The Weekend Edition # 58

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

• Macro - Where do we stand?

• Earnings Results - Nike

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts - Optimism remains

Let’s dive in ⬇️

Market Recap - Sep 26 - Sep 30, 2022

We’ve had one of the worst first 9 months to the year in decades. A Bloomberg article says it’s the 3rd worst performance since 1931. It could be the 4th but, that’s not the point. The point is that we’ve been in a slow grinding bear market for most of this year with occasional dramatic rallies. And every time we’ve had a rally, investors come out saying that the market has bottomed.

Looking at the macro data, more and more I believe that we have not bottomed. In fact the way we closed on Friday, we could see further downside continuation, as the broad market indices have now taken out key levels.

Last week, many thought the market was due for a bounce given how oversold it got. Believe me, so did I. And yet, one news after another came out and we never saw that rally. Instead, we saw heavy selling into the end of the week.

Commodities on the other hand seemed to have fared better this week. We saw both oil and gold rally. The chart below shows the ratio of SPX to CRB i.e., Equities vs. Commodities, and a decline signifies strength in commodities vs. stocks.

News broke out earlier this week that OPEC+ is going to meet in-person in Vienna on Oct 5th - the first non-virtual meeting since the pandemic started. The speculation from insiders is that they are considering a cut of 1 million barrels of oil production. This will definitely send the price of oil much higher.

Macro of the Week

Where do we stand? 

• GDP print came in at -0.6% for Q2, which was better than the -1.6% for Q1 but, that’s still two negative prints for the year.

• The Fed wants to see positive real rates but, we’re still not there and PCE data came in with an increase in month-on-month PCE of 0.3% and core-PCE of 0.6%. This is not good, because it signals inflation is becoming broad based. As a reminder core-PCE excludes food and energy and real rates is rates adjusted for inflation.

• Earnings will be where we really see a difference. Last quarter, companies still came in with some semblance of positive earnings. This time around I doubt that it will be so. Despite the negative revisions, we’re still forecasting positive growth in earnings, compared to the typical bear market earnings forecast of -20%.

• EM’s saw the largest outflow of funds at $70B, as rates rise in the Developed World but, are funds going there? Globally, there doesn’t seem like there’s anywhere to hide and liquidity is being withdrawn drastically from the system. We’re seeing the worst drawdown in global stocks and bonds since 2000. A global recession will certainly confirm the chances of an earnings recession for companies.

Earnings of the Week

I went on Fox Business on Friday and we talked a little bit about how Nike’s earnings sent us a warning signal. You can watch this clip here.

Nike  

Nike came out with a double beat on earnings and revenue, yet the stock sold off quite heavily on the news of their margins taking a hit due to their inventory build-up.

North American inventory levels increased a whopping 65% and in-transit inventory grew 85%. Total inventory increased 44% YoY.

While many are claiming that this could be as a result of their move to online, direct-to-consumer strategy, the earnings call makes it quite clear that it is not so. They said: “This reflects the combination of late delivery for the past two seasons plus early holiday orders that are now set to arrive earlier than planned and a prior year that was impacted by factory closures in Vietnam and Indonesia.”

Management was quite clear that they will be marking down their inventory. At least they’re living by their tagline - Just Do It! But, this will hit their margins.

Gross margin has already declined 220bps to 44.3% in Q1. They are now looking at a total of 350-400bps decrease in overall gross margins for Q2 bringing down margins to about 40%.

For the full year they are looking at low double digit growth in revenues despite a 800bps hit. On the margin front, they expect a decrease of 200-250bps in margin for the year:

• 150bps for higher markdowns

• 100bps from freight and logistics

• 70 bps from FX

Nike is still a very well-run business and they have a solid balance sheet to be able to withstand the pressure. Yes, we will see the stock sell off but, I still have a very strong long bias towards Nike.

The Week Ahead

Economic Calendar - The sheer number of Fed speakers every week now, mean I have to break my calendar screenshot into two images!

But, more importantly, it’s Jobs Friday!

Earnings Calendar

Closing Thoughts

We start earnings season in 2 weeks. That’s right, 2 weeks!

JP Morgan reports on Oct 14 and that marks the beginning of earnings season for me. This will certainly be an interesting one and we will be following along with live updates and analysis on our Traderade+ Discord.

Analysts have now made the largest cut to EPS targets for Q3, coming in at -6.6%. Looking at historical stats, the largest decline in the past has been only -4.8%, which is the average over 15 years (accounting for the GFC). Despite these cut in estimates, the expected change earnings still remains positive with a growth of +2.9%

The market still remains optimistic.

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   as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned, other than Traderade.com.