Trade The Journey

Trade The Journey

Earnings season Continues!

Top of the Morning! I hope everyone is enjoying their weekend and preparing for the week ahead. I’m really excited about the fight between Artur Beterbiev and Anthony Yarde. I’ve only seen Artur Beterbiev in a couple of fights so far but I’m impressed with what I have seen.

This past week, we saw a plethora of companies release their earnings report. Companies like 3M, Microsoft, American, and Southwest Airlines released their reports covering the past quarter. I won’t go into detail as most of the earnings reports have been covered extensively. I thought it best to provide some statistics on earnings so far that I gathered from Factset.

Thus far, 29% of the S&P 500 companies have reported, with 69% posting a positive earnings surprise and 60% posting a positive revenue surprise. The forward 12-month P/E ratio is 17.8 and is below the five-year average of 18.5. Energy and Industrials are some of the sectors reporting year-over-year earnings growth. Materials, consumer discretionary, communication services, and financials are among the sectors reporting negative year-over-year earnings growth. The sectors reporting the highest percentage of earnings above estimates are Real Estate and Utilities.

For the energy sector, all five sub-industries that have reported thus far have reported a year-over-year increase in earnings supported by crude oil prices. For the Industrial sector, 10 of the 12 industries are reporting year-over-year earnings growth. These industries are reporting earnings growth above 20%, Aerospace & Defense, Machinery, Trading Companies & Distributors, and Industrial Conglomerates.

The sector reporting the lowest percentage of earnings above estimates thus far has been communication services. Analysts are expecting earnings to decline in the first half of the year but recover in the later half.

The S&P 500 revenues, if the trend continues as is, will show an unchanged level from the third quarter. The sectors reporting the highest revenue above estimates are information technology and consumer staples. The sector that reports the lowest percentage of companies reporting revenues above estimates is communication services.

Revenue growth thus far is below the 5-year and 10-year average revenue growth levels. Thus far, Energy and Industrial lead year-over-year growth in revenue. For energy, all 5 sub-industries reported year-over-year growth.  For Industrials, 10 of the 12 industries are reporting year-over-year growth led by Airlines. Utilities reported revenue declines in each of its 11 sectors.

Net profit margins thus far are equal to the 5-year average.

If the energy sector was dropped from the earnings statistics, the S&P 500 earnings would have fallen further.

Economy

The Conference board’s leading economic index fell by 1% in December after declining by close to the same amount in November. Both the financial and non-financial components of this index are or have registered negative growth in December. The S&P 500 improved slightly in the financial components section and manufacturing new orders, nondefense capital goods excl. aircraft also improved slightly.

The coincident index rose by 0.1%. Indicating the current economic environment remains in a period of growth boosted by strong employment and personal income. Payroll employment, personal income less transfer payment, manufacturing trade and sales, and industrial production contributed negatively to the coincident index. The lagging economic index rose by 0.3% in December. Below is a picture of the components of the Leading Economic Index:

 

The Fed’s preferred inflation gauge, the PCE, was released this week and showed slowing price increases. The PCE remained at the same level as the previous month, at 0.1%. PCE, excluding food and energy, registered a 0.1% increase from the previous month. The PCE fell 0.5% from a year ago. Personal income fell by 0.1% and Disposable income stayed at the same level from the previous month, 0.3%. Both personal income and disposable income stated above are in current dollars.

Current dollars measure the value of a dollar without adjusting for the effect of inflation.

Prices for goods fell by 0.7% and prices for services rose by 0.5%. Food prices rose by 0.2% and energy prices decreased by 5.1%. Real PCE fell by 0.3%, reflecting a small decrease in spending on goods and an unchanged level of spending on services. Goods saw an increase in gasoline, and services saw increases in healthcare, housing, and mainly natural gas in utilities.

Real GDP rose at an annual rate of 2.9% in the fourth quarter. Please remember that this is an advanced estimate as the GDP is revised several times. The second estimate is scheduled to be released on February 23rd and the third estimate on March 30th. Private inventory investment, consumer spending, federal government spending, state, and local government spending, and nonresidential fixed investment rose in the fourth quarter. Residential fixed investment and exports fell in the fourth quarter.

