The Weekend Edition # 65

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 - Defensives in play

• Macro - Yield Curve

• Earnings Results - Best Buy & Deere

• Premium Post of the Week - USD & FTX

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts - What will Chair Powell say?

Let’s dive in ⬇️

Market Recap - Oct 18 - Oct 22, 2020

We had a shorter week for Thanksgiving. I hope those of you who celebrate had a wonderful holiday!

The Dow led gains on Friday, which seems to be quite the trend these days. In fact, the Dow led the gains for the week. This trend is not surprising, given that the Dow is made up largely of value stocks and somewhat defensives as well. There’s definitely been a move towards more defensive sectors this year, Energy being the anomaly.

On the commodities front, oil is taking quite the hit again. With the news of China reopening a few weeks ago, we saw prices come under some pressure. But since then, there are some serious concerns about China re-opening. There have been mass protests around the Zero Covid policy and the situation there does seem to be getting worse, while the Government continues to try and support the failing property sector.

Soft commodities seem to have caught a bit of a bid this week but, nothing close to Natural Gas which saw an almost 7% increase over the week. Reports of a cooler forecast for the winter and increased draw for heating sent the price soaring. Once storage stock reports were released for the week, we saw the commodity give up some price gains.

And after a week of price pressure, Gold seems to be setting up for a bullish play for the week. We will probably need to see some continuation into next week for that to play out.

Please remember: Chair Powell speaks at the Brookings Institute this Wednesday, Nov 30 at 1:30pm ET. It’s quite like to be a market moving event.

Macro of the Week - The Yield Curve (Again!)

The Yield Curve has now been inverted for 145 Calendar Days and roughly 102 Business Days. Not to mention this is the most it has been inverted since the 1980s. Unfortunately, the chart below only goes back to the 1990’s but, even then we see this is the deepest inversion.

According to research (I cannot remember where I read it), the Yield Curve inversion crossing 100 days is a sure predictor of a recession. None of us know if that will be true this time but, what we do know is that the economy is in for a difficult time.

We know that inflation is gradually abating, and this is being achieved in part, through demand destruction by the Fed, which will cause growth to slow. Whether this becomes a full-blown recession and deep one at that, remains to be seen.

But, I thought we could do a little recap of the Yield Curve just to remind ourselves what all of this means. Back in October 2021, I saw a slight inversion in parts of the yield curve and discussed the probability of the curve inverting signaling a possible recession. Here are few of the more salient points from that discussion:

• While the shorter end of the curve is usually controlled more by Fed Policy, the longer end is driven by market sentiment.

• More bond buying = Higher Prices = Lower Yields. So, if people move money into bonds from stocks, or if international investors think the rates are better than their local rates, prices will go up, and yields will come down. Of all the Developed Countries, the US still has the highest rates and the best rating. So, even with a strong Dollar, they are likely to attract buyers.

• Thoughts of longer-term inflation drive yields up, as people want more return on their investment to combat the erosion of wealth due to inflation. So, if people don’t see inflation as a long-term threat, bond yields at the longer end won’t factor as much of a premium. As we stand, we see inflation expectations still relatively lower than current CPI levels.

Earnings of the Week

We’re at the tail end of earnings season, with a couple of weeks left to go. We saw quite a few of the “other” retail earnings come out this week.

Most of the retailers still surprised to the upside when it came to EPS and Revenue estimates but, this didn’t account for a drop in margin.

Best Buy saw quite the gap up in stock price because they improved their guidance for Q4 and had a double beat. But, sales in the overall electronics industry are slowing and the only way that BBY managed to pull this off is to heavily discount their inventories. They pulled forward sales for the quarter. They also announced share buybacks of $1B and it's quite possible that they see another beat in Q4 with the Street's estimates coming in too low. But, the company will struggle to maintain margins. Comp sales were already down 10% and operating margins also declined.

Deere posted excellent results for the quarter with a bullish guidance for FY 2023. The stock soared 5% on the earnings release. It's no secret that I'm a big fan of the company and Deere has been progressively improving margins through their use of advanced technology. But, the valuation at this point looks full and I'd be careful chasing this stock any higher. Deere is the second largest lender to farmers in the US, after the Government. While the rising rate environment may create some tailwinds in terms of margin, it is sure to price out the smaller farmers. This means lower equipment sales in general. We're at a precarious point for Deere right now.

Premium Posts

Here are links to my premium posts over the past two weeks. Just a reminder that the premium subscription is only $10/month and I’d love it if you would consider subscribing.

Has the Dollar Lost its Mojo? 

FTX will hurt us all

The Week Ahead

Economic Calendar

Earnings Calendar

Closing Thoughts - What will Chair Powell say?

We have a heavy week ahead of us in terms of the economic calendar. We have Job Openings Data, Pending Home Sales and Jobs Friday. But the crown jewel will be Fed Chair Powell speaking at the Brookings Institue on Wednesday, two days before the FOMC black out period.

Interestingly enough, market sentiment is that he will be hawkish. The Fed minutes were out earlier in the week and as suspected, they discussed slowing the pace of hikes - meaning we may see a 50bp hike this December. The market has already priced this in with some certainty.

What will be interesting to see though is how high they will go. If you recall, at the FOMC press conference, the Fed Chair made it very clear that they will continue raising rates for longer and a determination would be made in December once they see the SEP (Summary of Economic Projections). Nevertheless, he alluded to the terminal rate being higher than the September projections. The market is probably thinking that this narrative is likely to continue.

Let’s see what the week brings us.

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 a short position in  as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.