Trade The Journey

Trade The Journey

Earnings season Continues

Top of the Morning! I hope everyone is enjoying their weekend. After completing this insight post-earnings, I’ll be watching the San Francisco 49ers battle the Dallas Cowboys.

The markets showed a bit of recovery towards the end of the week following last week’s fall from its highs. Notable earnings included Goldman Sachs, Netflix, Proctor & Gamble, Morgan Stanley, and United Airlines. Goldman Sach’s earnings report came in even lower than the forecast which wasn’t positive. The bank reported signs of credit deterioration as it increased the amount set aside for provision losses. Operating expenses also increased by 11% even though Goldman cut 3200 jobs, saving $475 million in January. Net Revenues declined 12% from the third quarter.

Morgan Stanley beat on earnings and revenues forecast boasting returns from wealth management and trading revenues. It cut 2% of its staff last December. Investment management and banking did not fare as well in the third quarter. They set aside $87 million for credit provision losses. 

United Airlines beat earnings and revenues forecast citing higher traveling amid higher fares. The company expects travel to increase by 20%. The company indicated that it is looking to improve its staff shortages by working to gain agreement with the pilots union and opening a new attendant training facility. As consumers continue to shift spending from goods to services and experiences, this should bode well for United Airlines.

Proctor & Gamble beat on earnings and revenues forecast, although higher prices are beginning to affect their revenue. Their grooming and skin & personal care division saw higher sales volume and were the few sectors within its business to do so. The company cited foreign currency headwinds ahead and also noted that supplier prices remain high. 

Netflix earnings missed the forecast while revenue came in flat. The bright spot for Netflix was its subscriber count which rose substantially. Netflix also notified investors that Reed Hastings stepped down from his CEO position. Netflix has also ceased providing subscription guidance similar to Apple’s discontinued iPhone sales unit guidance.

In November, Netflix launched its ad-revenue subscription plan although it did not report any results in this earnings report. They also noted that premium subscribers are not downgrading to the cheaper ad-based subscription plan.

Upcoming Earnings I’ll be reviewing Next week :

Johnson & Johnson (1/24), Boeing (1/26), Intel (1/26), Mastercard (1/26), Northrop Grumman (1/26), Visa (1/26), Chevron (1/27), and Tesla (1/27).

Most of the indices seemed to be trending sideways with volatility falling or remaining near recent levels. The Dow Jones seems to be the strongest out of the other indices.   Some analysts and market pundits are confident that we will narrowly avoid a recession, but I’m not so sure.

Economic 

The first economic report released this past week was the New York Empire State manufacturing survey which highlights manufacturing in New York, one of the staples for manufacturing. Business activity fell sharply across each of their metrics except for inventories which rose slightly. General business conditions weakened to their lowest level since the middle of 2020, at the height of the pandemic.  New Orders and shipments fell sharply.

Unfilled orders also fell but delivery times remained at the same level. Employment has slowed as have the hours employees worked during the workweek. Prices paid fell sharply while the prices received declined slightly. Both charts displayed in the report show prices falling toward their 2020 levels. Manufacturing is an important part of any economy because of the contribution it makes to a nation’s GDP.

Here is a quote highlighting the importance of Manufacturing:

In the United States, manufacturing accounts for $2.3 trillion in GDP, employs 12 million people, and supports hundreds of local economies. Although that represents just 11 percent of the US GDP and 8 percent of direct employment, the sector makes a disproportionate economic contribution, including 20% of the nation’s capital investment, 35% of productivity growth, 60% of exports, and 70% of business R&D spending.” – McKinsey & Company

Industrial production, a key metric for manufacturing, fell by 0.8% in December after falling 0.6% in November. With the Final products section, consumer goods fell by 0.1% and business equipment fell by 2.0%. Within Non-industrial supplies, construction fell 1.5% and materials production fell 0.8%.

Manufacturing production fell overall, with mining decreasing but utilities rising 4% due to the demand for heating amidst the cold weather and storms lately. Mining fell by 0.9% while utilities rose by 2.7% mostly due to the demand for electricity and natural gas. Durable goods manufacturing fell by 1.1% and nondurable manufacturing fell by 1.5%.

Capacity utilization continues to fall, decreasing 0.6% from the previous month. It fell by the same amount in November. For Manufacturing, it was the same story as the overall utilization fell by 1%, the same decline posted in November.

With the US looking to return its manufacturing onshore, how will the numbers change moving forward? Deglobalization isn’t just a forecast, it’s the new reality moving forward as countries seek to return their supply chains after the Pandemic wreaked havoc on companies and countries’ supply chains. Industrial production and capacity utilization can be used as a gauge of consumer demand, inflation, and economic growth or decline. Capacity and production are edging downward, as evidenced by the charts below:

The retail sales report showed a decline of 1.1% in December, following a decline of 1% in November. The numbers from the report are seasonally adjusted and do not account for inflation. Minor growth was found in Building materials & garden equipment & supplies dealers at 0.3%. Food and beverage sales were flat. The largest decrease in sales was found in general merchandise stores: department stores (-6.6%), gasoline stations (-4.6%), and furniture & home furniture stores (-2.5%). The previous month’s report also showed similar declines although in different areas. Consumers are continuing to pull back on purchases, specifically in goods purchases which along with the manufacturing reports above signal slower economic growth.

The PPI, which serves as an indicator of future prices consumers will pay, came in lower than forecast. The PPI declined by 0.5% in December. The final demand index declined, with most of the decline attributed to falling prices for goods. The final demand for services edged up by 0.1%. For final demand goods, the decrease was led by a 7.9% fall in energy, specifically the prices for gasoline. For final demand services, the small increase was led by an increase in fuel and lubricants retailing.

