Trade The Journey

Trade The Journey

Choppy Market

Top of the Afternoon! Let’s get right to business, as this post will be a little longer than usual.

Economy

Industrial production rose 0.4% in September. Manufacturing rose by 0.5% with mining and utilities rising by similar amounts. Industrial final products rose by 0.6%. Within the industrial products section, consumer goods, business equipment, nonindustrial supplies, construction, and materials all rose slightly with construction leading production by 1.1%. Durable and nondurable goods manufacturing rose by 0.5% and 0.3%.

Total capacity utilization increased by 0.2% in September, with the total rate equaling 80.3%, signaling that utilization still has room to grow. As a refresher, capacity utilization measures how much of the potential output is being realized. Although the relationship is loose, capacity utilization is linked to inflation. A high-capacity utilization rate puts pressure on suppliers and other costs such as competition to fill positions and secure materials which can lead to higher prices. Some reports suggest that the natural rate of capacity utilization is around 82%.

Initial claims came in below forecast, declining by 12,000, with the total initial claims by 214,000. Initial claims refer to a claim filed by someone after a separation from their job. The FED is closely watching these numbers to help guide them in their rate decisions as they try to bring inflation back to their target of 2%. A strong job market is seen as a major determinant in assessing how well the economy can handle rate increases.

Continuing claims increased by 21,000. The four-week average used to assess the trend of initial claims remains around the 200-216k level. The beige book highlighted the slowing growth in the US economy.  The slowing demand was attributed to higher rates, inflation, and continuing supply disruptions in some industries. Travel remains strong while retail was sluggish due to slowing discretionary spending. The housing market challenges remain as mortgage rates are nearing 7% and home prices are still elevated.

Shelter, as evidenced by the latest CPI, is still high although rent prices are moderating somewhat. Loan volumes fell as banks adjust their loan loss provisions and mortgage department employment numbers. Although the latest initial claims fell, the rapid pace of hiring is slowing in the districts reported with layoffs and hiring freezes gaining traction. Prices remain high although the pace of rising prices is slowing.

Companies are having to adjust to this environment as the consumer is pulling back on their spending due to higher prices. Earlier this week, the President announced another draw from the strategic petroleum reserve to help moderate gas prices as we head into the November midterms. Gas prices have slowly crept back up to the summer highs.

The leading economic index fell by 0.4%. The leading economic index (LEI) is flashing warning signals that a recession is all but certain. The coincident economic index and the lagging economic index rose by 0.2% and 0.6% respectively. The LEI measures are designed to measure the turning points in the business cycles and is comprised of several leading indicators. According to the conference board, the LEI anticipates turning points in around 7 months.

Some of the indicators include building permits, the S&P 500 index, the interest rate spread (10-year yield less than the fed funds rate), average consumer expectations, weekly hours in manufacturing, initial claims, new orders, and new orders for nondefense capital goods (Business purchases of capital goods).

Mortgage applications fell 4.5% from a week earlier as did the refinance and purchase index. The adjustable-rate mortgage share of applications increased by 12.8%. The 30-yr fixed mortgage rate for conforming applications rose to 6.94% for conforming loans ($647,200 and less) and to 6.31% for jumbo loans ($647,200 and higher).

Higher rates are affecting everything from homebuilders’ sentiment to existing and new home sales. Existing home sales fell 1.5% from August and is down close to 25% from a year ago. The median existing-home sales price is up 8.4% from a year ago, totaling $384,000. Existing home sales have declined eight months in a row. There is currently a 3.2-month supply of existing homes for sale.

First-time home buyers represented 29% of the sales. Single-family home sales decline 4.22% from August. Distressed sales (Foreclosures and short sales) represented 2% of the sales up one percent from August. A short sale can be defined as a sale of a home for less than they owe on their mortgage from an owner in financial trouble. Distressed sales are an indicator for extreme stress in the mortgage market.

Building permits came in 1.4% higher than the August report, although single-family authorizations were 3.1% below the August report. Housing starts were 8.1% below the August numbers and single-family housing starts fell 4.7%. Privately-owned housing completions were 6.1 below the August report and single-family completions fell 3.2%.

2 to 4 units and 5 units or more rose 2.1% and 8.2% respectively for September. Starts for all units fell but more notably in units above single-family units. Single-family homes under construction fell 1.1% from August but rose 1.9% for units of 5 or more.

Housing starts are a leading indicator of spending in the economy due to the spending involved in furnishing a home, improvements made and overall maintenance a home requires. Although the housing market faces challenges ahead, the banking and housing market is in a better overall position than the 2008 global financial crisis.

As the earning season continues, companies for the most part have beaten the earnings consensus forecast. Most of the major banks have reported earnings above expectations. Bank of America reported a strong earnings report with gains in interest income and better-than-expected income from fixed-income trading. Unfortunately, I was unable to capitalize on the earnings report due to my call options position missing its opportunity to be filled.

Attempting to capitalize on an earnings report with an options trade is challenging the night before due to uncertainty. My only option was to chase the market by increasing the amount I was willing to bid.

An interesting development in most of the bank’s earnings report is the increasing amount being set aside for loan and credit losses signaling a slowing or faltering economic outlook. Goldman Sachs also beat on earnings and revenues.

Netflix surprised on its earnings report beating on earnings and revenue, highlighting an increase in subscribers to the tune of 2.41 million. Its subscriber growth rose in the Asia-pacific region but registered smaller growth in the US region with just 100,000 net subscribers. The streaming giant also highlighted its plans to crack down on password sharing and its s new ad-supported plan launching in November.

Global streaming grew 4.5% year-over-year above the 2.6% forecasted growth. In its report, it said that the decline in revenue was mostly due to the dollar’s strength. Average Revenue per membership (defined as streaming revenue divided by the average number of streaming paid memberships divided by the number of months in the period) is forecasted to grow 6.6% year over year with 4.5m paid net adds in the fourth quarter. According to their report, their fourth quarter is their lowest due to their content and marketing spending.

Tesla missed on revenue but beat earnings, highlighting transportation capacity for delivering new cars. Musk reassured investors that transportation issues would be short-lived. Musk also made a bold claim that its market cap could exceed Apple in the foreseeable future, while possibly buying back between $5 billion and $10 billion in the works pending the board’s approval. Tesla shares dipped close to 17% on the release of its report.

Upcoming Earnings reports with the potential to move the markets:

October 24th: Twitter ~ should be interesting being that the deal between Twitter and Musk is not yet finalized.

October 25th: Microsoft (MSFT), Alphabe (Goog)

October 26th: Apple (Appl), Meta (Meta)

October 27th: Amazon (AMZN)

October 28th: Chevron (CVX), Exxon (XOM)

This past week’s cashflow in review:

I would say that it was okay in terms of balanced spending. I think I spent a little too much on some discretionary items. On top of that, I had some emergency expenses that I did not anticipate. This coming week, I hope to spend on just the necessities.

Grade: C

Reason: Spent a little too much.

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