The Weekend Edition # 92

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 - Price Target Cuts on Oil

• Macro - The Market Breadth Story

• Earnings - Lennar

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts - Bucking the Trend?

Let’s dive in ⬇️

Market Recap - 12 Jun - 16 Jun, 2023 📉📈

It’s a long weekend in the US with trading closed today, Monday. The week was marked with a whole host of economic data, not to mention the Fed meeting that shocked most people with an increase in the target interest rest for the year as 0.50% higher from here, implying two further rate hikes. Core Inflation remains a key concern for the Fed, as it does for the Eurozone which saw the ECB raise interest rates by 0.25% with a clear message of further hikes.

Friday bought us June OpEx with one of the largest notional expiries for the June expiry at $2.2 Trillion set to expire on that day. Prior to that, Thursday saw the highest level of call options bought, ever! Ultimately, Friday did close red across the indices.

The prior week saw revisions to targets for the S&P500. Well, that’s not the only target that’s getting revised. We’re seeing targets for energy prices also being taken down, despite attempts from OPEC+ to keep the oil market tight.

Moody’s has cut their target crude oil target by $4 per barrel for the second half of 2023. They expect Brent to average $83.02 in 2023 vs. $85.45, from a month ago. They’ve reduced Henry Hub NatGas expected prices from $3.34 to $3.15.

Goldman’s Jeff Currie has also lowered their target - on Brent from $95 to $86 and for WTI $89 to $81. 

While prices have decline from last year’s peak levels, WTI prices still remain above the pre-pandemic level of $62, so we’re still not really cheap.

Macro - Market Breadth

There been a lot of discussion about Market Breadth recently. Market breadth refers to how many stocks are participating in a given move in an index or on a stock exchange.1 There are those who don’t believe that you you need market breadth for a sustainable rally. While we’re seeing some evidence of that in recent weeks, I don’t believe we’re in a true bull market unless this rally broadens out to other stocks.

Let’s look at the Nasdaq-100.

The chart below shows the Advancers vs. Decliners for the NDX. One way to measure breadth when the index is going up is to determine whether the number and volume of advancers are also increasingly outpacing decliners commensurate with the price trend of the index. The other is way is to take a look at 52-week highs vs. lows.

Improvement in breadth in this case would be more advancers. We’ve been seeing advancing volume increase, which is not a surprise given that the top stocks pulling up the index are seeing volume pile in. While still not great, we’re starting to see some of that in the number of stocks as well.

Friday was a down day for both the Nasdaq and the S&P500, and as we saw the indices pull back, we also saw the Advance-Decline (A-D) lines fall.

Looking at the indicators for the S&P500 below, we see that the breadth is slightly better than the Nasdaq-100. We see a steeper A-D line here.

The one thing that is noticeable on both these charts is the previous August rally. While this time the S&P500’s A-D Line has surpassed the August rally, it has not done so for the Nasdaq as yet.

But here comes the big surprise…. the Advance-Decline line for the market tells us a very different story.

While breadth for the NYSE is improving, that of the Nasdaq as a whole is abysmal. Yet more confirmation that the story is not complete. If we are to enter a new bull “market”, we certainly need to see both of these lines improve. This simply shows that there is still a lot of carnage under the surface for the Nasdaq and therefore, something to be very careful about.

Earnings - Highlights 📝

Not many earnings in these odd weeks between earnings season. We have some interesting ones coming up next week - FedEx, KB Homes and Accenture.

This week, we got some solid numbers from Adobe, Oracle and Lennar.

Lennar, the second largest homebuilder in the US, confirms our suspicion of the housing market coming back. Here are some of the stats from FactSet (FS):

• Deliveries 17,074 vs FS 15,654 with avg. price $449.0K vs SA $443.0K

• New orders 17,885 vs FS 16,635 with avg. price $457.0K vs FS $442.2K

• Backlog 20,214 vs FS 20,393 with value $9.53B vs SA $9.46B

• Homebuilding Gross Margin 22.5%, (700bps) y/y vs FS 21.3%. Cancellation rate 13.5%, (800bps) q/q, +120 bps y/y

While margins fell, so did cancellation rates on a quarterly basis. On a yearly basis however, cancellations are still up 1.2%. But, if you look into new orders and deliveries under the first two points, they are both up vs. estimates and with higher average prices compared to estimates.

Last week at MacroVisor we briefly discussed the housing market and the pressure there for new and existing homes. We’re seeing a situation where inventory is running at low levels mainly because the higher mortgage rates are preventing people from moving out of existing homes or buying new homes. The chart below shows existing inventory for existing homes (red line) at below 3 months and for new homes at below 8 months (blue line).

We think that this could possibly lead to higher rental rates, something we’re already hearing about and witnessing in certain parts of the market. It also however, means that homebuilders are resuming business and they are working on new orders because of the shortage of homes.

The Week Ahead 📅

US Earnings Calendar

US Economic Calendar in Eastern Time 

Closing Thoughts - Bucking the Trend?

This market is scary and it’s got everyone on edge. A Fed announcement of two more rate hikes taking the year end rate to 5.6% should’ve rattled the market. So should’ve the idea of increasing core inflation forecasts. But the market shrugged it off like cheap gossip.

We’re in a stage now where the Fed is no longer believed. People don’t need to heed the warning signs because if something bad were to happen the idea is that Fed will step in. This time perhaps not with rate cuts but, with plenty of liquidity that should at least keep the stock market afloat.

As a result, we’ve gone back to building bubbles and expensive valuations. We’ve gone back to pumping bad companies such as Upstart. The stock is up 200% since its lows in May. Why? The company supposedly uses “AI” and they got a lifeline from some capital company while their balance sheet has just gotten uglier and their AI business model remains broken.

But, the market is so scary that even the banks are capitulating and increasing their price targets. Being wrong on the downside is way worse that being wrong on the upside. It’s in fact a scary business and forecasting price targets and stock performance has become even more challenging with all the public scrutiny.

There was a time when all we could do is scream at the TV. The guy on the show would be none the wiser. But, with social media now, everyone is a market expert and has the ability to call you names, if you’re even slightly off the narrative. So we’re living in a time when people just want to follow the masses and don’t really want to stick their neck too far out from the consensus.

What I’ve always endeavored to do with this newsletter and now what we do with MacroVisor is present the data… no matter where it leads us.

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.

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.