Increases in fourth quarter GDP first estimate release:

Private Inventory Investment: Manufacturing, mining, utilities, and construction industries mainly in utilities.

Consumer Spending: Goods rose by an increase in spending on motor vehicles and parts. Services rose by an increase in healthcare, housing, utilities, and personal care services.

Federal government spending: Nondefense spending.

State and local governments: Increase in compensation of state and local government employees.

Nonresidential fixed Investment: Increase in spending on intellectual property.

A decrease in single-family construction contributed to the fall in nonresidential fixed investment. The PCE portion of the Advance GDP report is covered above. The price index for gross domestic purchases rose by 6.8% this past year compared to 4.2% growth in 2021. The personal savings rate as a portion of disposable personal income rose by 0.2% from the third quarter, bringing the total to 2.9%.

The durable goods report showed a surprise increase of 5.6% in December, rising from the negative reading posted in November. Without transportation, new orders decreased by 0.1%. Transportation equipment led the increase in new orders, rising 16.7% in December. Shipments of durable goods rose by 0.5% in December led by transportation equipment. Unfilled orders rose by 1.3%, also led by transportation equipment.

Unfilled orders have risen for over two years or 28 months consecutively. Inventories rose by 0.7% led by transportation equipment. Nondefense new orders for capital goods rose by 19.2% in December. Shipments, unfilled orders, and inventories all rose for nondefense capital goods at varying amounts. New orders also rose for communications equipment (3.9%), Electrical equipment, appliances and components (1.9%), Motor Vehicles & Parts (0.7%), and Fabricated metal products (0.3%).

Moving to housing, new home sales rose by 2.3% buoyed by a fall in rates. However, the rate of new home sales is 16.2% below the level from a year ago. The median sales price in December was $442,100 and the average sales price was $528,400. Currently, there is a 9-month supply of new homes at the current sales rate.

New home sales rose for the $200,000 to $299,999, $300,000 to $399,999, and the $500,00 to $749,000 levels. Sales fell for the $400,000 to $499,999 and the $750,00 and over level. Construction not started but sold during the period rose. Sales for houses under construction and completed fell. For sale at the end of the period, houses not started and under construction fell but rose for houses that were completed.

Pending home sales rose by 2.5% in December. The pending home sales index leads the existing home sales by a month or two and is a leading indicator of housing activity.

Mortgage applications rose 7% from a week earlier. The refinance index rose 15% and the seasonally adjusted purchase index rose 3% from the week prior. Mortgage rates have been on the decline for the past three weeks. The 30-year fixed rate for conforming loans fell by 0.03%, coming in at 6.20%. The 30-year fixed rate for jumbo loans fell by 0.16%, coming in at 5.92%. The adjustable-rate mortgage portion of applications fell by 6.5%.

Initial jobless claims fell again and continue to trend downwards, signaling a still-tight labor market. Continuing claims moved up and continue to rise. With companies reluctant to let employees go and some industries still in need of skilled labor, it might take rates remaining higher for a longer period to weaken this labor market.

The University of Michigan Consumer Sentiment released its final report which came in a bit below the forecast but not by much. I believe I covered the report in a previous post, so I won’t cover it again. One of the charts listed the buying & selling conditions and I thought you’d like to see the chart which is below.

Bitcoin has seen a bit of a resurgence indicating that a risk-on environment may be developing. I think it’s still too early to tell, as the economic reports have been mixed. With the Fed’s pledge to keep rates higher to ensure that inflation has been tamed, it’s hard to see a full recovery to price stability anytime soon. I’d definitely be scouring the market for deals, as the market turns before the economy does.

Technical Reference Levels:

This past cash flow management in review:

To be honest, cash is slipping through my hands like sand at the beach. I tried to slow down the cash flow drain but things keep coming up that require my attention. As I build this site and my trading skills, I rely primarily on my income to pay my bills and any surprise expenses. With my income about the same as my previous employment, I’m now in search of a new job after six months of employment at this new job.

I doubt that I’ll have to withdraw any money from my investment accounts this coming week, as I have been able to rebuild my savings account balance.

Grade: C-

Reason: Poor planning for the week ahead

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