Trade The Journey

Trade The Journey

Debt Ceiling Talks Continue!

Top of the Morning! Another week has passed, and I booked another loss to end the week. I hope everyone’s week went according to plan. A more detailed review of my most recent trade can be found here.

The major concern for the market this past week centered around the debt ceiling talks that reached an impasse, with republicans voicing their preference for the following issues: work requirements for entitlements like temporary assistance for needy families, supplemental nutrition assistance programs and Medicaid, Spending Cuts, Recoup appropriated but unspent pandemic money, Permitting reform, and Cuts to climate legislation. On Friday, Republicans walked out of the meeting putting a halt to the progression on the debt ceiling talks that were given by President Biden and Speaker McCarthy.

Democrats are gathering signatures, to urge Biden to invoke the 14th amendment to bypass congress and force a vote. Here is an excerpt from the 14th amendment, it states: “Validity of the Public debt of the United States, authorized by law, including debts incurred for payments of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” Its not clear if this method of action will be successful, as former President Obama considered the action but took it off the table.

Janet Yellen has voiced her displeasure with the stall in progress, stating that the US government could potentially default by June 1st. Wall Street is also displeased as major banking and investment firms prepare for the possibility of a default. Tax revenues won’t be enough to cover the government’s expenses.

CNBC offered a glimpse into the expenses due on the first of June which include Medicare ($47 billion), Veterans Benefits ($12 billion), Military pay and Retirement ($10 billion) and Civil Service Retirement ($6 billion). Total spending due totaled $101 billion and the projected revenue is $26 billion.

The US has run a deficit every year since 2001, and the limit or ceiling has been increased seventy-eight times. A default would severely limit the government’s ability to service debt, and fund Medicare. It would also result in a downgrade in the US credit rating, higher borrower costs, market sell off, consumer confidence crisis and a loss of jobs. A default would send shockwaves through the global economy.

This issue will remain at the forefront of market participants’ attention for the foreseeable future, having the ability to move markets. Inflation and rate hike concerns have taken a backseat. While I think the debt ceiling issue will be resolved, with the division in the United States this is bound to be a continued problem.

Economy

Manufacturing, Production, and Inventory

Empire State Manufacturing: New York

In April business activity rose sharply but in May business conditions dropped to -31.8, as uncertainty increased. In May 48.5% of the respondents reported that business conditions were lower or had worsened. New Orders fell 28 points and shipments fell 16.4 points. Prices held steady from the previous month for both prices paid and prices received. Hiring continues to stagnate and the average workweek was unchanged from the previous month remaining negative. Forward-looking which is equivalent to six-months ahead produced the following: Future plans for capital outlays increased slightly but didn’t inspire much confidence moving ahead. New Orders are expected to rise with the index, rising 11.4 points to 18. Shipments are expected to increase, rising 8.2 points to 15.8. Unfilled orders are expected to fall by 8.2 points. Delivery times are expected to improve while inventories are expected to be lower.

Philadelphia Fed Manufacturing Business Outlook Survey

Manufacturing general activity declined in this region but improved from last month. New Orders and shipments improved but remained negative. Current new orders rose from the previous month but remained negative. Employment declined sharply, while the average workweek was unchanged. Prices paid rose, while the prices received noticeably declined.

Future business activity which is six months ahead declined sharply. New Orders and shipments are expected to also declined. Unfilled orders and delivery times are expected to improve. Prices paid and received are expected to rise sharply as was the number of employees. The average workweek remained unchanged. Capital expenditures are expected to rise. According to the report, participants expect moderate growth.

Industrial Production and Capacity Utilization

Industrial Production rose 0.5% in April, after remaining at a unchanged level of zero for the two preceding months. Manufacturing rose 1%, factory output excluding motor vehicles and parts rose 0.4%. Consumer goods rose 0.6% while business equipment production rose 1.2%. Consumer durables featured a considerable rise in automotive products.

Durable and nondurable goods manufactured both rose, 1.4% and 0.6% respectively. Construction supplies and Materials production both rose 0.4%. Mining production rose by 0.6% while utilities fell 3.1% due to milder temperatures.

Capacity Utilization rose 0.3% to 79.7%, which matches the long-run average. Manufacturing capacity utilization rose 0.7%, and mining rose 0.6%. Utilities fell 0.6% for the reasons listed above and remain below their long-run average.

Business Inventories

Business Inventories fell 0.1% in March. Inventories fell for manufacturers by 0.8% but rose by 0.7% for retailers and was unchanged for merchant wholesalers. Inventories rose the largest for motor vehicle & parts dealers (1.6%), and general merchandise stores (1.2%). Inventories fell the sharpest for building materials, garden equipment & supplies (1.3%), and department stores (1.1%).

 Sales were down 1.1% for distributive trade sales and manufacturers’ shipments. Sales were down for manufacturers, retailers, and merchant wholesalers. The inventory-to sales ratio was 1.39. The inventory-to-sales ratio rose slightly for retailers and merchant wholesalers but fell slightly for manufacturers.

Retail Sales

Retail sales rose 0.4% in April. Retail sales aren’t adjusted for inflation. Excluding motor vehicles & parts, retail sales rose 0.4%.  The sharpest rise occurred in miscellaneous store retailers (2.4%), nonstore retailers (1.2%), general merchandise stores (0.9%), and health & personal care stores (0.9%). The sharpest decline occurred in sporting goods, hobbies, musical instruments & bookstores (3.3%). Its apparent consumers are making the shift towards consumer staples and shunning discretionary purchases or at least spending less freely.

