The Weekend Edition # 47

Beautiful Turnaround, The Market Correction by Goldman Sachs, Lennar Earnings,

June 26, 2022

Welcome to another issue of the Weekend Edition!

Thank you to all who’ve read and subscribed to the newsletter this week! I am truly grateful.

I’m very excited to announce that I have my premium website up and running now at ayeshatariq.com. And I’m launching with a special 3-part co-authored article on China and potential investment opportunities.

The premium subscription is just US$ 10 per months or US$ 100 per year and will cover weekly content on Macro, Stocks and Earnings.

Reminder: The Weekend Edition remains free and on Substack!

Here’s what we cover this week:

  • Market Recap - Beautiful Turnaround

  • Macro - The Market Correction by Goldman Sachs

  • Earnings of Week - Lennar

  • The Week Ahead - Economic & Earnings Calendar

  • Closing Thoughts - China in Play

Let’s dive in ⬇️

Market Recap - 21 Jun - 24 Jun, 2022

We had quite the rally this week even with all the J Powell’s testimony and other macro data not coming in too hot. The shorter week saw the Nasdaq rally over 7% and the SPX rally almost 6.5%.

While the Nasdaq and Russell still remain significantly below the 20% decline, the S&P is technically no longer in a bear market. One month return on the Nasdaq has turned slightly positive while the Dow and SPX still remain negative.

The current set up looks more like a bear market rally and we all know these rallies can be vicious. We closed SPX at 3911 for the week and we just may see the market cross 4000 before we head back down.

Commodities 

Commodities are disinflating. This is a good thing for overall inflation. Lumber prices are down over 58% from their highs and this should help ease some of the homebuilding costs.

Oil and NatGas was down heavily from their respective 52-week highs. WTI did however, recover towards the end of the week. The long term thesis for both still remain bullish due to supply side constraints.

Not to mention, manufacturing activity and lockdowns in China are depressing demand. On the NatGas side, Europe is entering. the summer season and heating is less of a concern. Concerns around the supply however, still remain for the winter.

Housing Data

We had some housing data come out this week:

  • New Home Sales (MoM) +10.7% for May compared to -16.6% last month

  • Existing Home Sales (MoM) -3.4% for May compared to -2.4% last month

Despite the uptick in new home sales, the market now expects a -47% decline in Q2. The current inventory level fell to 444,000 representing 7.7 months of supply down from a 12-year high of 8.3 previously.

Increases in mortgage rates and high input costs for home building have analysts expecting a drop of -8% next month.

Housing data will be increasingly important to track given that it represents the largest share of the CPI. 

Macro - The Market Correction by Goldman Sachs

Earlier this week, Goldman Sachs published an interesting article about market correction driven by Fed Policy and Deleveraging of Private Markets. The looked at whether there was a turning point in economic activity (as measured by the ISM) and whether there was a shift towards Fed easing in the three months before and after equities bottomed. Here are the historical findings:

The findings were:

  • Monetary policy tightening was the most common cause of corrections and markets bottoms once the Fed shifted to easing

  • Activity trough (drop in the ISM data) has usually occurred several months after the market troughs

  • When the source of the correction was monetary policy, the Fed easing had an almost immediate reaction.

  • In deleveraging-driven corrections, the growth side seems to matter more.

Conclusion: 

The recent market correction has been a Fed-driven one, as equities have steadily priced in more tightening this year while simultaneously worrying that such front-loaded tightening will ultimately lead to a policy reversal.

In particular, it may be that the market needs to see signs of the inflation deceleration that our US economists expect in 2H22 in order to see sustained relief

Earnings of the Week - Lennar

We had few interesting names reporting this week, giving us some key singlas of what’s happened in the market and what lies ahead. I was keen on looking at these earnings to give us an update on Housing, Transportation and Restaurants.

Lennar - Home Builders

Lennar beat both on the top line and bottom, which was quite a surprise given their previous quarter’s miss. New orders grew 4% and gross margins increased from 26.36% to while net margins increased from 8.12% to 15.80%. 29.5%. Home deliveries 16,549, above their previous guidance.

But the important discussion was around the company’s outlook for the next quarter. While demand remained strong in the previous quarter, the CEO expressed concerns about the housing market and what he sees coming:

“Supply remains limited across the country and the need for affordable workforce housing continues to be at crisis levels. Clearly, production must catch up to the growing household numbers as production of dwellings over the past decade has lagged prior decades by as many as 5 million homes. Nevertheless, the rapid increase in interest rates, together with price appreciation have created at least sticker shock and perhaps a more structural cooling of demand.”

“Although these preliminary reflections of market conditions are not as positive of the state of the market, indicators have been building since the Fed's tightening began. And given the Fed's expressed conviction to combat inflation by the definitive statements made recently, it seems that these trends will harden as the Fed continues to tighten until inflation subsides. While we can choose to fight against the trend, the reality is that the market has been changing, and we are getting ahead of it by making all necessary adjustments.”

The Week Ahead - US Markets Closed on Monday Jun 20

Economic Calendar (time in ET)

Some very interesting numbers reporting next week - GDP, PCE, PMI numbers. 

Earnings Calendar

Closing Thoughts - Greener Pastures

I got out of China around January last year, i.e., 2021. After the fiasco with Jack Ma and Ant Financial’s listing, I felt the market was too volatile. To be fair, I also hadn’t studied that market well enough for me to keep on long-term positions.

The macro landscape for China, however, is changing. They are not experiencing the same part of the macro cycle that the US or other economies are experiencing right now. There may be some avenues to explore there as the macro environment changes and the companies start to pivot. The China Shanghai Composite index is already up over 6% over the last one month.

To this end, I co-authored of articles with Markets & Mayhem, on:

  1. China’s macroeconomy

  2. The Policies

  3. Investment Ideas

And the first part launches this week on my paid website - ayeshatariq.com

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

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers

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None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have no positions in any tickers mentioned as of the date of publication of this newsletter. I have no affiliation with any of the companies other than that mentioned here.

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