The Weekend Edition # 96

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 - Pricing in a soft landing

• Macro - Charts of the Week from MacroVisor

• Earnings Recap - JP Morgan; United Health, Delta Airlines, PepsiCo

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts - We’re on a roll!

Let’s dive in ⬇️

Market Recap - 10 Jul - 14 Jul, 2023 📉📈

Another positive week for the market with all the major indices closing out the week higher. Friday however, was mostly flat other than the Russell 2000,which was down over 1%.

We received better than expected inflation data with the CPI and PPI coming in softer. Core CPI was the highlight, declining to 4.8% in June from 5.3% the previous month. The market is now focused on the Fed’s hiking cycle being done with one more possible hike this month. The view is that a soft landing may be achievable after all.

Views on the first rate cut have also moved back up to Jan 2024 from May 2024. Treasury rates have declined moving the entire curve with slight steepening.

A few issues to note:

• The Nasdaq 100 will have a special rebalancing on July 24 to address the rebalancing the overconcentration of the Magnificent Seven, which currently make up almost half of the Index. As part of the rebalance that will come down to 38.5%. This will be the first special rebalancing since the May 2011.

• Services inflation still remains sticky, not just in terms of the CPI but, also the PPI. We saw the numbers for monthly final demand gain 0.1%, due to services.

• The Dollar Index declined about -3% over the past week closing at 99.9. A weaker dollar may be good for stocks in the short term but, it could also lead to inflation coming back.

Commodities

Views of a soft landing also gave some commodity prices a lift for the week.

Russian oil exports from western ports are set to fall by some 100K to 200K bpd next month from July levels. Halts in Libya and Nigeria may disrupt up to 500K bpd of output. Supply continues to remain tight.

IEA reduced their 2023 oil demand growth estimate by 220K bpd due to persistent macroeconomic headwinds on Jul 13. IEA now estimates 2023 demand to rise by 2.2M bpd.

Meanwhile Platts reported, in contrast to IEA’s estimate, OPEC revised its 2023 global oil demand forecast up by 90K bpd to 2.44M bpd, followed by growth of another 2.25M bpd for 2024.

This is certainly an interesting divergence, but the consensus is that supply is likely to fall short of demand this year causing some upward pressure on oil prices into the end of the year.

The charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Macro

I’ve covered a number of earnings this weekend, so I’ll leave you with our very well-liked “Charts of the Week” for your Macro section.

Earnings Season - JP Morgan Delivers!

FactSet Summary

Earnings season kicked off this week and while the overall earnings growth still remains negative, we had mostly positive surprises across the board. We’re only 6% into Q2 Earnings season for the S&P500.

JP Morgan (JPM)

There were several stars this week already but the one that took the gold was JP Morgan, coming in with a QoQ earnings growth of 6.6% and revenue growth of 7.7%.

The provision for credit losses was $2.9B, up from $2.28B in Q1. Excluding First Republic, the provision was $1.7B, reflecting net charge-offs of $1.4B and a net reserve build of $326m. These numbers came in slightly higher than expected but, still not enough to cause alarm.

Net Interest Margin came in at 2.6% with Net Interest Income at $21.9B, up 44% YoY. Average loans were up 13% while average deposits were down 6%. They expect a slightly lower level of deposits for the second half. Net Revenue from Corporate and Investment Banking was down 8% QoQ.

Overall, JP Morgan’s take on the economy was that while spending and labor market metrics were softer, they’ve taken a milder stance on the macro concerns.

United Health (UNH) 

A major focus for United Health and other Managed Care Operators has been medical cost trends going up. But UNH reported better than expected costs against a +16% YoY revenue growth.

Their Medical Cost Ratio (MCR) came in higher than expected at 83.2% but the market still viewed this positively, as the estimates were higher. (MCR = Costs/Premiums. As a general rule, a medical cost ratio of 85% or less is desirable.)

The increase is mainly because of pent up demand for procedures led by ortho and cardiac procedures and then behavioral health care. This is a positive for the like of Tenet Health (THC), Medtronic (MDT), Life Stance (LFST) and Universal Health (UHS).

Delta Airlines (DAL)

The tailwinds from the increase in travel and leisure are still working in favor of Delta who reported a beat raise for the quarter. Revenue grew +23% YoY while EPS came in at $2.68 vs Q2, 2022 EPS of $1.44. The company delivered Free Cash Flow of $1.1B for the quarter.

Delta’s CEO, Ed Bastian, continues to see growth for the company for the next several quarters. He discussed that spending on services were still lagging far behind spending on goods and that it would take several years for the former to catch up.

Domestic revenue increased +8% YoY and corporate travel recovery is expected to continue slowly during the fall.

International passenger revenue increased by +61% YoY. Transatlantic revenue increased by +65% due to strong US demand while Transpacific revenue increased by a whopping +175% with the reopening of Japan and their partnership with Korean Air.

Pepsi (PEP)

Pepsi delivered a good quarter proving they still have brand strength. While there were slight declines in volumes, the increase in prices helped revenues increase 10.4% YoY to $22.3B. With supply chains improving, adjusted operating margins increased by 0.44%.

Consolidated volumes held up, with Foods and Beverages falling just -3% and -1%, respectively.

• North America: Frito-Lay volumes were up +1.0%, Quaker Foods down -5.0%, and Beverages down -4.5%

• Africa, the Middle East and South Asia: Food volumes were down -6% and beverage volumes down -3%

• China: Food volumes fell -4% while beverages grew +7%.

• Latin America: Food fell -3% and beverages increased +2%

• Europe: Food increased +2% and beverages fell -1%

The Week Ahead 📅

US Earnings Calendar

US Economic Calendar in Eastern Time 

Closing Thoughts - We’re on a roll

Companies are on a roll kicking off earnings season with some pizzazz! We’ve got a series of beats across the board. Yes, I know many of the estimates were revised down, but some of the companies actually posted great sequential growth as well such as JP Morgan and Delta.

Next week things are about to get more interesting. We have quite a few companies reporting that may be influenced by the macro numbers - lower new orders, manufacturing declines and rising delinquencies in consumer finance.

We have many of the Regional Banks reporting as well and I do think some of the bigger, well-run banks may do quite okay simply because the expectation has hit rock-bottom for these banks.

As we did last quarter, we will be putting out our earnings preview for the week every Sunday and tomorrow’s one will be free. So stay tuned!

Here’s wishing you safe investing. 

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.