Trade The Journey

Trade The Journey

Markets Stabilize

Top of the Morning Markets! 

As you may know, I’m a huge fight fan markets, and tonight marks the return of Jon Jones. Tonight he faces Cyril Gane who is a formidable opponent. Valentina Shevchenko is also fighting and she is one of my favorite fighters to watch.

Markets staged a return towards the end of the week. Below are some of the earnings results for retailers, highlighting some of the challenges consumers are facing.

Ross Stores, which owns DD’s discount stores, remarked that inflationary pressures are impacting lower-income customers. Ross is in the midst of a 2-year stock buyback program and will increase the quarterly dividend by 8%. Expecting the next year to be challenging, comparable store sales are forecasted to be flat. Their forecasts are based on incentive compensation, higher wages, the deleveraging effect of flat same-store sales, and lower freight costs.

Earnings: Beat 6.25% surprise    Revenue: Beat 1.42% surprise

Dollar tree is expanding its merchandise price points from $1, by adding $3 and $5 merchandise. They are also replacing control brands with private brands while adding national brand equivalent products later this year. Dollar Tree cut its financial outlook for next year. Dollar Tree expects capital expenditures to increase to $2 billion with 39% dedicated to business continuity and 61% to growth optimization & productivity improvement. Dollar tree plans to open 650 new stores and renovate close to 1,000 stores. Dollar tree noted that consumers are opting to spend on necessary products instead of discretionary and extra items.

Earnings: Beat 2% surprise      Revenue: Beat 1.48% surprise

Kroger reported they are seeing customers show a preference for their brand instead of name brands to stretch their food budgets. Consumers are also redeeming coupons and seeking items available on promotion. Kroger noted that higher Last-in-First-Out inventory charges were much higher due to higher product cost inflation in grocery. Kroger is in the process of acquiring Albertsons.

Earnings: Beat 9.48% surprise          Revenue: Missed 0.23% surprise

Lowes saw continued demand in Do-it-yourself (DIY) core home improvement but saw a decrease in demand for holiday gift buying in the same category. Lowes also faced a decline in comparable sales. Cited millennial household formation, baby boomers’ preference to age in place, and remote work as tailwinds. The report also mentioned that 50% of US homes are owned by someone over 41 years old. Consumers are opting to upgrade existing homes instead of moving due to higher rates and low supply.

Consumers held back on discretionary spending during the holiday season. Also noted that consumers are likely to remain cautious and continue to shift their spending to experiences, causing Lowes to issue a conservative outlook for the year ahead.

Earnings: Beat 2.94% surprise          Revenue: Missed 1.18% surprise

Best Buy noted that comparable sales were down 10.4% over the past year. Noted that they had inventory challenges, ending October with an unusually high level of inventory. Saw year-over-year sales declines in nearly all product categories, with the steepest declines in computing and home theater. Best buy is noticing that consumers are making trade-offs, as savings are being used and credit usage is rising. Consumers are showing increasing interest in sales events and in some cases are trading down.  Sales growth is rising in outdoor living categories. Best buy also plans to adjust cost structures to match the shifting macro environment.

Earnings: Beat 24.88% surprise      Revenue: Missed 9.66% surprise

Economy

Durable goods new orders fell by 4.5% in January after rising in December by 5.3%. Excluding transportation, new orders for durable goods rose just 0.1%. Transportation equipment rose 13.3% this past month. For a long time, I’ve seen transportation equipment lead the new orders growth or declaration but did not have a clear understanding of what transportation equipment covers.

Transportation equipment consists of refrigerated straight trucks, tractor trucks, refrigerated van trailers, vans, and trucks to name a few components.

Shipments fell by 0.1% in January, with shipments of transportation equipment falling by 1.7%. Unfilled orders for manufactured durable goods were unchanged. Transportation Equipment fell by 0.1% in January. Unfilled orders for transportation equipment have remained elevated for close to two years. Inventories for January fell 0.7%, led by a decrease in transportation equipment.

New orders for nondefense capital goods fell over 15%, with shipments also decreasing by 1%. Unfilled orders for nondefense capital goods fell by 0.1% and inventories fell by 0.2%. Companies may be in the process of scaling back their investment in capital goods, amidst rising fears of a slowdown.

The ISM manufacturing index shared a similar story, with a third straight month of contraction. New orders were 47%, lower than the 50% of expansion but higher than last month’s reading of 42.5%. Production fell by 0.3% to 47.3%. Prices rose 6.8% to 51.3%, while the backlog of orders index rose 1.7% to 45.1%. Employment contracted, falling below the 50% level to 49.1%. Supplier deliveries slowed by 0.4%, bringing Januarys’ total to 45.2%. The inventories index fell by 0.1% to 50.1%.

Four manufacturing industries registered growth in February which was Apparel, Leather & Allied products; transportation equipment; petroleum & coals products; and electrical equipment, appliances & components. Business conditions are mixed according to respondents, with some industries reporting strong sales and other industries citing softening in new orders and business sales. Most respondents expressed reluctance to reduce their headcounts.

