The Weekend Edition # 57

Welcome to another issue of the Weekend Edition. 

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

Here’s what we cover:

• Market Recap - Rate Hikes

• Macro - Emerging Markets

• Earnings Results - Costco

• Other Posts of the Week - The FOMC Meeting Recap

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts - The clear message

Let’s dive in ⬇️

Market Recap - Sep 19 - Sep 23, 2022

What a week this has been! We’ve seen equities yet again under pressure with all the broad market indices falling below 20% from their 52-week high. By Friday, markets had become heavily oversold and we did see somewhat of a turnaround in the second half but, obviously not enough to close in the green.

Bond yields soared across the curve but obviously more on the short end as the Fed delivered another 75bps hike on Wednesday. The 2-year yield is now 1,644% above it’s 52-week low. Yes, that one thousand six hundred and forty-four percent!

One thing that Fed Chair Powell did say is that they would like to see positive real rates across the curve. This simply means we have more pain to endure as they keep hiking. 

Please don’t forget QT also has an indirect effect on rates, as I had written previously. So it’s quite likely that some of the rate increases will come about as a result of QT and not just hiking the Fed Funds rate. 

We saw a great many rate increases across the board this week from various Central Banks (CB). There’s no secret that most CB’s follow the Fed. Some, like the UAE, have no choice as their currency is pegged to the US Dollar and others are facing a similar dilemma and take direction from the most powerful CB in the world.

I’m sure many of you have seen the chart above from Bloomberg. This was posted on 22 Sep 2022 and it would seem that hardly any country is safe from hiking, the notable exceptions being Japan and Turkey.

The Net Result… every market across the Globe is feeling the pressure. While Emerging Markets are still faring better than Europe or China, the question remains: for how long?

Macro of the Week - Emerging Markets

The World Bank is already projecting a worldwide recession in 2023. Higher yields in the US and the strength of the US Dollar are not helping Emerging Markets (EMs). The USD index hit a fresh 20-year high this week leading to currency devaluations and the risk of de-pegging for many countries.

Foreign currency reserves in EMs, which are primarily denominated in USD, are getting depleted. With most sovereign debt priced in dollars, this can very well lead to a crisis not very different from what we saw in Sri Lanka. Many of the EMs are seeing their debt re-rated downwards and Credit Default Spreads widen. Countries with over 900bps spreads have now reached historic levels. ⤵️

All these factors have led to a rising risk of default. Many of the EM Countries have debts to repay in the coming months and they will not have sufficient repayment capacity, without the intervention of the IMF.

Some of these countries are in talks with the IMF and have even gotten their reviews approved, such as Pakistan. But, the question remains how much is the IMF going to help even if they do agree to it. The amounts required might come in lower than expected and that may still mean a partial default.

Earnings of the Week

Costco 

Despite beating on revenues and EPS, Costco didn’t really catch a break. One reason of course was the broader market sell-off but there was also the fact that margins declined for the retailer, mainly due to lower gasoline prices.

While Costco is better positioned that their peers, Walmart and Target, the company is still looking at pricing pressures across the spectrum, and they are not considering an increase in their membership fees, either.

Not to mention Costco also remains more expensive on forward PE basis at about 32x compared to Walmart at 22x or Target at about 17x.

Other Posts

The Week Ahead

Earnings Calendar

Economic Calendar - A really full week ahead

Closing Thoughts - The clear message

The message from Fed Chair Powell was scary but clear. I wrote a free recap of the meeting and I’ve linked it above. But, let’s just say that this time their projections are sufficiently hawkish.

I know there are still a great many out there who think that a Fed Pivot is coming. Perhaps so but, not anytime soon. The way I heard it, the Fed’s policy will remain tight for 2 years at least until 2024 and they realize that they will have to inflict a considerable degree of pain in order to achieve this. And that involves the stock market.

Fed Chair Powell said that tighter monetary policy will first lead to worse financial conditions and then worse economic conditions and, part of the worse financial conditions is seeing the stock market decline.

In a recent interview, Neel Kashkari came out and said that they did not expect the stock market to soar after their previous FOMC meeting. That should not have been the response to the hawkish message from the Fed.

All of this corroborates the two messages I’ve been reiterating in my newsletters:

• The Fed can and will tighten into a recession

• The Fed will not backstop the stock market

Times are going to be tough ahead and we need to position for that.

Here’s still 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 no affiliation with any of the companies that are mentioned.