Trade The Journey

Trade The Journey

Insight 4-21

Top of the Morning! This past week most of the earnings reported beat the forecast although earnings estimates were lowered for this quarter. It seems like most market participants are more concerned about the forward guidance companies are providing. According to Factset so far, 18% of the S&P 500 companies have reported earnings with around 75% beating the earnings forecast with earnings surprises on the positive side.

Communication Services, consumer staples, energy, health care, and materials sectors have 100% of companies reporting earnings above estimates so far. Consumer discretionary is the largest sector reporting a difference between actual and estimated earnings. Materials, Industrials, and the financial sectors, in this order, are also reporting positive differences between actual and estimated earnings.

 The S&P 500 net profit margins is sharply down from the 2021 highs. The current level of 11.2 is virtually unchanged so far from the fourth quarter level of 11.3%. Leisure products, household durables, textiles, apparel & luxury goods and automobiles sectors are predicted to have earnings declines of more than 10%. Below are some charts of the earnings and revenue picture so far.

Economy

Building permits disappointed, as permits fell 8.8% in March. Permits for single-family homes rose 4.1%. for single-family homes have risen for a second consecutive month but far below the March levels of a year ago.  Permits for 2 to 4 units rose over 10% but fell decisively for apartments or housing with 5 or more units. Housing starts fell 0.8% in total but rose 2.7% for single-family starts.

Housing starts for single-family homes are at their lowest level in the past year. Starts for apartments or housing with 5 units or more have remained near their highest level in over a year.

Housing completions fell 0.6% in total and rose 2.4% for single-family completions. Completions for single-family homes remain high although they are down 0.2% from a year ago. Housing under construction fell 0.8% in March and fell 2.3% for single-family homes. Housing under construction for single-family homes is at their lowest level in the past year. With a tight supply of existing homes for sale, permits indicate the housing may be starting the long road of recovery.

Existing home sales fell 2.4% in March. The median price of existing home sales declined 0.9% to $375,700. Single-family existing home sales fell 2.7% in March and the median price was $380,000. Housing inventory was at 980,000, up 1% from the February levels and currently there is a 2.6- month supply at the current sales price. First-time home buyers rose 1% in March to 28% of sales.

Mortgage applications fell 8.8% this past week as mortgage rates rose. The refinance index fell 6% and the purchase index fell 9%. The 30-year fixed rate for conforming loans rose 13 basis points to 6.43%. The 30-year fixed rate for jumbo loans rose 0.02% to 6.28%. Jumbo loans are for loans above $500,000 or more and are typically for the more expensive homes.

Confirming loans are more intended for the average consumer. Conforming loans are those whose size limits are set by the FHFA and whose underwriting guidelines are set by Fannie Mae and Freddie Mac. According to a paper written on the spread between jumbo and conforming loans, the spread should widen when mortgage demand is high and tighten when the market becomes more liquid.

The NAHB housing market index rose one point in April and is at the highest level in the past six months. Single-family home sales rose by two points and are at the highest level in the past year. Single-family sales for the next six months also rose in April and are at the highest level in the past six months. Traffic of prospective buyers was unchanged in April and has also steadily recovered.

The Empire State manufacturing report showed that general business conditions rose 10.8%. The new orders index climbed sharply, and inventories also increased. However, the number of employees edged lower as did the average employee workweek. Delivery times were unchanged.

Expectations for the next six months slumped or remain unchanged for business conditions, new orders, shipments, technology spending and unfilled orders. Prices paid, prices received, number of employees and capital expenditures rose slightly to moderately. Although activity improved, there’s not much to get excited about in the near future.

The leading economic index from the condition board showed the outlook for economic growth is worsening, falling by 1.2% in March. The non-financial components of the Leading Economic Index fell 3.4%, falling sharply for the ISM Index of new orders and average consumer expectations for business conditions. The LEI is sending recession signals loud and clear with the six month growth rate falling below the -4.2% level.  The financial component of the LEI fell 0.2%. Only two components prevented a steeper fall, which were stock prices and manufacturers’ new orders for consumer goods and materials. The LEI typically anticipates changes in the business cycle by about seven months. The coincident index, which measures current conditions, rose 0.2%. The lagging economic index fell 0.2%. Below is a chart of the components of the LEI.

Earnings for Economic Trends:

Proctor & Gamble beat earnings and revenues forecast. However, the earnings call detailed that they raised prices in Europe & US and consumers are opting for a cheaper alternative.  However, on scale consumers have not switched to private labels, as its level remains unchanged which is a good sign the consumer is still resilient. The company cited headwinds due to foreign exchange rates and higher commodity and material costs.

Organic sales in China were up 2%, however, European market continues to see challenges due inflation pressures. Keeping an eye on Chinese consumers spending on travel retail could signal China’s full recovery as it emerges from its pandemic zero tolerance policy. Organic sales strips out foreign-currency changes. They also spoke about continued volatility in the macro and consumer environment.

Higher wages, interest expenses and benefits were offset by price increases and productivity improvements. According to management, “We believe this is a rough patch to grow through, not a reason to reduce investment in the long-term health of our business.”

Bank of America beat on earnings and Revenue. The earnings call provided excellent information on the consumer and the economy. Their research team predicts a shallow recession in the third quarter. Debit and credit card spending remains strong although spending is slowing. Consumers’ financial position remains generally healthy according to their numbers. Total deposits were down 1% and they also mentioned that clients are moving from lower-yield sweep accounts into higher-yielding preferred deposits and off-balance sheet to other investment alternatives.

 Net interest income, sales and trading results contributed to strong revenue for the quarter.  The charge-off rate remains below the pandemic rate. Loans grew at a much slower pace, as credit cards were paid down after holiday spending and commercial demand slowed.

Goldman Sachs missed on revenue but beat on earnings forecasts. Investment banking fees showed lower net revenues in advisory and debt underwriting. Equity trading revenues were lower in both derivatives & cash products. Bond trading, and asset & wealth management also declined. Fixed income trading revenue fell 17%. Goldman Sach’s unlike the other major banks don’t have a large retail banking sector as part of its business.

Charles Schwab fell on revenue but beat on earnings forecast. Trading revenue declined while asset management and administration fees increased slightly. They have paused their active buyback program. Net Interest revenue expanded by 27% due to the Fed’s tightening, as it helped improve revenue for most banks. Bank deposits declined by 11% as consumers moved to higher yielding and alternative investments.

Netflix beat on earnings and missed slightly on revenue forecasts. Netflix added 1.75 million subscribers, which was close to forecasts. They said that password sharing continues to be a challenge, restricting its investment in new content. $17 billion is the amount they plan to spend on new content in 2024.

Tesla beat on earnings slightly and missed on revenue forecasts. Tesla cited higher raw materials cand commodities, logic, and warranty costs. Environmental credits also contributed to a drop in earnings. Tesla CEO, Elon Musk sees turbulence in the economic horizon in the next year. As has been in the news, Tesla has issued price cuts in automobiles fueling concern of a potential price war.

 However, Musk stated that it sees production of 1.8-2 million vehicles this year. Tesla has experienced a drop in demand for its cars, as its pre-orders and deposits from buyers eager to secure a car have also fallen. Tesla’s energy revenue is up 148% over the past year. Its energy storage system, called the Powerball increased to 3.9 gigawatt hours.

This Past weeks Cash Flow in Review:

This past week went okay, a little worse than the week before. I was able to add more to my savings account and contribute more to reducing my credit card balance but I’m still spending on unnecessary items.

Grade: D

Reason: Little to no improvement

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