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- The Weekend Edition # 80
The Weekend Edition # 80
Not really a bullish week; Macro: LEI; Earnings: Tightening Lending Standards; Calendars; Closing Thoughts: Proceed with Caution
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 - Not really bullish
Macro - Leading Economic Index (LEI)
Earnings - Tightening Lending Standards
Articles of the Week - The Fed’s Super Discount Window and CPI
The Week Ahead - Economic & Earnings Calendar
Closing Thoughts - Proceed with Caution
Let’s dive in ⬇️
Market Recap - 13 Mar - 17 Mar, 2023 📉📈
Yet, another tumultuous week with plenty of news stories to keep us busy. And while we had a lot of action from the Fed, we didn’t hear a word out of them because we’re in the Fed blackout period before next week’s FOMC meeting on Tuesday and Wednesday. I don’t know if that’s a good thing or a bad thing but, I do know we didn’t need more Fed speakers coming out and talking about the banking “crisis”, lending more volatility to the market.
What we could have used though, is a speech from Chair Powell letting us know his thoughts on the new funding program - BTFP. But, we’ll just have to wait until Wednesday 2:30pm for the press conference.
While it would seem that there’s been plenty of opinions flying around about the BTFP being QE, we certainly didn’t see enough signs of that with the major indices. The first report on the Discount Window usage came out on Wednesday and we got a temporary pop on Thursday due to the perceived increase in liquidity in the system, the market turned around on Friday, selling off into OpEx. We had $2.9T of options expiry this Friday and the price action suggests we’re likely to see a depressed, choppy market until the Fed meeting.
The Fed’s rate hikes have definitely been called into question several times this week, going from 50bps last to 25bps to no hike. However, we’ve got 25bps back on the table now and we’ll just have to see what the Fed does.
While the Nasdaq seems to be holding up the most, the S&P and Dow are both taking hits from the banking sector. After a brief reprieve on Thursday when the announcement came that JPM and Co., were injecting $30B in deposits in to First Republic Bank , the selloff in the regionals resumed.
Commodities had a wild ride as well, with Lumber gaining over 36% during the week. Somehow, the market seemed to have signaled that everything was okay with the housing market. We did get better-than-expected earnings from Lennar this week that may have sparked some of that. But in general, there was still a flight to safety, with Gold up +6.3% during the week, while WTI Crude Oil (-13.6%), Natural Gas (-3.6%) and Copper (-2.8%) all down for the week pricing in a recession.
Macro - Leading Economic Index (LEI)
The Conference Board Leading Economic Index® for February was published this Friday:
The Index fell -0.3% month on month
The Index fell -3.6% over a six month period
What contributed to this? Mostly the non-financial indicators. ⤵
We’ve been covering most of this data throughout the last one year, seeing progressive signs of weakness in these items. This summarizes exactly what we’ve been seeing and it’s definitely not good news. After the last two weeks, the market seems to be pricing in a recession, something we’ve seen coming for a while now. The LEI seems to suggest exactly that as well. ⤵
Earnings - Tightening Lending Standards
FedEx and Adobe certainly had great reactions to their earnings, both gapping up after the earnings release. William-Sonoma and Dollar General, however, didn’t do so well.
More than digging into individual earnings this week, I wanted to discuss the repercussions of last week on earnings. If you’ve read my last article on the Fed’s new funding program (BTFP), one of the outcomes of this situation with the Banks will most likely be tighter lending standards.
The banks need to raise funds for deposits and one way to do that is to retain funds that are repaid under bank loans instead of lending them out again. They will also be more picky about lending out the new deposits that they get.
While we’ve already seen meaningful tightening in lending standards, the consensus forecast is that we see further tightening now.
Lending promotes business growth, and it stands to reason that we’re about to see further declines in business growth. More so for small businesses, who rely heavily on bank lending for working capital finance to cover operating expenses.
This will lead to higher rates of unemployment and eventually, lead to lower earnings growth for listed companies as well. I do believe that we will now see a further downward rerating of EPS forecasts as we progress over the next few weeks.
We have about a month until the next earnings season.
Articles of the Week
Both my articles for this week are free to read. Please check them out, if you haven’t already.
Please do consider upgrading to my premium newsletter for only $10/month or just $100/year. I offer original research regularly focused on macro updates, industry reviews, stocks, and more
The Week Ahead
Earnings Calendar
Economic Calendar - Fed Rate Decision on Wednesday 2pm ET
Closing Thoughts - Proceed with Caution
The market still does not look stable. For the short-term we’re likely to see more choppy action as volatility measures remain elevated and the level of uncertainty continues to plague us.
We’re still getting news on Credit Suisse, the latest being they’re not happy with the offer from UBS at ~$0.25/share and the Swiss Government is contemplating nationalizing part of the Credit Suisse.
I long for the day we are back to living in precedented times and life in the financial world is boring again.
Here’s wishing you 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.
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