The Weekend Edition # 76

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 - Risk Off?

• Macro - Retail Sales, Housing Market Index, PPI

• Earnings - Deere, Dash, Palantir

• Other Article - January CPI

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts

Let’s dive in ⬇️

Market Recap - 13 Feb - 17 Feb, 2023 📉📈

It’s been a trying week for the bulls and very choppy market indeed. We got a hotter than expected CPI number, but the markets didn’t react much to that. What did it in for the bulls was the PPI number coming in hotter than expected.

It would seem that this bear market rally is now losing steam. Unfortunately, it’s tough to say that the macro, technicals or fundamentals support anything really, given that the market has been pushed around by options and short covering.

But, we did get a host of Fed speakers discuss the re-emergence of inflation and their concern surrounding that. We’ve seen the market pricing in rate cuts a few weeks ago and all of that seems to have reversed.

There seems to be more of a rotation to a risk-off market here but, after what we saw during the early part of year, it’s becoming impossible to tell which way the wind blows.

We have a shorter week ahead of us with the US markets closed on Monday, Feb 20, 2023. But, then we get a whole host of retail earnings and the Fed Minutes on Wednesday at 2pm ET.

Macro - A few of the Major Economic Data of the Week

Last week was busy. We saw a whole host of economic data releases with the most important perhaps being the CPI which I covered under my article for the week.

Retail Sales  

Retail sales came in much stronger than expected with restaurant dining leading the pack. There’s no good explanation as to why restaurant and bar sales were up so drastically. But, as expected the auto sales numbers came in much stronger. This is something we expected with the Manheim Used Car Index and the US auto sales numbers going up. While the data is seasonally adjusted, it’s not adjusted for inflation and much of this increase could be because of the rising prices. None of this, however, supports lower inflation.

NAHB Housing Market Index

The NAHB Housing Market Index (HMI) is something we’ve been tracking to gauge the strength of the housing market. The Index has been on a decline throughout 2022 and January saw the first real uptick (blue line above). The overlay on the chart above shows the Weekly Mortgage Applications in Green and this corresponds to what we’re now seeing in the HMI. The housing market saw some relief in January because of muted long-term rates. But, we’re seeing this trend reverse in the Mortgage Applications and quite likely the February data for the HMI will show the same.

Produce Price Index (PPI)

This is what seemed to have really rattled the market quite a bit. The PPI data came in hotter than expected particularly the monthly data. The issues with supply chain and rising costs have abated significantly, yet we’re seeing numbers coming in higher than expected which tells us all is not fine. While supply chain gluts have improved, the higher prices still remain, and are making their way through the system.

Earnings

FactSet Earnings Scorecard: 

We’ve had 82% of the S&P 500 report and we’ve seen a blended earnings decline of -4.7% this week. This is an improvement over the past weeks where we saw -4.9% and -5.3% prior to that.

But, we have earnings from major retailers coming up next week and that will be something to keep an eye on. While January retail numbers came in stronger as we just saw, the prior quarter has still been under pressure. Most importantly, I’d be keen on looking at the inventory numbers, how much has been cleared and the impact it has had on margins.

A few earnings for the week:

• Deere reported another blow out quarter with better than expected EPS and Revenues. YoY acceleration was also unprecedented. I suspect however, this is likely to slow down this year. With interest rates rising, Deere is likely to see pressure in further sales through financing and those who’ve taken advantage of new equipment aren’t likely to upgrade anytime soon.

• DoorDash reported terrible earnings numbers missing EPS estimates by -145%. The company continues to lose money with every order. The macro environment is getting tougher and it’s likely the company continues to lose money. There are reports that people are already ditching delivery services because of how expensive it’s become and opting to pick up their own orders.

• Palantir actually surprised this quarter reporting GAAP profits for the first time. Government sales also accelerated. The company still has some ways to go but, now they seem to be getting caught up in the AI frenzy and this is giving the share price somewhat of a boost.

Article of the Week

Premium membership is $10/month or $100/year but this week’s article is free to read for all!

The Week Ahead - US markets closed on Mon, Feb 20, 2023

Earnings Calendar 

Economic Calendar

Closing Thoughts

The market seems to simply be defying gravity. It seems to be pushing itself to a range which is not sustainable. And it can’t be sustainable given that it’s driven by options and short covering. It almost seems as if there are issues boiling under the surface. From a macro and fundamental perspective, we know that things are not as strong as they seem.

When cost-cutting is celebrated and seen as a reason to drive the market higher, you know something isn’t right. Neither is the celebration of imminent bankruptcy. Yet, the market seems to want to ignore the underlying signs and head right up in defiance of what actually lies beneath the surface.

Earlier this week, I revisited the situation in Europe. European markets have been unusually strong over the last several weeks, heading to 2-year highs. They’ve wiped out almost all the losses incurred in 2022. Yet, what’s lurking under the surface? As I discovered, the macro picture continues to remain weak. There have been some relative improvements in the numbers, but the Eurozone is hardly out of the woods and that’s exactly what the ECB members keep saying as they commit to raise rates even further.

The companies themselves don’t look any better and earnings are deteriorating. Yet, on a relative basis, since they beat lowered estimates, the market continues to be bullish on them, including the investment banks. I find it hard to understand why as I’ve laid out in my article here:

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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