Trade The Journey

Trade The Journey

Market Rebound or Bear Rally?

Top of the Morning! I hope everyone is enjoying their weekend and preparing for the week ahead. This past week marked the beginning of the fourth quarter earnings season.

Here are the dates for the beginning of earnings seasons:

First quarter: April 15 to May 31

Second quarter: July 15 to August 31

Third quarter: Oct 15 to November 30

Fourth Quarter: Jan 15 to February 28

Bank earnings largely came in above expectations with most beating earnings and revenue estimates but not all. JP Morgan came in below expectations for net interest income. Net interest income is the amount left over from what banks charge in interest and their interest expense. JP Morgan’s CEO, Jaime Dimon, continues to warn of a mild recession and has increased its provision for credit losses to protect against loan defaults. Here is a quote from Jaime Dimon regarding his outlook:

“We still do not know the ultimate effect of the headwinds coming from geopolitical tensions including the war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation… and the unprecedented quantitative tightening.”

Bank of America beat on earnings and revenue estimates bolstered by a higher net interest income reported for the quarter. Its CEO also warned of a slowing economic environment. Bank of America also increased its provision for credit losses but not at the same scale as JP Morgan. The average credit outstanding held by consumers jumped 14%. Revenue from fixed-income, currency, and commodity trading has risen 37% year to date.

Wells Fargo beat expectations, however, when it boosted funds available for provision for credit losses it hurt its bottom line. The company’s ongoing litigations and legal problems continue to affect its balance sheet. The mortgage side of their business, which is quite large compared to other banks, continues to face challenges as its sales, refinancing, and home lending activity has fallen steeply.

Citigroup missed earnings and beat on revenue expectations. Citigroup set aside more money for its provision for credit losses, hurting its bottom line. They increased revenue with growth in interest income and fixed-income trading. Citigroup also saw increases in its private and personal bank revenues but saw falling retail revenues due to lower mortgage volumes.

(Earnings summarized mostly from CNBC and other references)

All of the banks increased their provision for credit losses or loan defaults in anticipation of slower economic activity. Nearly all of the earnings reports reflected the possibility of a mild recession moving forward.

All of the indices ended the week in the green with the VIX moving below the twenty level. The VIX hasn’t been below twenty since early March when it briefly drifted below the level before rising again. Yields retreated across longer maturities boosted by a resurgence in the bond market with the notion that the Fed. The short end remains near the highs made for most yields three months ago.

Are we seeing a market rebound or a bear rally? With the exception of the Nasdaq, the other indices are up from their recent lows with the Dow showing continued strength. With many variables in play, it’s hard to say what the future holds but I wouldn’t be surprised if markets drifted back lower.

Last week’s trade review can be found here.

Economy

The first report released this week was the consumer credit report highlighting revolving and nonrevolving credit among other credit updates. Revolving credit can be associated with credit cards while nonrevolving credit can be thought of as a student or auto loan.

Total outstanding credit increased slightly with revolving and nonrevolving both rising in November. Revolving credit rose at an annual rate of 16.9% and nonrevolving credit rose at an annual rate of 3.9%. New car loan rates are now comfortably above 6% for both 5-year and 6-year car loan rates. Credit card rates are closing in on 20%. Personal loans rose to 11.25% in November.

New car loan maturity has reached an average of 66 months at a rate of 5.5% with a total amount of $40,156, the highest amount and rate reached in the last several years.

Nonrevolving credit includes motor vehicles, mobile homes, education, boats, trailers, or vacation loans, and anything not included in revolving credit. Consumer credit outstanding excludes real estate loans. Flow data represent changes in the level of credit due to economic and financial activity. The flow for revolving credit in November has reached its highest level in several years, while the flow for nonrevolving credit in November has fallen to its lowest level, dating back to 2020.

Wholesale inventories for November rose by 1%. November sales of merchant wholesalers were down 0.6%. The inventories/sales ratio in total rose by 0.03 points to 1.35. As a reminder, the inventories to sales ratio indicates the number of months of inventory on hand to cover sales, so 1.35 indicates wholesales have enough inventory to cover almost a month and a half of sales. Durable sales fell 1.7% while nondurable sales rose 0.4%.

Metals sales for wholesalers fell the steepest at nearly 5% for durable sales while drug sales for wholesalers rose 4%. Inventories rose for durable wholesalers by 1.1% and 0.7% respectively in nondurable inventories. Machinery inventories led to an increase in wholesale durable inventories at 2.2%. Drugs and Apparel inventories led the increase for nondurable wholesalers, both above 2%. Apparel is also the highest in terms of inventories to sales at over 3 months of inventory to cover sales. Machinery, Hardware, and Metals led the inventories to sales, all above two months of inventory to cover sales.

