Trade The Journey

Trade The Journey

Reflection XI

Top of the Morning! I hope everyone is enjoying their weekend. Earnings season is upon us, and the results are somewhat what most anticipated, slowing earnings growth. Although companies are beating earnings forecasts, the magnitude of positive earnings surprises and forecasts for future earnings growth is less than stellar. In fact, a large part of the growth estimates can be attributed to the energy sector and in the last week, healthcare also contributed to higher estimates.

All the indices showed a recovery, venturing above their respective 50 SMAs, ending the week on a strong note. The volatility indices for the S&P, Nasdaq and Dow Jones are trending downward indicating that the fear in markets could be dissipating. As the Federal Reserve mulls over the next rate increase, the effects of the rate increase have yet to severely slow customer spending.

One development that may have assisted the indices in its short recovery, is the dollar’s retreat from its highs. As the ECB raised rates, it provided some relief to the rising dollar. A rising dollar hurts multinational companies’ bottom line and also makes their products & services more expensive for consumers outside of the United States.

Initially, the markets anticipated a one-hundred basis rate increase instead of the seventy-basis point originally forecasted. However, it seems that the Fed is leaning more towards a seventy-five-basis point increase. The European Central Bank raised rates fifty basis points, making it one of the last central banks to increase rates.

 

To assist weaker governments, the ECB is committed to buying bonds to help control yields in countries that may have trouble with higher rates. The ECB is trying to avoid another situation like Greece’s debt crisis. Although Russia reopened the Nord Stream pipeline, energy costs are one of the top concerns of the ECB moving forward. Below is a chart I found on a website that shows the results Central Banks hope to achieve by raising rates.

Central banks worldwide are worried that inflation may entrench their economies. The only economy yet to join the rate hikes in Japan and to a lesser extent, China. In an article on Barron’s, thirty property developers defaulted on their dollar debt or pushed out maturities. New home purchases account for most of China’s property sector. China’s real estate accounts for 30% of its GDP and property loans account for 30% of the outstanding loans.

Although China is attempting to support the economy while it implements its Zero Covid policy, residents are becoming impatient. There were stories of bank runs occurring in China as citizens attempt to retrieve their money from the small banks in the region.

Yields dropped towards the end of the week as bond buyers stepped in. The yield curve is still inverted on the short end. Bond buying increased heavily on the thirty-year bonds. Cryptocurrency also recovered with Bitcoin leading the charge. Bitcoin moved off its latest lows in June.

Most analysts are forecasting a recession to hit the US economy later this year or at the beginning of the next year. The yield curve inversion is adding more support to this belief. Some say that a potential recession may have already been priced into the market. In my opinion, the current market situation warrants extreme caution.

The tech industry is already laying off or freezing hiring. There are concerns that companies may have over-hired and overstocked their inventory due to heightened demand after Covid. Some of the bigger companies like Microsoft, Netflix, Carvana, JP Morgan, Wells Fargo (Mortgage lending), Tesla, Coinbase Lyft, and Tikok have either begun laying off workers or are in the process of making cuts.

The National Association of Home Builders housing market index continues to trend down, falling to 55. Single-family home sales for the present and next six months also Fell. The traffic of prospective buyers has also fallen precipitously. The chart below shows the downtrend of the housing market index. The months are jumbled together but the chart does include each month.

Building permits fell slightly during the month. Single-family housing starts fell steeply as did the housing completions for single-family housing. Five or more units building permits rose 13% on the month. Housing started for single-family housing fell 8% and rose 15% for 5 or more units.

Existing home sales fell 5.4% for the month of June. The median price of existing home sales rose for the month of June to $416,000. The sales range of $250,000 to $500,000 made up most of the sales at 43% for the month of June.  $500-$750,000 made up 20% of the sales. Home builders face a serious dilemma moving forward. As material, land, and labor costs eat into profits, how soon before the housing market faces a severe slowdown?

With rising rates and home prices, potential home buyers feel it better to stay in their home or residence rather than seek out a new home. Rent is also rising across the United States. Mortgage application volume continues to decline due to the reasons listed above. Purchase and refinance applications also fell for the week.

The Leading indicator index fell 0.8% for June, after falling in May by a similar amount, making it four consecutive months of decline.

Leading the decline in the Leading Indicator Index were average consumer expectations for business conditions, business conditions, weekly initial claims, Ism index of new orders, and average weekly hours of manufacturing. Leading the growth in the index was the lending credit index and the interest rate spread for the 10-year bonds less the fed funds rate.

Initial claims and continuing claims rose for the week. Initial claims came in over forecast making it the first week with over 250,000 claims since November of last year.

No options trades were made last week.



This Past Week in Review:

This past week went well for me. A new job means new opportunities. I’ve yet to receive a paycheck so it’s hard for me to form a budget. Lately, I’ve been adjusting my spending by lowering the amount I spend on discretionary items.

I continue to monitor the housing markets looking for signs that a severe slowdown is in the works, which I think has already begun. I still have some time to save for a down payment. One great thing about my new job besides the telecommuting and the laid-back work environment is the amount I have saved in travel costs. My new job is about twenty minutes away compared to my previous job which was a little over an hour away.

Grade: C

Reason: Consistency in keeping my discretionary purchases to a minimum.

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