The Weekend Edition # 66

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 - Choppy Markets and Jobs Report

• Macro - Oil

• Earnings Results -

• Premium Post of the Week - Shelter Inflation

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts

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Let’s dive in ⬇️

Market Recap - 28 Nov - 02 Dec 2022

It’s been a choppy week with far too many economic data releases, not to mention Fed Chair Powell speaking at the Brookings Institute on Wednesday. The market certainly liked what he had to say - discussing a slower pace of rate hikes in the next meeting. It was interesting that the market rallied on news that was already known. Fed Fund Futures were pricing in a 50-bp hike for December anyway, with quite a high degree of certainty.

The S&P500 Index broke some key technical levels during the week. We saw the Index cross above the 200-day moving average and a key trend line for the year. We then a saw a little bit of pull back after that.

We have several conflicting views on whether we get a Santa Rally into the year end. I think we ought to hold out until the Fed meeting on 13-14 December, to make that determination. One thing we are seeing though is lower year-end targets coming out of the Wall Street banks.

The Jobs Report continues to show strength with 263,000 jobs added in November and the unemployment rate remaining unchanged at 3.7%. The labor force participation rate which is a key metric tracked by the Fed actually declined to 62.1%. The Fed has been discussing the imbalance between demand and supply of labor - too much demand and too little supply. This measure continues to show that the labor supply remains weak.

Macro of the Week - Oil

The OPEC+ meeting was held today, and production quotas were maintained at previous levels. One interesting development that came out of the meeting was that they have agreed to meet twice a year (probably Jun and Dec) instead of monthly, with the Joint Ministerial Monitoring Committee meeting to take place every two months.

The price cap on Russian oil has been agreed at $60/bbl. While the cap is at a level above the current trading price of $50/bbl for Russian Ural crude, Russia has still threatened to stop production in response to the cap and negotiate directly with their trading partners.

Earnings of the Week

We had quite a few interesting earnings this week.

Ulta Beauty Another massive double beat on Ulta. The company reached a 52-week high right before earnings but didn't have much of a reaction on this massive beat. In fact, it pulled back slightly with the overall market decline.

Ulta's sales trajectory remains strong but, I am skeptical that this continues. Not only are we seeing softening in high-end beauty products, as reported by Estee Lauder and Unilever, but as well, we have competition heating up. As Sephora starts to roll out across Kohl's, I believe the company will lose market share.

The company also has more challenging comps to go up against in the 4th quarter and I wonder whether the holiday spending, where customers are trading down, will be sufficient to beat Q4 estimates.

Salesforce In a surprise turn of events, Salesforce saw their Co-CEO, Bret Taylor announce that he will be stepping down on Jan 31. Marc Benioff will be Chair and CEO. The company sold off quite heavily on the news. People don't like the surprise.

While the company saw both Sales Cloud and Service Cloud growth of 12% YoY, the company sounded a note of caution on the conference call. They discussed measured buying behavior and longer sales cycles, with additional approval layers during the sales process.

Premium Posts

A look at Shelter Inflation (and when it will peak)

This week I took a deeper look at Shelter Inflation, which is about 30% of CPI, to understand it better and look at some trends to see where it might peak. A quick reminder - premium subscriptions are $10/month or $100/year. I publish broader macro themes on a weekly basis. 

The Week Ahead

Economic Calendar

Earnings Calendar

Closing Thoughts

We have a few earnings and economic events to look at next week but nothing as major as the following week when we get CPI and the FOMC meeting.

The market has been looking bullish and quite pleased with the Fed slowing the pace of hikes. But, this needs to be looked at with some caution. Whatever the short-run trajectory is in the next few weeks, it doesn’t eliminate the fact that we still have a tough earnings quarter ahead of us and the potential for an earnings recession.

Perhaps to a large extent we’re already seeing this, but the market will start to realize that companies are earning lower, and profitability is under massive pressure, whether they beat estimates or not.

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 and should not be relied on for trading or investing in securities. 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.