The Weekend Edition # 30

Welcome to another issue of the Weekend Edition. I can’t believe I’ve been writing for 30 weeks straight!

Thank you to all who read and have subscribed to this newsletter; you encourage me to keep writing!

This week we cover:

• Market Recap - What happened last week

• Chart of the Week - Is it time to enter stocks that have had massive drawdowns?

• Earnings of Week - Reopening, Consumer Staples & Healthcare

• The Week Ahead - Calendars & What I’m Watching

• Closing Thoughts

Let’s dive in ⬇️

Market Recap - Feb 07 - Feb 11, 2022

With major earnings out the way, this week saw the indices retract again. Thursday and Friday were marked by low liquidity with significant pull backs in the indices, a spike in the Volatility Index (VIX) and fluctuating oil prices. Yields also shot up with the 2Y increasing 13.96% over the last week. As of today, the FedWatch tool shows a 93.8% probability of a 0.50% rate hike in March.

Several key events drove the market:

• Hot CPI (Inflation) data was released on Thursday - showing the CPI rising 0.6% MoM and 7.5% YoY - the highest reading since Feb 1982.

• Oil temporarily pulled back towards the beginning of the week on the news of Russia not advancing and positive talks with Iran.

• Reports were released on Friday that the "U.S. believes Russian President Vladimir Putin has decided to invade Ukraine." National Security Advisor Jake Sullivan clarified that the White House doesn't think President Putin has made a final decision, but he did acknowledge a "distinct possibility" that Russia could invade Ukraine before the end of the Olympics. This sent the entire market spiraling again with Oil shooting up.

• The preliminary reading for the University of Michigan Consumer Sentiment Index for February declined to 61.7 from the final reading of 67.2 for January. This reading marks the lowest level for the index since November 2012.

Charts of the Week - Are we there yet?

The chart above shows the percentage drawdown from the peak for several tech stocks as of Feb 11, 2022

• Upstart - UPST: -74.34%

• Affirm- AFRM: -72.38%

• Roku - ROKU: -65.81%

• Square / Block - SQ: -61.72%

• Upwork - UPWK: -57.84%

• Sea Limited - SE: -56.87%

And the question is… are we done with the drawdown? Is this the market bottom for these companies or can they actually retrace their March 2020 Covid lows?

The truth is, no one knows. I still don’t think we are seeing the full effects of liquidity reducing in the system and the proposed rate hikes. For anyone who says that the hikes are priced in, just look at what happened on Thursday after the CPI number came out. So it could very well get worse.

So where do we draw the line? Where do we look at these names and think they look attractive now, and we want to buy some more? I know there are some who think dollar cost averaging into these companies right now is the right way to go. Perhaps they’re right but, I’m waiting for a bit.

I hold Square and I’ve averaged somewhat but, with smaller positions and now, I don’t believe I should anymore. I maybe dead wrong but, I want to wait until the Fed makes their first announcement to hike rates. 

I’m always willing to take less profits but, never willing to take larger losses.

Earnings of the Week

Following earnings is a cumbersome job - keeping up with the estimates, listening to calls, reading transcripts, readings 10K/ 10Qs. But, it will also teach you a lot not just about the company that you want to buy but, also about the market in general. This is why I’ve started to include more earnings in my list. I don’t do it because I hold all these companies, I do it so that you can get a sense of what’s happening in the market right now.

Let’s look at earnings a little differently this week. Here’s what I see from the list above:

Reopening trades are looking bullish

I really thought Disney was going to disappoint this quarter because of Omicron. While I was optimistic about the Dis+ subscribers, I didn’t think parks would do so well. Turns out, I was pleasantly wrong. Parks revenue more than doubled YoY to $7.23B. Moreover, the company reported Disney+ paid subscribers of 129.8M, up from 94.9M last year. 

While Uber still reported an impact from Omicron, gross bookings were up 51% YoY and they’ve guided to an improved 2H of 2022.

Expedia and MGM Resorts (+500% earnings beat!) show travel is back on the cards and gaining momentum.

Food & Consumer Staples - preferred defensive plays in a retreating market

Tyson reported an excellent quarter - on the back of raising prices. They’ve raised prices for their meat and poultry to combat inflation. Kellogg, Coke, Pepsi, Phillip Morris and even Chipotle reported beats. Consumer Staples have pricing power and have managed to weather the inflation storm.

Healthcare - also a semi-bullish sector in a retreating market & a reopening play

Tenet Healthcare, DaVita (Kidney dialysis), Centene and CVS Health all reported top and bottom line beats. Healthcare is definitely a sector I’m looking into - not just managed healthcare and hospitals but also medical equipment. With Covid subsiding (hopefully), people will resume their lives and elective surgeries will be back on the cards. Hospitals who were overloaded with treating Covid patients can now resume seeing patients who were otherwise too scared or not critical enough to go in.

The Week Ahead

Economic Indicators

• Mon Feb 14 - Fed Closed Board Meeting on “Review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks.”

• Tue Feb 15 - PPI & Core PPI [more inflation data, after last week’s hot CPI data, we can probably expect elevated PPI data]

• Wed Feb 16 - Retail Sales Data

• Wed Feb 16 - FOMC Minutes [The release of the minutes last month caused significant volatility when we were hit by the idea of balance sheet tightening]

• Thu Feb 17 - James Bullard Speaks at 11 am ET [He’s been in the news lately calling for a 1% rate hike by July]

• Thu Feb 17 - Housing Starts & Building Permits

• Fri Feb 18 - Existing Home Sales

Earnings

Closing Thoughts

It feels like the week ended with a “To be continued…”

With the geopolitical tensions and economic events, next week will likely be another volatile week. We had quite a drawdown when the previous Fed minutes were released. I doubt we see anything like that but, caution may still be warranted. So let’s stay sharp.

What I’m watching this week:

• Geopolitical Tensions - short bias $RSX, $SPY - long bias $WEAT*, $WTI, $USO, $BRENT, $VIX

• Fed Minutes - Short Bias - Bonds $TLT, $IEF, $SHY

• Agri Commodities - Long Bias - The Agri Plays I discussed last week are still holding up $DBA $JO $SOYB $WEAT $CORN

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

Please take a moment to share and subscribe, if you found this newsletter useful.

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers

None of the above is Investment Advice. Any trades made based on ideas or discussions in this newsletter are solely your own responsibility. I may or may not have positions in any of the stocks mentioned. I have a long position in $SQ, $DIS as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.