Trade The Journey

Trade The Journey

Bull trap

A bull trap?

Top of the Morning! I hope everyone is enjoying their weekend being that the Superbowl takes place today. This Superbowl marks the first time that two black quarterbacks will face each other in the big game. Being that I’m a Los Angeles Rams fan, I just hope that the Superbowl is an exciting and competitive game.

This past week most of the indices retreated from their recent uptrends that began at the start of the year. A vocal Fed issued its preference to keep rates higher for longer to help its fight against inflation. They also spoke of having to raise rates higher than initially expected. The market reacted with the indices reversing their trend, bond yields surging higher and rates markets forecasting an additional hike and higher rates.

It seems like the market is finally taking the Fed and its insistence on higher rates for longer seriously. The recent employment situation report added fuel to the change in sentiment.

Economy Bull Trap

This past week, there weren’t too many economic reports released. The Fed chairman and most of the board members spoke this week about rates remaining higher for longer. The futures market is indicating that rates could venture above 6%. The Fed’s rate tool previously forecasted a 65% chance of another twenty-five-basis hike in March. However, the probability of a twenty-five-basis hike has risen to 93.5%.

For the May meeting, the probabilities have shifted from a pause to another twenty-five-basis point increase bringing the target range to 5-5.25%. Venturing further out to the June meeting, the probability of a quarter points increase to the Fed rate is steadily rising. In early January the probability was close to 10% and is now over 35%. Maybe the market is finally receptive to the idea the Fed has been delivering which is that rates will remain restrictive for longer.

In response to the strong employment situation report which showed 517,000 jobs created, the bond market sold off and continued its downward trend as the Fed speakers took the podium. The Markets responded by retreating from its uptrend with the exception of the Dow which has held steady above its 50 SMA.

The first report released this week was on US International Trade in Goods and Services for December. Exports were down 0.9% while imports rose 1.3%. The deficit increased by 10.5%. Contributing to the decrease in exports were industrial supplies & materials, and consumer goods. Services exported rose in travel, transport, and other business services.

Imports increased in consumer goods, automotive, vehicles, parts, and engines. Imports of services fell in travel and transport. Spending on travel has steadily increased as the Pandemic subsided and will most likely continue to rise in 2023. According to the Wall Street Journal, Americans have spent close to 35% of their savings gained during the Pandemic. At the end of the year, they forecast close to 65% of their savings will be gone.

To put the amount of savings in perspective, a total of $2.7 trillion was distributed to households. In 2020, the savings rate swelled to 16.8% and as of 2022 the savings rate fell to 3.3%. As inflation continues to clamp down on available discretionary income, consumers are turning to credit. Although the latest credit report showed that revolving credit rose far less than forecast, that may soon change.

Total credit fell by $21.6 billion in December.  Revolving credit fell by $8.1 billion and nonrevolving credit fell by $13.5 billion. Total flow for revolving and nonrevolving credit fell steeply in December. Flow data represents changes in the level of credit due to economic and financial activity. Car, credit card, and personal loan were not available. Below is a chart of the year-over-year change in consumer credit, where you will see the rebound in consumer credit after 2020. The level of consumer credit reached the same level as the recovery that occurred after the financial crisis in 2008-09.

Monthly wholesale inventories rose 0.1% in December, a smaller increase than the 0.9% in November. Merchant Wholesalers’ sales were unchanged. Inventories rose 0.1%. Durable goods sales rose 1%, rising for professional equipment (3.3%), computer equipment (4.6%), Electrical (2.6%), hardware (2.3%), and Machinery (0.1%). Nondurable goods sales fell across the industries, with the steepest decrease in Alcohol (3.8%), and Apparel (3.6%).

Wholesalers’ Inventories for Durable goods rose by 0.9% and nondurable goods fell by 1.2%. Durable goods Inventories rose for automotive (2.6%), machinery (2.2%), and electrical (1.4%). Durable goods inventories fell markedly for Computer equipment (4.6%). Nondurable goods inventories fell sharply for Petroleum (5.8%), Farm products (3.6%), Apparel (2.3%), and Paper (2.3%). The inventory-to-sales ratio remained about the same, at 1.36.

Moving to housing, mortgage applications rose by 7.4% from the prior week. The refinance index increased by 18% and the purchase index rose by 3% from the previous week. Applications are about 58% lower than the same time a year ago. Looking at the average loan size can give you an indication of the trend and income home buying is centered within.  30-year fixed rates for conforming loan balances fell 1% to 6.18%. 30-year fixed rates for jumbo loan balances fell 0.03% to 5.96%.

Initial claims increased slightly, ending the week with a total of 196,000 new claims added. Continuing jobless claims rose 38,000 to 1.688 million. The labor market remains tight. The four-week moving average for initial claims fell to 189,000, and continued to trend downward.

