Trade The Journey

Trade The Journey

Debt Ceiling Agreement Reached!

Top of the Morning! I hope everyone’s week went as planned. This past week the Debt Ceiling monopolized the market’s attention, as an agreement between both political parties remains distant although some progress was reportedly made. June 1st is being touted as the date where the Treasury will likely default on some of the payments due.

While inflation and rate hikes remain on the minds of participants, a default by the United States holds dire consequence for both the US and global economy. However, a debt ceiling deal was reached on Saturday which still faces a vote in congress and the senate. Here are some of the details of the deal although the full details won’t be released for another week.

The debt deal would increase the limit for two years. The agreement features: caps on non-defense spending, remaining flat in 2024 and increasing by 1% in 2025. Protection for veterans’ medical care, a temporary broadening of work requirements for some adults receiving food stamps. A decrease in unspent Covid-19 relief funds, a cut in internal revenue service funding and a restart in student loan repayments while maintaining Biden’s current plan of up to $20,000 in debt relief.

Economy

FOMC Minutes

The labor market remains tight, prices remain elevated while wage growth is slowing. Nearer term expectations moved down, while long-term expectations remained in range according to the consumer-based surveys. Federal funds volumes fell sharply for a few days late in the period as Federal Home Loan Banks (FHLB) as liquidity needed to be maintained for advancements to member banks.

Expectations for future credit quality deteriorated. Financing conditions for businesses, households, and cities tightened, while lending volumes were solid. Credit quality as of now remains strong. Spreads for speculative-grade corporate bonds rose sharply. There were some concerns that treasury liquidity conditions would remain tight. Inflation compensations declined in shorter maturities.

The staff projected a mild recession later this year and a recovery in the next two years. Real GDP growth is expected to recover in 2025. Unemployment is expected to rise above its natural rate in the first part of 2024. The natural rate is the minimum unemployment rate resulting from real or voluntary economic forces like structure of the labor force, workers who lacked the skills to be hired or were replaced by technology. Inflation is expected to decelerate further for several reasons. Food inflation is expected to fall this year, while energy prices have already fallen from its high last year. Labor and product markets are expected to loosen.

While PCE inflations is expected to be around 2 percent in 2024 and 2025, which is dependent on banking and financial conditions.

In their assessment of current conditions, inflation and the job market remain stronger than expected. Although members agreed that the banking system is sound, the future hold many uncertainties, especially credit conditions for households and businesses. Participants commented that the expected disinflation in core services has yet to materialize. Participants also saw risks to economic activity weighted to the downside.

In the absence of the banking crisis, participants considered a fifty-basis point increase to the target range. However, with the banking crisis most participants agreed to a twenty-five basis points, with several members favoring a pause to assess the effects of the rate increases.

Participants stated that some additional policy firming may be needed to return inflation its target range of two percent. They will also monitor credit conditions and credit flows closely to assess current economic conditions.

The current target range is 5-5.25%. The probabilities for a pause in rate hikes have changed decisively for the June meeting from the previous week. Last week the probability of a pause stood at around 80% and now the probability stands at around 36%. The probability of another twenty-five-basis point hike is now over 60%, rising 17% from the previous week. July’s meeting shows an elevated probability of a pause while a cut in rates remains a low probability event.

GDP : Second Estimate

Real GDP in the second revision rose to 1.3% from 1.1%. The increase was attributed to a rise in consumer spending, exports, government spending and nonresidential fixed investment. Private inventory and residential fixed investment declined. Gross domestic purchases and the PCE remained the same as the first estimate.

PCE

The Fed’s preferred gauge for inflation rose in April to 0.4% from 0.1%. Excluding food and energy, the PCE rose 0.1% to 0.4%. Personal income rose 0.1% in current dollars. Wages and Salaries was led by sharp increases in private industries and the services-producing industries. Disposable income rose 0.1% but in chained dollars (2012), it was flat. Personal savings has steadily declined from the high at the beginning of this year, showing negative growth in April. Prices for goods and services rose, 0.3% and 0.4% respectively. The increase in services was led by financial services & insurance, healthcare, and other services. The increase in goods was led by motor vehicles & parts and other nondurable goods. Food prices were basically flat, and energy prices rose 0.7%.

In chained dollars, goods rebounded sharply in April for durable goods and rose for nondurable goods. For services, prices remain elevated from the previous month after declining in February.

