The Weekend Edition # 52

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and subscribed to the newsletter and supported me over the last one year. I am sincerely grateful for all of you. 

Here’s what we cover:

• Market Recap

• Earnings

• The Week Ahead

• Closing Thoughts

Let’s dive in ⬇️

Market Recap - Aug 08 - Aug 12, 2022

Another week of stocks marching higher. The SPX is now 17.69% above it’s 52 week low, with the Nasdaq +23% above it’s lows. The VIX is now below 20 and the market seems to think that we’re beginning a new bull market in equities.

It smells a lot like a bear market rally to me though. Bear market rallies have reached +20-25% as well in the past, before the market declines a further leg down.

The market right now seems to be marked by

1. short squeezes in smaller companies

2. short covering after better than expected economic data and,

3. companies beating estimates that were perhaps too low to begin with.

Better than expectations doesn’t necessarily mean better. The macroeconomic data however, suggests that the economy is weakening and inflation still hasn’t declined to levels where the Fed might reconsider their rate hikes. We also are yet to see the full effects of QT, which will ramp up further in September.

Here’s a chart I posted on Twitter after the CPI data came out and it clearly shows that while energy costs had a big impact in bringing down inflation, food inflation in terms of groceries continue to increase, hurting the consumer.

While food inflation was still soaring last month, we may see a slight improvement by next month as the cost of soft commodities are gradually decreasing.

Earnings of the Week

The earnings scorecard for this week comes from Refinitive. The S&P 500 companies have been beating earnings to a large extent while, revenues beats have come in slightly softer. Analyst estimates may have been tempered down quite a lot this quarter and it remains to be see how they turn out next quarter, with further estimate revisions.

But, corporate earnings and revenue growth continue to slow. A look at QoQ numbers show that there has been a significant slowdown in all sectors except energy, which is also set to slow next quarter.

The balance between demand destruction and high input costs is a tricky one. The next quarter will see high levels of cost from inflation, further inventory build up and the beginning of demand destruction. Add to that increases in interest rates and we’re likely to see further dampening of profits and lower levels free cash flow.

Third quarter results will also see a depletion in liquidity and money supply in the economy - leading to lower levels of spending and revenues.

Companies can continue to beat estimates set by analysts but, the real question remains whether these companies are actually doing well. For many like Teledoc and Upstart , I think the companies are getting gutted from the inside and while they may not face bankruptcy, it will be some time until they recover and become good investments again.

The Week Ahead

Economic Indicators - Housing Data and Retail in Focus

Earnings - Retailers in Focus

Closing Thoughts

We have an interesting week ahead with the major retailers reporting earnings. While we’ve already had Walmart revise down their estimates, it would be interesting to see what the other major retailers have in store for us. Inventory levels will be something to watch and a decrease could actually be quite positive for stock prices.

We also have housing data and retail detail coming out. These will definitely be worth watching. I think we see some softening in both and that could potentially have a positive effect on the market.

The problem with bear rallies is that they can reach inordinate heights at times and just when you think that this could be the start of a bull market, the market turns, often on inconsequential issues.

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

Sincerely yours,

Ayesha Tariq, CFA

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 none of the companies mentioned as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.