The final report released this week was the Preliminary report from Surveys of Consumers by the University of Michigan. Consumer sentiment increased by 2.1 points to 66.4. Current economic conditions rose by 4.2 points to 72.6, however, the current index of consumer expectations fell 0.4 points to 62.3. Inflation remains a top concern for concerns.  While the long-run inflation expectations was unchanged, year-ahead inflation rose from 3.9% to 4.2% reflecting the concern about short-term price increases.

In a report released last November by the University of Michigan, they detailed some of the changes consumers are making in response to inflation. Here are the five major points listed in the article:

  • About 60% of consumers have scaled back their spending due to inflation and the year ahead even more are planning to cut back spending led by lower-income consumers. Goods with large prices have largely been avoided by consumers.
  • Consumers who did decrease their spending have higher inflation expectations contrasting those who did not cut back their spending who have lower inflation expectations.
  • Consumers are more reluctant to borrow for major purchases than to dissave.
  • Inflationary psychology, which is the preference of buying now before further price increases, has not spread.
  • Consumers report a greater awareness of inflation in the news than back in the 1970s.

Earnings Picture Overall Insights from Factset

So far 69% of the companies in the S&P 500 have reported. 69% have reported EPS above forecast and 63% have reported revenues above forecast. Earnings surprises have been below their five and ten-year averages. Revenues reported above estimates are below the five-year average but slightly above the ten-year average.

Energy and Industrials lead the four sectors that have year-over-year earnings growth out of the eleven sectors in the S&P 500.  Real Estate and Utilities also had earnings growth over the past year. So far earnings growth has shown a decline of 3.3%. Communication Services, materials, and consumer discretionary lead the sectors reporting year-over-year earnings decline. Energy, Consumer Discretionary, and Industrials led the sectors reporting year-over-year growth in Revenues. Information Technology, Materials, and especially Utilities were the only industries that declined in revenue growth year-over-year. The S&P 500 revenue grew 3.9% year-over-year. According to Factset, earnings are expected to show growth in the second half of 2023.

Some Notes from Earnings:

Continuing from last week, lower-priced fast food is still bringing in profits evidenced by YUM! Brands’ recent earnings report. Despite the higher price for commodities and shortage of workers in some areas, they will still able to improve sales and operating profit. YUM! Brands opened a total of 55,000 restaurants globally.

Hertz beat on earnings but missed on revenues forecasts, coming in unchanged.  Hertz is adding to its EV fleet, by fulfilling its order of 100,000 Tesla Model 3’s as part of the 428,700 vehicles it added last year. They cited that leisure and corporate demand is returning to pre-pandemic levels. Hertz renewed 100% of corporate contracts at higher pricing. They also noted the continuing positive shifting spending patterns on travel, as their revenue growth exceeded their expectations.

Chipotle missed earnings and revenue forecasts. Higher prices may have led to weaker sales and foot traffic for the second straight quarter. Menu prices rose 13.5% from the previous year and digital sales make up a large part of its revenue. They noted supply outages, staffing challenges, and exclusions from COVID as challenges they faced this past quarter. On a positive note, they repurchased their stock and are on pace to open 255 to 285 new restaurants in 2023.

Jacob’s engineering beat on earnings and revenue forecasts. They cited the passage of the $1.2 trillion infrastructure & jobs act and the return of semiconductor manufacturing capacity as tailwinds for the company. They noted that three market trends are set to see growth moving forward which are cyber, commercial space tourism, and 5G technology for national security.

Disney beat on revenue and earnings forecasts, with the latter surprising the market. It is well known that Bob Iger returned, replacing Bob Chapek to help Disney regain its footing. To assist in saving costs, Disney will cut jobs and other operational costs, restructuring the company to be made up of three divisions which are Disney Entertainment, an ESPN division, and parks, experiences, and products.

An increase in its Disney+ subscription costs led to a loss of subscribers but fewer than analysts expected. Disney experienced a sharp increase in revenues in its parks, experiences & products division with a large part coming from theme parks. During the earnings call, Bob Iger mentioned that Disney will no longer be providing long-term subscriber guidance and foresees that Disney+ will reach profitability in 2024. He also stated that he plans to reinstate the dividends as cost-cutting across Disney will allow him to do so.

Nasdaq : Stock Chart, reference levels, and normal distribution chart

Dow Jones : Stock Chart, reference levels, and normal distribution chart

S&P 500 : Stock Chart, reference levels, and normal distribution chart

Russell 2000: Stock Chart, and reference levels

 

This past week’s cash flow report:

The cash flow crunch continues but on the brighter side, I have multiple job interviews lined up this upcoming week. Either I have to further cut my expenses or increase my income to help bring my cash flow back in balance. Either way, I have to do something to help replenish my savings account which has been drained due to emergency expenses, namely car repairs. I expect this upcoming week will be challenging.

Grade: D+

Reason: Not much improvement from the previous week

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