities experienced a 0.3% decline. Consumer goods production exhibited mixed results, with a 0.2% decline in consumer durable goods production and a 0.1% change in nondurable goods production. Business equipment production dipped for the second consecutive month, falling to 1.7%. Construction production contracted by one point to negative two. Materials production surged by 0.9%, with non-energy durables and non-energy nondurables rising by 0.8% and 0.5%, respectively. Consumer durable goods production increased by 1.2%, while nondurable goods production remained unchanged. Capacity utilization climbed by two points to reach 79.7, aligning with its long-run average. Manufacturing capacity utilization rose by 0.1 to 77.8, mining capacity increased by 0.5 points to 95.1, and utilities capacity fell by 0.4 points to 72.7.

Leading Indicators:

The Leading Economic Index (LEI): The LEI dropped by 0.7% following a decline in August and a year-and-a-half-long trend of contraction. While the last six months have seen contractions, they occurred at a slower pace than the previous six months. The Coincident Economic Index increased by 0.3% and remained in positive territory. Key indicators to monitor include payroll employment, personal income excluding transfer payments, manufacturing trade and sales, and industrial production, as they provide insights into the likelihood of an impending recession.

The Lagging Economic Index: The lagging economic index rose by 0.2% but remained unchanged from the prior month. Within this index, non-financial components led the increase. Notably, average consumer expectations for business conditions and the ISM index of new orders each declined by over 1% over the past six months.

Initial Claims:

Initial claims came in below expectations, decreasing by 13,000 to 198,000. However, continuing claims increased by 29,000, reaching 1.734 million. The four-week moving average for initial claims nudged up by 1,000, settling at 205,750. This data suggests that employers are becoming increasingly reluctant to lay off workers, reflecting the challenges businesses face in finding qualified or skilled labor.

Earnings:

Netflix: Netflix exceeded earnings expectations and slightly outperformed revenue forecasts. The company also surpassed its initial subscriber projections. A notable achievement was the 70% increase in subscribers to its ad-supported tier, now comprising 30% of new sign-ups. Looking ahead, Netflix aims to enhance its margin, targeting 22-23% compared to the initial forecast of 20%. Despite prior concerns, free cash flow is improving.

Even with the resolution in SAG-AFTRA, Netflix anticipates maintaining positive free cash flow. Its operating income has exhibited a robust 25% year-over-year increase. Impressively, 70% of its subscribers are located outside the United States, while domestically, Netflix lags only behind YouTube TV in terms of screen time. The stock has experienced positive upgrades in terms of price, demonstrating steady progress in its operating margin, with a sole pullback observed in 2022.

Tesla: Tesla fell short of both earnings and revenue expectations. Elon Musk, Tesla’s CEO, expressed concerns about the economy and rising interest rates. While he discussed the forthcoming launch of the Cybertruck on November 30th, critical details like pricing and specifications remain uncertain. The Cybertruck is expected to take time before contributing significantly to Tesla’s cash flow. Furthermore, Tesla reported its lowest earnings since the fourth quarter of 2022. Notably, free cash flow declined by over 70% year-over-year, while capital expenditures surged by 36% in the past year. Revenues saw only a modest 9% increase.

Tesla continues to grapple with high costs at its new factories, even as it reduces prices. However, the energy generation and storage sector remains a bright spot for Tesla, despite declining production levels.

American Airlines: American Airlines outperformed earnings expectations but missed revenue forecasts. Earnings and operating income experienced noticeable declines compared to the previous year. Rising fuel prices are posing a threat to American Airlines’ future profitability, with the price per gallon of fuel increasing from $2.91 to a range of $3 to $3.11. American Airlines adjusted its earnings projections downward. Consumer travel patterns have shifted from domestic flights to international travel. Labor costs have also eaten into profits, rising by 17% over the past year.

However, American Airlines anticipates a return to travel numbers from the previous year and has successfully reduced its debt burden by $1.4 billion. It’s worth noting that United Airlines and Delta Airlines reported increasing revenue and profits.

Bank of America: Bank of America exceeded both earnings and revenue forecasts. Net interest income continued to bolster profits, rising by 4% year-over-year. The provision for credit losses stood at $1.2 billion, reflecting a modest increase, as net charge-offs increased but remained below pre-pandemic levels. Average deposits experienced a slight decline, while loans and leases remained virtually unchanged from the second quarter. Bank of America added 1.1 million credit accounts and achieved its 19th consecutive quarter of growth in checking accounts.

The bank’s headcount continued its downward trend. Based on checking account data, consumer spending is showing signs of weakening. While the quarter was positive, Bank of America remains susceptible to higher interest rates due to its significant holdings in low-yielding, long-duration securities. Bank of America’s CEO, Brian Moynihan, maintains a view of a soft landing for the economy, despite the slowdown in economic growth, which, while slower, continues to expand.

Technical Story:

 

This Past week’s Cash flow report:

This past week went well as I added it to my savings account. Unfortunately, I purchased a phone and decided to use credit instead of cash which added a balance to a card I paid off. I’m confident that I’ll pay the card off within the next several weeks. My goal is to pay off all of my personal credit accounts as I began working overtime this past week.

Another goal of mine is to save over 30% of my income so far, I have managed to save at least 25% of my income. Overall, I’m in an admirable financial position and I look forward to being free of debt in the coming months.

Grade: C-

Reason: Some improvements

Leave a Comment

Your email address will not be published. Required fields are marked *