Durable Goods, Inventory

Durable Goods

New orders for manufactured durable goods rose 1.1% in April and rose for a second consecutive period albeit less than the 3.3% a month prior. Excluding transportation, shipments and new orders declined equally, falling by 0.2%. Shipments of durable goods fell 0.7%, with transportation equipment leading the decline, falling by 1.8%. Unfilled orders rose by 0.8%, with transportation equipment leading the increase, rising by 1.3%. Inventories for durable goods rose by 1%. Capital goods new orders fell 0.5%. Shipments for capital goods also declined, falling by 1.8%. Inventories for capital goods rose 2.3%.

Inventories

The advance reports for international trade in goods, wholesale inventories, and retails inventories showed varying results for April. The International trade in goods rose by 17%, while wholesale inventories fell by 0.2% and retail inventories rose by the same amount. Focusing first on the international trade section, exports fell 5.5% and imports rose 1.8%. For exports, nearly all the categories declined, with the only increase in exports being reported in foods, feeds and beverages.

For imports, most of the categories rose, with the decline in imports being reported in foods, feeds & beverages, and capital goods. The previous report for February-March showed the opposite result, with imports falling as a whole and exports rising.

Merchant wholesale trade inventories rose 0.4% for durable goods and fell 1.1% for nondurable goods. For retail inventories, excluding motor vehicles & parts dealers, inventories fell by 0.1%. Motor Vehicles & parts inventories rose by 1.2%.

Employment, Consumer Confidence

University of Michigan surveys of Consumers

The final report for consumer sentiment from the University of Michigan showed that consumer sentiment declined overall. The index of consumer sentiment fell several points, as did the index of consumer expectations, and current economic conditions. Consumers are concerned about the possibility of a coming recession. Views on personal finances were unchanged, as income expectations remained stable.

Year-ahead inflation expectations fell 0.4% to 4.2%. Long-run inflation expectations moved up slightly although they remained within the 2.9-3.1% range. Below is a helpful graph, highlighting the home buyer enviornment.

Initial Claims

Initial claims continue to show a tight labor market. Initial claims increased by 4,000, bringing the week total for May 20 to 229,000 below expectations of 247,000. The week prior to the last showed the initial claims were revised downward from 242,000 to 225,000. Continuing claims for the week of May 13, fell 5,000 to 1.794 million. The four-week moving average for initial claims were unchanged for the past two weeks.

Housing

New Home Sales/Pending Home Sales

New home sales for single families rose by 4.1% in April.  New homes sales in the Northeast fell over 50% and fell 9.1% in the West. Sales for the Midwest and the South both rose, 11.8% and 17.8% respectively. The median sales price for new homes sold was $420,800 and the average sales prices was $501,000. At the current sales rate, inventory stands at 7.6 months. New home sales rose across price ranges, only falling for the $500,000 to $749,000 range.

Pending home sales were unchanged in April. Reasons for the unchanged level were listed as limited inventory, and affordability challenges.

MBA Weekly Survey

Mortgage Applications fell 4.6% from the week prior. The refinance index fell 5% and the seasonally adjusted purchase index fell 4%. The average rate for a thirty-year fixed conforming mortgage loan rose by 0.12% to 6.57%. The average rate for a thirty-year fixed jumbo mortgage loan rose by 0.11% to 6.57%.

The median payment for mortgages rose by 0.9% to $2,112 from $2,093 in March. The median payment for conventional loans also rose to $2,170 from $2,145 in March.

Earnings

Earnings reports continued with retail taking center stage.

Retail

Dick’s Sporting Goods

Dick’s beat on both earnings and revenue forecasts. Total sales growth was 5.3% with comparable store growth of 3.4%. They also boasted of a 2.7% increase in transactions and 0.7% rise in average transactions. Unlike Targets report where inventory is a major concern, Dick’s inventory level rose 7% from the first quarter. They ended the first quarter with $1.6 billion in cash and cash equivalents with no borrowings on their $1.6 billion unsecured credit facility.

Dick’s reaffirmed their outlook for 2023, with their comparable store sales expected to be within the flat to 2% range. The CEO, Lauren Hobart, said the consumer is prioritizing their health and fitness as a necessity, continuing to make purchases even in the current inflationary environment. Footwear, athletic apparel, and team sports products were the primary drivers of performance in the fourth quarter and full year. Dick’s is also launching its “House of Sport” which is a storefront that will feature rock-climbing, batting cages and golf putting greens. It will add nine stores in 2023, and ten in 2024.

Dollar Tree

Dollar tree fell more than 16% on Thursday after company reported that missed on earnings forecasts. Dollar tree beat on revenue forecasts. Comparable store sales rose 4.8%, while total sales rose 6.1%. Comparable sales rose 3.4% for dollar tree and 6.6% for family dollar. Comparable traffic rose 5.5% for dollar tree, and 4.3% for family dollar. The average ticket size for the dollar tree ticked down while family dollars’ average ticket size rose.  Dollar tree also made the transition to $1.25 price point and will $3-$5 plus items to an additional 1,800 stores.