The NFIB small business optimism index fell two points in December, ending a full year of the index remaining below the 49-year average. Inflation remains a top concern of small business owners, souring better business conditions over the next six months. Small business owners’ raised average selling prices decreased by eight points. Price hikes were reported in wholesale, manufacturing, construction, and transportation. Interest on loans has risen 2.5% in total from 5% to 7.7% from January to December of last year.

A net 44% of small business owners reported raising compensation. 41% of all owners reported job openings they could not fill in the current period with most of the difficulty within the construction, manufacturing, and transportation sectors. The percentage of small businesses with at least 1 unfilled opening remains high, while the percentage of small businesses planning to hire is trending downwards. Labor quality is the second top concern of small business owners behind inflation.

Small business owners are expecting a slowdown this year. Input cost concerns are another concern for small business owners.

Initial claims for the past week came in at 205,000, decreasing slightly from the previous week. Continuing claims decreased by 63,000, totaling 1.634 million. The four-week moving average for initial claims fell by 1,000 to 213,000, signaling a still-tight labor market.

The CPI for all items fell 0.1% for all items, falling precipitously for energy specifically for gas but rising for food. Energy fell 4.5% in December with gasoline falling over 9%. Natural gas rose 3% and electricity rose 1% in December.

The food index rose 0.3% in December. The food at home index rose 0.2%, with the price of eggs rising over 11%. The food away from index rose 0.4%. Excluding food and energy, the CPI rose 0.3% in December. The shelter, rent, and owners’ equivalent rent index all rose 0.8%. The index for used cars and trucks fell 2.5%, while the new car index fell 0.1%. The shelter index has accounted for most of the rise in the CPI when excluding food and energy.

*All data used in insights are seasonally adjusted. Seasonally adjusted changes are ideal for analyzing short-term price trends in the economy. They eliminate the effect of changes that normally occur at the same time and in about the same magnitude every year- such as price movements resulting from weather events, production cycles, model changeovers, holidays, and sales. *

Notable increases and decreases in prices occurred in Fuel Oil (-16.6%), Gasoline (-9.4), and Eggs (11.1%).

The CPI relative importance table gives you a good idea of what is weighted the heaviest in terms of the CPU report. It is published once a year in December. The relative importance of a component is the expenditure or value weight expressed as a percentage of all items within an area or an area within the US according to the bls.gov site.

Food represents 13.781, energy at 7.868, commodities less food and energy commodities at 20.882, and shelter at 32.929.

Prices for U.S. imports rose 0.4% in December and fell 2.6% for exports. Fuel imports rose 0.6% while imports excluding fuel rose 0.4%. Prices for imports rose in nonfuel industrial supplies & materials, consumer goods, foods, feeds, beverages, capital goods, and automotive vehicles. Prices for imports from China fell 0.1% in December. Prices for imports from Japan rose 2.3%.  Prices for imports from Canada and Mexico both fell 0.2%. The prices of exports to those countries each declined in December.

The University of Michigan’s preliminary consumer sentiment was released on Friday showing improvement in consumer sentiment, economic conditions, and consumer expectations in January. Easing inflation improved current assessments of personal finances. Year-ahead inflation fell to 4% from 4.4% in January. Long-run inflation expectations remained in the 2.9-3.1% range, above the 2.2-2.6% long-run expectations two years prior to the Pandemic.

Mortgage applications rose 1.2% from the week prior. The refinance index rose 5% and the purchase index fell 1% from the week prior. All loan types showed a decrease in rates. The interest rate for 30-year fixed-rate conforming loan balances fell by 0.16% to 6.42%. The interest rate for 30-year fixed-rate jumbo loan balances fell by 0.03% to 6.09%.

Included below is a chart of the Strategic Oil petroleum reserve:

Indices charts and reference levels:

This past week’s cash flow in Review:

This week went as expected; however, I had some emergency car expenses that were somewhat unexpected.  I needed a new car battery which was higher than the normal battery cost due to the type of car I drive. I also needed automotive repair on the car which was a bit more than I expected.

My discretionary expenses were about what I expected. Unfortunately, recent expenses have all but drained my savings account. It doesn’t feel good withdrawing money from my savings account that I have spent months building but on other hand, I’m happy that I had the funds available for emergencies.

The only other option I would have had would be to take on more debt to cover the car expenses. While I continue to pay down my credit accounts, I’ll also be rebuilding my savings account to cover future emergencies.

Grade: C

Reason: Money available to cover emergency expenses.

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