Intermediate demand for processed goods fell by 2.8% in December led by a large decrease in prices for diesel fuel. Intermediate demand for unprocessed goods rose 3.4%, led by a sizeable increase in prices for natural gas. Intermediate demand for services rose 0.4%, led by an increase by an increase in prices for deposit services. As a refresher, intermediate demand tracks price change for goods, services, and construction products sold to businesses as inputs to production, excluding capital investment.

The business inventories report rose 0.4% in November. Sales were down 0.8%  while inventories were up 0.4% in November. The inventories/sales ratio was up 0.09 points. Manufacturers, retailers, and merchant wholesalers’ sales declined in November. Inventories rose slightly for manufacturers and retailers while rising higher for merchant wholesalers. The inventories/sales ratio for each remained around the same level.

Motor vehicles & parts dealers (1.1%) registered the largest change in inventories, while general merchandise stores: and department stores fell sharply (-4.9%).

Moving to housing, mortgage applications rose by 27.9% from the prior week. The refinance index rose 34% and the seasonally adjusted purchase index rose 25% from the previous week. The 30-year fixed rate with conforming loan balances fell by 0.19% to 6.23% and the 30-year fixed rate with jumbo loan balances fell by 0.01% to 6.08%. If you have been reading my insights, then you probably remember that Mortgage-backed securities hold importance in the determination of mortgage rates.

If the price of MBS goes down, rates rise, and the reverse holds true when the price of MBS goes up.

Building permits, an indication of future construction, fell 1.6% in December. Single-family permits fell by 6.5%. Housing starts were 1.4% below the November level. Housing starts for single-family homes rose 11.3% in December. Housing completions were 8.4% lower in December and single-family housing completions also come lower by 8%.

Permits for 2 to 4 units fell by 13.5% while rising by 7% for 5 units or more. Starts for 5 units or more fell by 18.9%. Housing under construction at end of the period rose 0.3% for single-family homes and rose 1% for 5 units or more.

Existing home sales fell for the 11th straight month, falling by 1.5% in December. This includes single-family homes, townhomes, condominiums, and co-ops. The median existing-home sales price rose 2.3%. Total housing inventory was down 13.4% from the previous month. First-time buyers’ percentage of sales rose by 3% in December. Existing home sales fell the largest amount in the South, at 2.2%.

Initial jobless claims fell from the previous week and totaled 190,000.  Continuing claims rose from the previous week. This signals a still strong labor market which the Fed doesn’t want to see due to the wage-spiral effect which describes the phenomenon of price increases because of higher wages.

The Commitment of Traders report and Traders in Financial Futures report is a valuable resources for traders. I’m still in the process of learning how to decipher and use information. It details the positions of commercials, large and small speculators, commodity funds, and a host of large market players.

It’s taken every Tuesday and the report is released on Friday. It’s a lagging indicator, however, what is most important about the report is the trends. The report features holding by the sell-side (Dealer/Intermediary) and the buy-side (Asset Manager/Institutional, Leveraged Funds, and other reportables).

Traders in Financial Reports

Asset Manager/ Institutional: Pension Funds, endowments, insurance companies, mutual funds, and portfolio/investment managers. – Medium to Long-term view

Leveraged Funds: Money managers, Commodity Trading Advisors, registered commodity pool operators. – Short-term view

Other Reportables: Corporate treasuries, central banks, smaller banks, mortgage originators, credit unions, and other traders not reported in the above two categories.

Bonds

Fed fund rate

Asset-Managers: Net short (52-week high) – Trend: Selling

Leveraged Funds: Long (Reversal from short) – Trend: Buying (52-week high)

Five-year bonds

Asset-Managers: Net long (52-week high) – Trend: Buying

Leveraged Funds: Net Short (52-week high) – Trend: Selling

Ten-year bonds

Asset-Managers: Net long (52-week high) – Trend: Buying

Leveraged Funds: Net Short (52-week high) – Trend: Selling

Thirty Year bonds

Asset-Managers: Net long (52-week high) – Trend: Buying

Leveraged Funds: Net Short (52-week high) – Trend: Selling

Stock Indices

S&P 500 Index

S&P 500 E-mini

(Tiff report)

Asset Managers: Net Long – Trend: Buying

Leveraged Funds: Net Short – Trend: Selling

Russell 2000

Russell 2000 E-mini

(Tiff report)

Asset Managers: Net Long reversal from net short – Trend: Buying

Leveraged Funds: Net Short – Trend: Selling

Dow Jones

Dow Jones E-mini

(Tiff report)

Asset Managers: Net Long – Trend: Mixed buying levels in the last several weeks.

Leveraged Funds: Net Short – Trend: Buying but long positions have been trending downward.

 

NASDAQ

Nasdaq E-mini

(Tiff report)

Asset Managers: Net Long – Trend: Buying

Leveraged Funds: Net Short – Trend: Selling

This past week’s cash flow report:

I think my spending plan has been followed somewhat. While my day-to-day purchases have moderated, I’m still making some silly purchases which has set me back. On the positive side, the amount I’m spending on take-out or “food away from home” has declined significantly which has resulted in me losing weight.

I’m down close to twenty pounds which I am extremely proud of. For a couple of years, I struggled to lose weight even though I pushed myself to the brink when working out. With a couple of adjustments to my diet, the weight began to slide off which taught me an important lesson. A plan or goal is a test of long-term endurance, the ability to make small adjustments without getting discouraged on the path toward accomplishment.

Never give up, just keep adjusting until you reach your destination. Nowhere is this more true than in the insights I post weekly. Revisit my original posts to see the difference.

Grade: D+

Reason: Ill-advised purchases

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