Trade The Journey

Trade The Journey

Beginning of a Bull Run?

Greetings this brisk morning,

Please bear with me, as today’s financial narrative will be somewhat abridged, given I’m currently grappling with the flu, contracted from a colleague who joined a facility visit despite their illness. The ripple effect of this illness is yet to be fully determined within our ranks, but given our shared transport, it’s likely more than just I have been affected.

Reviewing the previous week, we observed a pattern consistent with the prior one — a flurry of economic data and corporate earnings that held sway over market dynamics. Central to the discourse was a cluster of high-profile companies, the ‘Magnificent Seven,’ each contributing notably to market sentiment:

  1. Amazon: Exceeded earnings and revenue projections. The giant’s cost-efficiency measures have paid off, bolstering both top-line revenue and operating margins. Despite a cloud division performance that didn’t quite reach the lofty growth of Microsoft and Google, Amazon still managed to outstrip its rivals in advertising revenue.
  2. Google: Also outstripped earnings and revenue expectations. A surge in YouTube ad revenue outpaced TikTok’s daily views. However, the cloud revenue, while improving, didn’t meet the market’s expectations, trailing behind Microsoft Azure and Amazon Web Services. Cost optimization, particularly through layoffs, appears to be a focus, with Google Services, inclusive of YouTube, enjoying increased revenue influx.
  3. Tesla: The electric vehicle pioneer didn’t hit the mark with earnings and revenue. With ongoing price adjustments, operational margins have suffered. Elon Musk’s scant details on the Cybertruck’s release, combined with a prudent economic outlook that highlights the challenges of high-interest rates, suggest caution ahead. A pullback in revenue to Q1 levels from a Q2 peak has also been noted.
  4. Apple: Slightly outperformed earnings and revenue forecasts, with mixed success across various segments: iPod, iPad, and services exceeded expectations, whereas Mac and wearables did not. iPhone revenue was on target. The year-over-year analysis provides a different perspective, with sales impacted by regulatory scrutiny in China, affecting government workers’ usage of iPhones — a claim that remains disputed by China. Apple’s market share is just shy of Huawei’s in China.
  5. Nvidia: Set to report on November 21, 2023, the AI-driven interest boom positions Nvidia for strong performance expectations, reflected by substantial quarter-over-quarter revenue growth in Q2.
  6. Microsoft: Surpassed both earnings and revenue estimates, with Azure’s revenue growth being a highlight at 29%. Microsoft’s integration of AI across its suite, notably in its search engine and Office applications with Microsoft Copilot, shows strategic expansion. OS sales recovery and the nearing acquisition of Activision Blizzard are also key points.
  7. Meta: Topped earnings and revenue expectations but cast a shadow with less-than-stellar forward guidance. Improvements in daily active users and revenue metrics were noted, as was stable monthly user growth. Despite these positives, substantial losses continue to accrue in its virtual and augmented reality segments.

Collectively, these seven behemoths command a 28% stake in the S&P 500’s market performance, which closed the week on a positive note. The Federal Reserve’s intimations of a potential end to the rate hike cycle contributed to the optimistic closure, with nearly all S&P sectors ending above their five-day moving averages, except consumer staples and health care.

Financial markets experienced a retraction in yields, with ten-year treasury notes dipping from 5% to 4.57%. Gold retreated to just under the $2,000 mark, and crude oil prices slipped to $80, influenced by geopolitical tensions in Gaza. The dollar experienced a slight pullback to $105.06 against the backdrop of stationary Fed rates. Bitcoin’s price action continues to flirt with the recent high of $35,000.

Fed’s Stance on Monetary Policy:

The Federal Reserve held rates steady, with the federal funds rate range fixed at 5.25-5.50%. With an expectation for a further tightening of financial conditions, facilitated by an uptick in long-term yields to more constrictive levels, the Fed identified a strong dollar and subdued equity prices as contributing factors. The deceleration in economic growth and easing labor conditions are perceived as integral to reining in inflation to the target 2%. The Fed’s monetary strategy is also predicated on a rise in long-term yields, not solely from policy maneuvers. Chairman Powell elucidated that the current economic stance is far from considering rate reductions, with a primary focus on subduing inflation to the 2% threshold. The Fed’s commitment to data-driven decisions remains steadfast, with indications pointing towards a high likelihood of maintaining the current rate in December.

Economy:

Manufacturing
ISM Manufacturing: October
The manufacturing sector lingered in contraction, inching up to 46.7% — a 2.3% rise yet below the expansion threshold. The industry has been navigating a shrinking growth pattern, with no ventures into expansion throughout the year. Manufacturers witnessed demand contraction, with new orders diminishing, although export orders marginally escalated. Backlogs remained insubstantial, and output/consumption metrics softened, leading to a strategic reduction in workforce numbers in anticipation of further growth deceleration.

Input variables indicative of future growth showed mixed signals; inventories stayed lean, suggesting potential demand-side constraints, while delivery performance saw enhancements and price acceleration eased. Amongst the prominent manufacturing sectors, only food, beverage, and tobacco products reported growth. Surveyed entities reported a tempered demand and a consistent decline in backlogs, with some projecting enduring business demand while others anticipate a downturn into 2024.

The Manufacturing PMI reflected these challenges, falling below the twelve-month average as new orders experienced a contraction, corroborated by a higher fraction of respondents. Production hovered between contraction and expansion, a delicate balance as employment figures slid into contraction, corroborating the headcount reductions. Delivery times have improved over the year, but inventory levels have dipped further, with more respondents reporting lower stocks. Customer inventory levels did see an uptick, yet they stayed in contractionary terrain. Price deceleration persisted, albeit at a diminished rate compared to previous months.