Dollar tree cited the transition to $1.25 price point, higher consumable mix, lower merchandise margin, elevated shrink expense and increased distribution costs as reasons for their disappointing performance. Family dollar faced some of the same challenges.

Their outlook for 2023 remains cautious. They expect to improve inventory shrink through defensive merchandising efforts, real estate optimization and possibly higher prices. However, inventory shrink, and unfavorable sales mix to persist for the remainder of the year. Dollar tree also lowered its expected earnings per share below forecasts. Dollar tree shoppers have shifted spending to essential items which have lower margins than discretionary items.

Best Buy

Best Buy beat on earnings and revenue forecasts. Same store sales fell 9.3% with the decline being largely attributed to lower sales in computing, home theater and appliances. Digital sales contributed 31% of Best Buy’s domestic revenue, which have remained stable in the last two years. Their inventory is down 17% compared to last year’s level, with a target of 64 days of supply. The company cited cloud, augmented reality, generative AI, and the expansion of broadband access as possible trends they could capitalize on.

Their overall headcount has declined by 20%, lowering the number of in-store consultants and designers. In the current environment, guidance for 2024 revenue is expected to be in the range of $43.8 million to $45.2 million. Comparable stores’ sales are expected to decline between 3% to 6%. The company is optimistic that the economic environment will improve, and they will be able to take advantage of the recovery.

Builders

Toll Brothers

Toll Brothers beat earnings and revenue forecast decisively. Toll brothers has seen an increase in demand that began in January has continued as mortgage rates have stabilized. They delivered 2,492 with an average price tag of $1 million. Home Sales revenue totaled approximately $2.5 billion, with deliveries exceeding their midpoint guidance. Toll brothers ended the quarte with $762 million in cash and equivalents, and $1.8 billion available under their $1.9 billion revolving bank credit facility.

Their buyers have continued to make nonrefundable downpayments at an average of $85,000. 23% of the buyers paid in cash and the remaining took on a mortgage with a 70% loan-to-value, meaning 30% was paid and 70% is remaining on the loan balance. Their quarter end backlog stood at $7,574 homes.  While Toll brothers  saw improvement in their contracts, a year-over-year comparison still shows a decline in contracts. Some challenges include low inventory, and existing homeowners reluctant to give up their low-rate mortgages with 90% of the outstanding mortgages with rates under 5%.

35% of the homes for sale are new construction compared to the norm of 10-15% according to a report cited during the earnings call. Toll Brothers issued positive full year guidance, expecting to deliver between 8,900 to 9,500 homes.  They are expecting the delivery price to be between $975,000 to $995,000. They also cited spec homes, which are unsold homes with at least a foundation in the ground, as rising trend for the company with spec home sales representing at least 40% of the orders in the quarter.

In the third quarter, they expect to deliver between 2,350 and 2,450 homes with an average price of $1,015,000.

Software

Nvidia

Nvidia beat on earnings and revenue forecasts. Revenue is up 19% with growth driven by record data center revenue, with gaming and professional visualization platforms emerging from channel inventory corrections according to the earnings call.  Data center revenue is up 14% year-over-year. However, Nvidia’s gaming division showed a 38% drop in revenue. Its automotive division, which includes chips and software for self-driving cars us up 114% year-over-year.

Generative AI is tailwind for Nvidia moving forward driving demand for Nvidia chips. Cloud service providers have welcomed their flagship Hopper and Ampere architecture GPUS’. Their H100 has been welcomed by large companies Microsoft, Google, Oracle, and Meta.

The H100, based on the NVIDIA Hopper™ GPU computing architecture with its built-in Transformer Engine, is optimized for developing, training, and deploying generative AI, large language models (LLMs) and recommender systems.

The company is in a leading position in the market for AI chips. Unfortunately, I am not well versed in this sector so providing a detailed account of their earnings report is beyond my scope of knowledge.

This Past Weeks cash flow review:

This past week proved to be challenging in terms of cash flow management. I struggled to hold on to the cast I earned during this past pay period. Bills and unexpected expenses drained my account balance. I sincerely hope that the next two weeks turn out differently.  

Market Technicals

Full chart to identify trend for S&P500:

Condensed view:

Full chart to identify trend for Dow Jones:

Condensed View:

Full chart to identify trend for Nasdaq:

Condensed View:

Full chart to identify trend for Russell 2000:

Condensed View:

Grade: C

Reason: While my account balance dwindled, I did the best I could managing my expenses.

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