Housing

Housing Starts and Permits

Building Permits fell 1.5% in April while single-family permits rose 3.1%. Housing starts rose 2.2% and single-family housing starts rose 1.6%.  Muti-family housing starts rose by 5.2%. Housing completions rose sharply, increasing by 10.4%. Single-family housing completions fell 6.5% and fell 17.4% for multi-family housing. Permits rising 3.1% for single-family is a good sign, as they have been trending upwards this year. Permits for muti-family starts rose 13.5%.

Single-family houses under construction fell 1.4% but rose 1.7% for multi-family housing.

Existing home Sales

Existing home sales fell 3.4% in April. The median existing homes sales price is $388,800. Limited inventory, and higher rates are affecting the enthusiasm of potential home buyers. Total housing inventory rose 7.2%, and unsold inventory at the current sales pace rose to a 2.9-month supply. Properties remained on the market for roughly 22 days, falling by 7 days. 73% of homes sold in April remained on the market for less than a month. First time home buyers rose 1%, bringing the total sales to home buyers to 29% of all sales.

Mortgage Bankers Association (MBA) Builder Application Survey and MBA weekly Applications:

Mortgage Applications fell 5.7% from the week prior. The refinance index fell 8% and the purchase index fell 4.8% from the week prior. The refinance share of mortgage applications decreased 0.6% to 27%. The average rate for 30-year fixed rate conforming loan rose 0.09% to 6.57%. The average rate for the 30-year fixed rate jumbo loan rose 0.13% to 6.46%.

In the builder application survey, mortgage applications for new home purchases rose 4.1% from last year but fell 11% from the march total. According to the report, this is the third consecutive decline.

Employment

Initial and Continuing Claims

Initial claims came in below forecast, falling by 22,000 to 242,000. Continuing claims fell by 8,000 to 1.799 million. The four-week moving average of initial claims decreased by 1,000 to 244,000. These totals signal a labor market that is still in a good place and most likely encourages the Fed to continue its quest to quell inflation by rising rates.

Earnings: Retail

Home Depot

Home Depot beat on earnings and missed on revenue, its biggest revenue miss in twenty years. Home Depot issued earnings guidance that disappointed, forecasting a fall in sales, comparable sales, and its operating moderation. They expect fiscal and comparable sales to drop between 2% and 5% in 2023. Operating Margin is expected to be between 14%-14.3%.

They stated in the call that moderation in the home improvement market is likely driven by monetary policy and that the consumer is in the midst of a transitional period. Noted in the earnings call was the shift consumers are making from larger projects into smaller projects. For example, they saw demand soften in flooring, kitchen, and bath.

Customer transactions dropped 5% this past quarter. Their sales declined below expectations mostly influenced by lumber deflation and unfavorable weather according to the earnings call. Sales on the digital platforms decreased 2.9% year-over-year. Regarding employment, they saw a year-over-year improvement in their attrition rates.

Target

Target beat on earnings and revenues forecasts. Although the earnings report was positive, the forward guidance put a damper on enthusiasm. Total sales in the first quarter rose 0.5% basically flat. Target reported a softening in discretionary purchases, as the consumer adopts a cautious position. Target reported that are continuing to contend with a inventory shrink, due mostly to limiting product availability and theft. If the shrink continues, it will reduce their full-year profitability by more than $500 million.

Traffic and sales growth was reported in food and beverage, household essentials and beauty sections while softening was seen in discretionary home, apparel, and hardlines.  Target is expecting second quarter sales and comparable sales are expected to decline.

Walmart

Walmart beat on both earnings and revenues forecasts. Walmart saw a 26% increase in global e-commerce which included growth in China and India. E-commerce improvement was led by growth in store-fulfilled pickup and delivery. Member count and Plus member penetration hit all-time highs at Sam’s club, as they gained market shar in their grocery category from high income and younger shoppers.

Comparable sales excluding fuel rose 7.4%, which included the growth in e-commerce. Comparable sales for Sams Club rose 7%. However, Walmart saw a shift in what consumers were purchasing as they moved from general merchandise to grocery and health and wellness. While Target is struggling with inventory, Walmart saw a more than 9% decline in managing costs in its US section.

Conclusion:

While the consumer still has some savings and the employment picture remains positive, anticipation of a recessionary enviornment is influencing consumer sentiment and purchasing decisions. Companies are also preparing for slowing growth by adjusting their product mix and operations. Although markets are clinging to the idea of rate cuts towards the end of the year, the Fed remains steadast in its intentions to bring inflation back to its 2% target even if the economy transitions into a recession.

The question is what will break next that will influence the Fed to cut rates? With the debt ceiling issue at the forefront, volatility will continue to exist although the VIX reflects a sentiment of some calm.

This weeks’ cashflow in Review:

One word to describe my cash flow management, Terrible. I know where my money is going, mostly on bills, some necessary and some for discretionary items. The silver lining is that a good percentage of the money automatically withdrawn from my account is going to my trading, investment, and savings accounts but not nearly enough to justify an optimistic outlook.

Grade: D

Reason: Poor Money management

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