The Weekend Edition # 18

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and subscribed to the newsletter this week!

Now, let’s grab a cup of coffee ☕️, while we take a look at what happened in the markets this week. 

Here’s what we cover:

• Market Recap

• Indicators of the Week - Are the Bulls Losing Steam?

• Earnings through Macro - Home Depot, Lowe’s, Advance Auto Parts, Tyson Foods, Walmart, Target, Oatley, Alibaba and Baidu

• Around the Markets - Covid Resurgence

• The Week Ahead - Earnings Calendar

• Closing Thoughts - a muted Santa Clause rally

Let’s dive in ⬇️

Market Recap - Nov 1 - Nov 5, 2021

A look at the indices for the week tells you, Nasdaq has been strong, particularly the Nasdaq 100, but the rest of the markets declined over the week. Big Tech did okay with Apple even hitting yet another all time high yesterday.

The Large Cap Dow and the Small Cap Russell 2000 came down over the week. The Dow fell below its 50-day moving average. While the small cap index declined more, it still remains above the 50-day MA. The small cap index tends to do better in a rising rate environment because the it’s mostly dominated by financial stocks.

Which brings me to rates. Longer term yields came down more than shorter term yields. The yield curve is flattening and bond yields are nowhere close to the increased levels that was expected with the tapering announcement. With inflation more widespread, Fed members are suggesting a discussion on the pace of tapering during the December meeting and a reduction in the Balance Sheet soon after tapering.

Bitcoin dropped almost 10% during the week, and the Vix increased by 10%. We had the second largest Options Expiry for the year, after the largest back in September. What we saw in September is that the S&P tends to dip because of this, and not surprisingly the S&P closed down on Friday.

But, there are a few more indicators that don’t look as bullish. ⬇️

Indicators for the Week - Are the Bulls losing Steam?

Let’s look at the S&P first. While the S&P is still in a confirmed uptrend, the rate of change is decreasing showing a slowdown in price increases. We’ll probably see a period of consolidation before the year-end Santa Clause rally.

We also see the Advance-Decline Line coming down for the markets. The AD Line is a breadth indicator based on Net Advances, which is the number of advancing stocks less the number of declining stocks. In other words, it measures the degree of participation in an advance or a decline.

This divergence doesn’t necessarily mean that there will be a correction but, definitely suggests that the short-term uptrend is starting to weaken. So let’s be mindful.

Earnings of the Week - thru a Macro Lens

We’re almost done with earnings season and here are the Key Metrics from FactSet:

FactSet also published an insightful article on the companies citing supply chain issues during their earnings calls. We’ve been examining exactly these issues every week.

According to FactSet: 342 companies reported having supply chain issues, the highest in the last 5 years, with the top 3 sectors being Materials, Consumer Staples, and Industrials. Not surprising. A look at the bottom line showed, Net Profit Margins had reduced to 12.9% in Q3, 2021, compared to 13.1% in the previous quarter.

This week, earnings were dominated by the retailers and a few strong tech names - Nvidia, Palo Alto Networks, Sea Ltd. and Intuit.

Supply-side, Inflation and Margins

• Tyson Foods reported excellent earnings and raised guidance despite rise in food costs. The company raised prices sharply in Q4 due to stronger demand, more than offsetting the increase in input costs, resulting in stronger margins.

• Cisco reported their first revenue miss in 5 years, due to supply chain issues. The company delivered a solid EPS beat, but guided lower revenue for the coming quarter and a huge backlog. They expect supply issues to continue into H1, 2022 and possibly H2, 2022 as well.

• One company benefiting from shortages is Advance Auto Parts. The company posted a solid quarter even though their expansion plans have slowed down due to construction delays. Chip shortages have lead to more people having to service and repair their existing vehicles instead of buying new ones and this is expected to continue into 2022.

Demand & Spending

• Both Home Depot and Lowe’s reported a slowdown in home improvement activity, as the economy reopens, and stimulus support is withdrawn. Still, they see some of the activity will continue, now that people have gotten a taste for it. Home Depot saw a drop in margins, this time due to transportation costs and not lumber prices like last time.

• Walmart and Target both reported strong demand and early holiday shopping, as people fear delays due to supply chain issues. Walmart’s control over their supply chain and logistical arrangements is simply commendable. Despite this, the stock price dropped because of margin compression, since they’re absorbing the supply chain costs more than passing it on to consumers.

Other Factors

• Oatly saw a miss in revenues and lower than expected beat in earnings. Despite strong demand for their products, Oatly hasn’t been able to ramp up production fast enough to meet demand. They’ve also seen pressure from food service closures in Asia due to Covid. Clearly, the company is off on it’s execution plan and while they have a market, there’s more work to be done.

• Both Baidu & Alibaba took blows because of regulatory crackdowns in China. This is not new but it’s severe. While Baidu still managed to post top and bottom line beats, Alibaba missed on both. JD, in the meantime, is taking advantage of Alibaba’s troubles and gaining on market share.

Around the Markets

• A new wave of Covid - Austria goes into lockdown next week. Certain parts of the US is also facing a resurgence. News of lockdowns have put downward pressure on oil prices. Re-opening trades - the airlines and the cruise lines all fell this week on the news of covid fears. If you wanted to get in on these trades and thought you missed them, here’s your chance.

• Alibaba, Tencent and Baidu have been fined again by the Chinese government, cracking down on monopolies. Total $3.4million. These companies just can’t catch a break.

• Disney is adding ESPN+ and Disney+ to it’s Hulu Live TV product for $5 more. This is a strong move. Disney’s stock hasn’t been doing very well lately because of less than stellar earnings. This could very well add a boost, particularly since the parks division could come under further pressure with another round of Covid.

The Week Ahead

Fed Chair Decision

The Fed Chair Decision is imminent. What seemed like a done deal for Fed Chair Jerome Powell a few weeks ago, is not the case anymore. Lael Brainard could just as easily be picked. It’s a real nail-biter! 😆

Earnings

Closing Thoughts

We saw strong Retail Sales data this week in the US, up 1.7% in October compared to 0.8% in September. I saw an interesting comparison from Bloomberg saying that while the sentiment data showed people are concerned, the actual sales data show that people are still spending.

Well, the earnings report don’t show any different; people are still buying. But here’s the thing, most people are aware of the widespread supply chain issues. So, what you’re seeing is the holiday spending starting early.

Combine this with tax moves coming into the market, we may have a more muted Santa Claus rally toward the end of the year. While it may look like the bulls are losing steam already, we have 28 trading days until the end of the year. So, you never know.

Here’s wishing you a happy weekend and safe investing. 

Sincerely yours,

Ayesha Tariq, CFA

@ayeshatariq

There’s always a story behind the numbers

None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have a long position in $LOW, $HD, $NVDA and short position in $M as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.