The Weekend Edition # 73

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and welcome to all the new subscribers this week!

Here’s what we cover:

• Market Recap - A strong rally week

• Macro - What did the GDP numbers tell us?

• Earnings - Microsoft, Amex, Tesla, Boeing, Visa & MasterCard

• Premium Article - A look at the Auto Lenders

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts - Still not in misery

Let’s dive in ⬇️

Market Recap - 23 Jan - 27 Jan, 2023

We had quite the market rally over the last five days as the market pushed higher past resistance. Microsoft’s earnings guidance on Tuesday after market close, pulled the market down. The market gapped down on open on Wednesday. But, by the end of the day, it may major turnaround and shot back up above the 200-day moving average.

Wednesday, we had Tesla earnings after market hours and that pulled the market right back up. The market certainly liked the earnings and Tesla’s stock shot up closing at $177.90 on Friday from its low of $135.80 at the beginning of the week. That’s an uptick of almost 31%.

Economic data for the week also came in as what could be construed as positive. GDP numbers came in above estimates on Thursday and PCE Inflation numbers were also in line with expectations. New and pending home sales number came in higher than expected, as did the Michigan Consumer Sentiment numbers. Overall, these conditions supported a rally.

The market is certainly in an uptrend and the momentum numbers seem to suggest that we will have some continuation. However, caution is warranted with the divergence we’re seeing between the Accumulation Distribution Line (in Green) and the On Balance Volume (in Red).

The On Balance Volume (OBV) line is simply a running total of positive and negative volume. The Accumulation Distribution Line (ADL) focuses on the level of the close relative to the high-low range for a given period (day, week, month). With this formula, a security could gap down and close significantly lower, but the Accumulation Distribution Line would rise if the close were above the midpoint of the high-low range.

This divergence between the OBV and the ADL suggests that we’re seeing volume come in during the day close at a high but not necessarily buying volume for the week. This may suggest that the current price is still being driven by short covering and / or same-day expiry options, i.e, the 0DTE.

With all the economic events and major earnings coming out next week, we’re certainly in for some major volatility and the lack of meaningful buyers can certainly turn this uptrend around. We have the FOMC rate decision next week on Wednesday and while the market expects 25bps, the press conference will be one to watch.

Macro of the Week - What did the GDP numbers tell us?

We got GDP growth number of+2.9% QoQ, above the estimates of +2.6% QoQ but lower than last quarter’s GDP growth of +3.2%. The growth was driven by higher levels of inventory investment and a narrower trade deficit.

Consumptions and Business Fixed Investment declined to +0.2% vs. +1.1% growth in Q3. This remains the more persistent category for GDP growth and a decline in these numbers are not encouraging.

Private Fixed Invesment fell -6.7% QoQ (from -3.5% in Q3) led by residential investment which declined -26.7% QoQ. This doesn’t bode well for the housing sector and often pulls down the GDP numbers.

Much of the acceleration was driven by inventory growth of over $130B in real terms this added +1.5% contribution to the GDP growth. About $70B of is came from the manufacturing sector which has seen a considerable decline in New Orders over the last 2 months. Inventory remains a volatile component and we know businesses had over-ordered. This boost is not likely to last as levels normalize pulling down GDP growth in the coming quarters.

The trade deficit narrowed adding +0.6% to GDP growth because imports fell more than exports on relative terms. Imports fell -4.6% QoQ but exports also fell -1.3%, despite a weaker US Dollar. While a deficit narrowing is good in general a fall in both exports and imports signify weaker demand domestically and globally. Ideally, we’d want exports to strengthen to boost the GDP not weaken relatively less.

Government Spending increased +3.7% QoQ with non-defense spending increasing 11.2% while adding a boost to GDP, government spending does increase inflationary pressures.

All in all, a very mixed report and the signs of consumption slowing is encouraging in that it shows inflation slowing but, definitely leads to a slowdown in GDP and perhaps even negative growth in the coming quarters.

Earnings

FactSet Earnings Scorecard: 

Earnings showed a decline of -5% for the S&P500 companies that have reported. We got a few important earnings this week. Some of the highlights are below:

Microsoft missed Revenue estimates but beat EPS estimates. Azure grew +38% Constant Currency (CC) barely beating guidance of +37% CC, still a slowdown from +42% CC in Sep and +46% CC in Jun. Guidance for March came in significantly lower at +32% to 33% CC. They discussed customers are optimizing spend and exercising caution given macro uncertainty.

Amex missed on EPS and Revenues but still delivered bullish guidance for FY2023 and increased quarterly dividends by 15% to $0.60 per share. The company saw +15% increase in expenses with provisions that increased to $492m, as they still plan for some headwinds during the year.

Boeing reported a loss vs. analyst estimates of a profit and guided to a loss for Q1, as well. But longer-term guidance into 2025-2026 remains intact. The company discussed improved delivery schedules despite lingering supply chain issues. They were less bearish on China compared to the previous quarter. Commerical Airplanes saw revenues jump +94% YoY to $9.22B driven by 737 and 787 deliveries.

Tesla beat estimates despite a decline of -4.46% in automotive margins. Price cuts have been effective in driving growth in volume as the company saw a surge in orders in January. A key issue is that these price cuts make most Tesla models eligible for the $7500 tax credit under the Inflation Reduction Act, leading to an almost 20% discount for the end-customer.

Visa and MasterCard both delivered double beats but card spending came in lower-than-expected Visa’s card spending increased +1.7% to $3.01 trillion while MasterCard’s spending jumped 11% to $1.73 trillion but both missed analyst estimates.

Premium Articles of the Week

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The Week Ahead

Earnings Calendar 

Economic Calendar

Closing Thoughts - Still not in misery

Layoffs continue as we saw a number of more companies announce job cuts and this time outside the tech sector as well.

The quarterly Employment Cost Index comes out on Tuesday, and this will be a number to watch, as the Fed has been citing the increase in this number over the last couple of months.

The Fed still has a tough job ahead of them and while the market is pricing in a 25bps hike this Wednesday, inflation numbers are still not near the levels we need to see. Unemployment numbers come in on Friday, and if the number still remain in imbalance, the Fed can continue to be aggressive with their hikes which would mostly likely be in the form of holding the rates at the 5% once they are done hiking.

The markets are still in a much better position than the late 70s and early 80s. Fed Chair Arthur Burn was too late in tightening monetary policy leading to soaring inflation levels and by the time Volcker came in to tighten aggressively, it ended in unemployment rates increasing to almost 10% levels. ⤵

The way people view the market today, with the labor market being so tight, the Fed’s hiking is not likely to push the economy into a recession. So, the market’s still not in misery. But, the macro and fundamentals tell us a different story, and this always takes a while to play out. There’s been significant slowdown in the macro data, not to mention most companies planning for a recession this year.

We’ll just have to take things one step at a time and invest accordingly.

Here’s wishing you safe investing.

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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 or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.

Full disclaimer: https://ayeshatariq.substack.com/about

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