The Weekend Edition # 61

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 - Housing

• Earnings Results - Highlights - J&J, Amex, Goldman Sachs and Boston Beer

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts - The most eventful week of the season

Let’s dive in ⬇️

Market Recap - Oct 17 - Oct 21, 2022

Another choppy week in the market and this is going to be the trend for a while. We saw earnings coming in with double beats, Fed speakers spark a decline, and then some hint of Fed easing from the Wall Street Journal (which isn’t really based on facts). Events have become a strong catalyst for drastic moves in the market because the market lacks liquidity and participants remain heavily hedged with options. Moves end up being sharp.

Bond prices continue trend down as bond yields continue to climb. The 30-year yield hit a level not seen since 2011.

In the world of commodities, Agri commodities are gaining some ground with corn outpacing the Agri Index.

Macro of the Week - Housing Update

• Total housing starts declined 8.1% MoM in September to 1.439million units missing estimates of 1.465million

• Building permits rose 1.4% MoM to 1.564million beating consensus estimates of 1.550million.

• Looking at the data from their peak levels, both housing starts and building permits have declined - Building Permits by -17.5% and Housing Starts by -20.3% from their high.

• A deeper look at the Housing Starts numbers show that single family units declined by -5%, while multi-unit starts declined by -13%. Clearly, people are not taking on bigger projects.

• The decline in starts and permits over the course of the last few months is a direct result of the Fed’s policies of increasing rates.

• Not only are mortgage rates increasing at alarming rates but also, construction companies are faced with higher corporate borrowing rates. When faced with the possibility of lower future house prices, homebuilders are not keen on taking on projects.

• The housing market is one of the biggest bubbles in the economy and the Fed’s policies are directed exactly towards making sure that prices come down, in order to reduce inflation and stabilize the economy.

Earnings of the Week

Earnings Summary from FactSet: 

Earnings Highlights: 

• Johnson & Johnson  delivered a top and bottom line beat but decreased their outlook for the consumer health and pharmaceutical divisions. They cut revenue forecast for the third time to $93.0-93.5B down from their initial outlook of $97.3-98.3B. Inflationary pressures and adverse FX impacts remain a sticky issue for JNJ.

• Goldman Sachs also beat top and bottom line expectations, on the back of their fixed income trading business capitalized on rising interest rates and heightened volatility for interest rate and currency related products. Nevertheless, earnings overall declined by 45% YoY and they’ve announced sweeping changes to their organization that combines its investment banking and trading businesses into one segment.

• American Express  beat on earnings and revenue, increasing FY2022 guidance saying they would exceed its prior outlook for EPS of $9.25-$9.65. Nevertheless, expenses were still up by 19% and provision for credit losses also increased up to $778M in Q3.

• Boston Beer Co crushed earnings estimates in Q3 on robust demand for Twisted Tea, improving wholesaler service levels, and continual supply chain improvements.

The Week Ahead

Earnings Calendar

Economic Calendar

Closing Thoughts

Earnings season was one of the major causes for the strong bear market rally last quarter and this time may not to be any different. We’re seeing companies come out with beat after beat in earnings results, as many of the estimates were taken down during the quarter after negative guidance and previous quarter misses.

We’re seeing pockets of companies where EPS and Revenue estimates have been decreased below previously achieved levels. Clearly analysts are erring on the side of caution and seeing negative growth for these companies. But, the earnings beats don’t mean that the companies are not actually posting lower achieved earnings and revenue. Many of them are, and we will continue to see a decreasing trend in the current economic environment.

As we head into one of the busiest week for earnings, we need to be ready for a continuation of the rally we saw last quarter and in fact, last Friday. Not to mention, we also have PCE data coming out on Friday. As most market participants are positioned bearish, earnings could spark off yet another strong rally. But, nothing is ever sure so, stay nimble.

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. 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.