The backlog of orders remained relatively flat, sustaining contractionary territory. The new export order index saw improvement, though imports experienced a slight downturn.

ISM Non-Manufacturing Index
The services sector recorded its tenth consecutive month of expansion, though momentum slowed. Business Activity scaled back 4.7% to 54.1%, marking the lowest reading in recent months, reflective of waning activity from respondents’ perspectives. New orders climbed by 3.7% to 55%, with a notable number of participants reporting a steady state of affairs. Employment expanded, despite a 3.2% dip, and supplier delivery performance bettered, with the index decreasing by 2.9% to 47.5%, indicative of faster delivery times.

Inventory levels contracted by 4.7% to 49.5%, while prices held nearly steady at 58.6%, signaling continued expansion albeit at a stable rate. The backlog of orders edged into expansion territory, contrasting with the sharp decline in the new export orders index, which registered a significant drop in international demand for services. Conversely, imports surged by 9.4% to 60%, a notable rebound from September.

Inventory sentiment was largely unchanged from the previous month. Participants reported economic resilience but adopted a cautious stance due to escalating geopolitical tensions, volatile crude oil prices, and labor market pressures. The UAW’s influence on wholesale trade was apparent, sparking consumer purchasing, though it did not significantly impact retail trade inventories.

Employment Picture
Employment Cost Index
Compensation costs trended upward by 1.1% post the quarterly period, with wages and salaries climbing 1.2%, and benefits increasing by 0.9%. The rise in employment costs outstripped expectations. Annually, employment costs ascended by 4.3%, a deceleration from the 5% peak in the prior September. Both wages/salaries and benefit expenses have receded over the year. While the private sector observed a downturn in year-over-year figures, state and local governments witnessed an uptick. In the goods-producing domain, compensation costs stabilized, whereas the service-providing sectors saw an increase.

JOLTS – Job Openings and Labor Turnover Summary: September
Job openings were stable at 9.6 million. There were nominal changes in hires and total separations, including separations, quits, layoffs, and discharges. Job openings amplified within the food services, arts, entertainment, and recreation sectors. Conversely, declines were noted in services, federal government, and information. The quits rate held at 2.3%, with a decrease observed in sectors like construction and wholesale trade, while an uptick occurred in retail trade and durable goods manufacturing.

ADP Employment Report: October
The private sector added 113,000 roles, with the goods-producing sector contributing 6,000 jobs, buoyed by construction and manufacturing. The service-providing sector injected 107,000 positions across various industries. Pay growth exhibited a slowdown.

Employment Situation Report
The economy added 150,000 jobs, trailing behind the consensus estimates. Gains were seen in health care, government, and social assistance, while manufacturing retracted due to the UAW strike. The construction sector bolstered its numbers significantly. The aggregate private sector’s addition fell short of expectations.

Average hourly earnings rose modestly by 0.2%, and the year-over-year wage growth slightly subsided. The average workweek was reduced by 0.1 hours, and the labor force participation rate slightly decreased. Temporary help services saw job additions, attributed to the impending holiday season. The unemployment rate inched up by 0.1% to 3.9%.

Initial Claims: Week of Oct 28th
Initial unemployment claims escalated modestly to 217,000, marginally surpassing forecasts. The four-week moving average edged up, as did continued claims. Yet, the overall trend in initial claims suggested a resilient labor market, somewhat impervious to the pressures of elevated interest rates.

Productivity and Factory Orders
Productivity Report: Third Quarter
Productivity improved by 4.7%, with output accelerating by 5.9% and hours worked increasing by 1.1%. Unit labor costs saw a marginal decline, while hourly compensation and real hourly compensation both experienced growth. In manufacturing, productivity witnessed a slight dip, impacted by a decrease in output despite more hours worked.

Durable goods manufacturing productivity diminished, even as output and hours worked both rose. Conversely, nondurable goods manufacturing productivity increased. Unit labor costs in manufacturing escalated significantly, driven by increased hourly compensation.

Factory Orders: September
Orders for manufactured goods rose by 2.8%, building on the prior month’s increase. Orders for durable goods notably rose, as did those for nondurable goods. However, some machinery sectors experienced a decline. Overall shipments increased marginally, as did unfilled orders, suggesting potential demand increases. Inventories expanded slightly, with materials supplies also seeing modest growth.

Housing Picture
Construction Spending
Total construction spending experienced a moderate increase, with year-over-year metrics showing substantial growth. Private sector spending rose modestly, with residential outpacing nonresidential. Public spending also increased, with particular strength in highway and educational construction.

MBA Weekly Index
Mortgage application volumes dipped by 2.1% as rates approached multi-year peaks. Both refinance and purchase indices saw declines. The average rate for a thirty-year fixed-rate conforming loan decreased, while the jumbo loan rate increased marginally.

Consumer Confidence: October
Consumer confidence slightly waned, with minor revisions to the prior month’s index. The present situation index retracted, as did the expectations index. Inflationary pressures, especially in food and energy, remained a concern, with recession fears prevalent. While business conditions seemed to weaken, employment was a silver lining. The six-month outlook dimmed, reflecting expectations of heightened inflation and potentially strained household finances. Recession likelihood perceptions remained pronounced among consumers.

This Past Week’s Cash Flow:
This week saw a departure from disciplined cash management, with missteps leading to unintended expenditure of my full paycheck and necessitating a draw from savings—a rare occurrence since commencing employment with my current firm. Corrective measures and a return to a structured financial plan are set for the upcoming week.

Grade: F
Reason: Cash flow mismanagement

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