Other noticeable trends include the falling manufacturing PMI, whose February total is a bit below the 12-month average of 51.8%, reaching its low last month. New orders are improving with a smaller percentage reporting lower new orders and a larger percentage reporting improved new orders. As supply chains improve, new orders should find some stability if the worries about a slowdown don’t damper enthusiasm too much.

Production is expected to improve in the second half of 2023. The buying policy which includes the average commitment lead time for capital expenditures (10 days), average lead time for production materials (1 day), and average lead time for maintenance repair & operating supplies (2 days) all increased in February.

The ISM services index was a different story, proving to be much more resilient than the Fed would like.  The services sector has expanded in 32 out of the last 33 months, registering 55.1%. Business activity slowed by 4.1% to 56.3%. New orders increased by 2.2% to 62.6%. Employment activity continues to strengthen, rising by 4% to 54% for February. Supplier deliveries improved, registering the fastest delivery performance since June 2009 according to the report. The price index retreated by 2.2% to 65.6% and inventory sentiment fell by 0.5% to 55.3% although both are still in expansionary territory.

Only four industries decreased in the services report which was wholesale trade; transportation & warehousing; information and management of companies & support services. Respondents remarked that inflation has eased somewhat but not enough. Some industries like construction and information are facing pressure to maintain margins due to challenges in reducing costs. While sales activity in accommodation & food services remains strong, the retail trade is looking to adjust inventory to match the lower sales forecast.

Notable trends include the strength of the Services Index with the index remaining close to its twelve-month high of 58.4.  Currently, the services PMI is right near its average of 55.5 for the past year. New order remains strong, and employers are looking to fill positions to handle the increased workload. Inventories are also rising, as companies prepare for the spring season. Inventory sentiment is still in the process of moderating, with the percentage of respondents reporting inventory is about right increasing.

Overall, services remain a solid part of the economy’s strength, resisting the effect of higher rates much to the Feds’ intentions.

Nonfarm business sector labor productivity in the fourth quarter rose 1.7%, as output rose 3.1% and hours worked increased by 1.4%. Unit labor costs for the business sector rose 3.2%, reflecting a 4.9% increase in hourly compensation and a 1.7% increase in productivity. Labor costs have risen by 6.3% over the past year echoing the respondents’ remarks in the ISM services report. Manufacturing sector labor productivity fell 2.7%, as the output fell 3.5% and the number of hours worked in the sector fell 0.4% in the fourth quarter.

Business sector productivity fell 1.7% in 2022, reflecting a 4% increase in the hours worked and a 2.3% increase in output. As a reminder labor productivity is found by dividing the real output index by the hours worked by all persons which include employees, proprietors, and unpaid family workers.

Moving to housing, pending home sales in January rose 8.1%, however pending home sales are down close to 25% from the previous year. The national association of realtors expects existing-home sales and new-home sales to fall in 2023 before staging a recovery in 2024. They also don’t expect a moderation in rates to occur until 2024 which is in line with the Fed possibly pivoting in 2024.

Total construction spending in January fell 0.1% in January. Private construction spending was unchanged in January. However private construction spending on residential construction fell 0.6% in January, while nonresidential construction spending rose 0.9%. Total public construction fell 0.6% in January, falling for both education and highway construction spending. Total residential public construction increased slightly.

The S&P Corelogic Case-Shiller US National Price Index fell 0.84% this past month, although up 5.76% this past year. The S&P/Experian First Mortgage Default Index rose 0.05% this past month, while the Second Mortgage Default Index was unchanged this past month. The Auto Default Index and the consumer credit default index rose 0.06% this past month. Both default indexes have steadily risen over the past year indicating that higher rates are beginning to affect the consumers’ wallets.

Mortgage applications fell by 5.7% from the previous week. The refinance index and purchase index both fell by 6% from the previous week as the 30-year fixed rate for mortgages rose to nearly 7%. The 30-year fixed rate for conforming mortgages rose 0.09% from the previous week to 6.71%. The 30-year fixed rate for jumbo mortgages rose was unchanged at 6.44%. The national median payment for mortgages rose 2.3% to $1,964 from $1,920. Home affordability will remain challenging for prospective buyers for the foreseeable future.

Moving to employment, Initial Claims for this past week declined by 2,000 bringing the total to 190,000 initial claims, well below the forecasted 197,000. Continuing claims also declined this past week. The conference board released the Consumer Confidence for February which showed a decline in confidence in February by 3.1 points to 102.9. The present situation index rose by 2.7 points to 152.8 points, while the expectations index fell sharply to 69.7 points from the January level of 76. The expectations level is below the 80 levels, signaling a potential recession within the next year. The availability of jobs buoyed the present situation index. Fewer consumers are planning to make major purchases and take vacations.

Fed speakers reiterated the need for higher rates, although Fed member Bostic said that rates may need to be paused by summer which improved sentiment in the market. The current market environment is still uncertain although volatility retreated towards the end of the week.  With treasury bills offering 5%, it might not be a bad idea to park your money in short-term money market instruments if you are uncertain about the current environment. With that being said, now might be a good time to start planning for investment in the year ahead.

This past week’s cash flow:

This past week went well. I didn’t spend as much as I anticipated while on my short vacation. This upcoming week, I plan to add money to my savings, investment, and trading accounts.

Grade: C

Reason: Moderate spending control

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