The Weekend Edition # 74

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 - Another week of options mania

• Macro - Manufacturing, Services and Employment data

• Earnings - Apple, Starbucks, Caterpillar, Google and Amazon

• Premium Article - Fed Day

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts - Confused Data

Let’s dive in ⬇️

Market Recap - 30 Jan - 03 Feb, 2023

The market continues to be dominated by the call options mania. We’re seeing buying frenzy like we haven’t in a long time - since the “meme stock” squeeze mania in early 2021. Apart from TSLA, SPY and QQQ, the options remain concentrated in stocks that are on the brink of bankruptcy or have been beaten down significantly over the last year. The chart below shows total call volume for US options - clearly, we’re at a cycle high.

Add to that the Goldman Sach most shorted basket that is soaring and we have on our hands yet another meme-stock mania. ⤵

When you have a situation where people pile into short selling a stock and the listed float (shares outstanding) are relatively small, the short covering can fuel a massive rally in the stock price.

As for the 0DTE - Options expiring on the same day - it’s a convenient way to play the market. If the options are closed within the same day you don’t need to carry a margin on your books. While this looks like retail call buying frenzy, this simply cannot be the case. The level of call buying indicates that there are large institutional players stepping in to do this. It is reckless behavior but, perhaps much required for them to keep their jobs. After a year of losses, institutions need to make up for market performance and some of that is being done through these options.

But we have not reached anywhere close to peak bullishness, and we still remain in a bear market.

Macro of the Week

We had a busy week for economic data marked by the Fed meeting on Wednesday, where the rate hike was the expected 0.25%. Following on from the hike however, the market seems quite happy to believe Chair Powell that there will be no recession. Nevertheless, we heard from companies who keep pricing in a mild recession.

We also got data to that effect. We saw both ISM Manufacturing PMI and New Orders collapse further this month. If you look at the data, these kinds of levels in the data have always been followed by a recession - whether mild or severe.

On the services side however, the ISM data ticked up from the contractionary level of 49.20 in December to a surprisingly expansionary level of 55.20. But, is it really a surprise. We’ve been seeing the PCE data and we know that there has been a collapse in the demand for goods but the demand for services continue to be strong.

Finally, we got the jobs report on Friday which really did come as a surprise to many. The Unemployment level came in at 3.4%, one of the lowest readings since 1969 and definitely lower than the expected 3.6%. However, Average Hourly Earnings still increased by 0.3% on a monthly basis, while declining slightly on a yearly basis. Payrolls increased by 517,000 vs. an estimate of 188,000. This suggests that most of the job increases were led by lower wage jobs since Average Hourly Earnings growth still remain low. This isn’t completely surprising given that people are struggling to pay their bills, and many may have resorted to a second or even third job at a lower pay. Overall, this is definitely not a great sign for the market.

Earnings

FactSet Earnings Scorecard: 

Earnings showed a decline of -5.3% for the S&P500 companies that have reported. Last week, this number was at -5%.

This was a major week for earnings. Some of the highlights are below:

Apple missed both Revenues and EPS. In fact, they missed analyst estimates on all their product categories except the iPad. And yet, the company’s shares gained 2.44% on Friday, after the earnings release. The previous problems of supply chain constraints and foreign exchange headwinds continue to plague the company and they guided to a decline in the next quarter, as well. However, they also mentioned that production was back on track and they achieved a milestone of 2 billion products in active use. So despite the quarterly decline on Apple’s part, the market seems content that the Apple’s issues stem from supply constraints and not necessarily a lack in demand.

Starbucks also posted a double miss, and it should come as no surprise as China’s situation has been weighing down on them. Despite a 10% increase YoY in North America which is 72% of their market, the results were dampened by the -28% YoY decline in China. Covid infections soaring after the re-opening led to an unexpected 4x drop in their Chinese revenues, and management is hopeful that the situation will improve next quarters and China’s pandemic situation comes under control.

Caterpillar missed on Earnings for the first time since the pandemic drop in Q1, 2020 leading to a tumble in their share price after several weeks of incredibly strong performance. The company beat their revenue estimates across all their divisions displaying strong demand drivers, but costs weighed on their margins. Caterpillar still faces higher manufacturing and freight costs, coupled with negative foreign exchange effects.

Google posted their 4th EPS miss in a row. Amazon missed EPS by 82%. Amazon’s cloud services grew 20% well below analyst expectations while Google’s cloud services grew 32%, both well below Microsoft’s 38% growth.

Premium Articles of the Week

Premium membership is $10/month or $100/year

The Week Ahead

Earnings Calendar 

Economic Calendar

Closing Thoughts - Confused Data

The markets and the data are confusing. On the one hand we have a Fed Chair saying there will be no recession while the data clearly suggests otherwise. You also have companies discussing a recession endlessly, even the likes of UPS. You have a Fed Chair saying that financial conditions remain tight, when they have definitely loosened significantly, and you have unprofitable companies soaring in the face of this. You have Cathie Wood saying her Ark Fund is the new NASDAQ and reiterating her $1m price target on Bitcoin. Apple has a double miss and YoY decline, and the share price soars. The market always has momentary lapses and bouts of optimism in a bear market. This one is fueled by a dangerous rally of options and short-covering. When the music stops, I hate to see who gets caught out. Because with rallies like this, the music will eventually stop. In the meantime, we still have earnings and macro making some sense. OneWater Marine (a luxury boat company) crashed on earnings and rightfully so. The company posted an EPS of 61 cents vs. an estimate of $1.76. That’s a 65% miss.

The macro will eventually make sense, and this is not the macro environment for luxury boats.

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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