The week ahead 01/16/2023

Happy Martin Luther King Jr. Weekend.

In July of 1953 — Dr. King gave a sermon in Atlanta in which he warned listeners about the negative ways money can impact our lives:

“Money in its proper place is a worthwhile and necessary instrument for a well-rounded life, but when it is projected to the status of a god it becomes a power that corrupts and an instrument of exploitation.

When men arrive at the point of making money a god they become more concerned with what they can get out of society than with what they can give to society in terms of service… when men bow down and worship at the shrine of money they are being deprived of their most precious endowment — the possibility of living life in its fullness and its endless beauty.”

During this MLK Jr. Day, let’s not only remember Dr. King for his iconic ‘I Have a Dream’ speech in Washington D.C.

Let’s also share thanks for the wealth of wisdom that he distributed to the masses — providing perspective, inspiring change, and challenging each of us to be a bit better than we were the day before.

 

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Key Earnings Announcements:

 

This week we’ll hear from major players in the financials space as well as consumer staples return, and analysts have no idea what to think about Netflix.


The most anticipated earnings releases scheduled for the week are Morgan Stanley #MS, Netflix #NFLX, Goldman Sachs #GS, Silvergate Capital #SI, Citizens Financial #CFG, United Airlines #UAL, Charles Schwab #SCHW, Signature Bank #SBNY, Procter & Gamble #PG, and SLB #SLB.

Monday (1/15): MARKET CLOSED

Tuesday (1/16): Citizens Financial Group, Goldman Sachs, Interactive Brokers, Morgan Stanley, Pinnacle, Silvergate Capital, United Airlines

Wednesday (1/17): Alcoa, Charles Schwab, Discover, H.B. Fuller, J.B. Hunt, Kinder Morgan, PNC, Prologis

Thursday (1/18): Comerica, Fastenal, M&T Bank, Netflix, PPG Industries, Procter & Gamble, Truist

Friday (1/19): Ally, Ericsson, Huntington, Regions Financial, Schlumberger, State Street

What We’re Watching:

  1. Netflix (NFLX)

Chart: Netflix Reignites Growth, Albeit at a Slower Pace | Statista
  • Analyst Expectations — Revenue of $7.84B and EPS of $0.55.

  • Key Factor to Watch — Updates on the early success / failure of Netflix using a tiered pricing system and featuring ads on the platform.

  • Barclays Prediction — Expects NFLX to miss its guidance of 4.5M net subscriber additions.

  • JPM Prediction — Expects NFLX to beat its guidance, with 4.75M net additions.

  1. Procter & Gamble (PG)

Procter and Gamble Innovation Strategy under David Taylor
  • Analyst Expectations — Revenue of $20.7B and EPS of $1.59

  • Key Factor to Watch — Higher freight and commodity / input material costs are expected to cut into P&G’s gross margin.

  • Wells Fargo Viewpoint — WF analysts recently maintained a Buy rating on Procter & Gamble, with a price target of $168.00 (currently $150.88).

  • Analyst Note — 15 of the last 17 P&G earnings revisions by analysts have been to the downside.

 

Investor Events / Global Affairs:

 

Assessing government bonds, Warren Buffet’s wingman is pro-remote work, Japan’s crazy approach to inflation, and JP Morgan sees this rally running out of steam (at least in Europe).


  • The Government Can Only Take High Rates for So Long…

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Nearly $11 trillion in U.S. Treasury bonds are set to mature in the next 24 months and need to be refinanced. The current average rate on those bonds is 1.6%-1.9%, where as the new average rate would be somewhere between 3.4%-4.6%.

This would increase the interest paid on government debt as a percentage of the government’s budget from 8% to 17%.

Unsustainable?

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Currently, the interest expense vs. revenue for the U.S. government is at its worst levels since the late 1990s. If (and that’s a big ‘If’) the Fed pivots and decides to cut rates in 2023 — this could be a huge reason why.

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This could be a contributing factor to Bank of America’s new base case — that rate cuts will begin this summer:

“The bull case would be that 2023 is going to be much like 1975.

Then, after a period of roaring inflation and interest rates, the labor market finally cracked and inflation fell sharply. In early 1975, the Fed was able to pivot aggressively toward lower rates, and that was a glorious year of massive returns for both bonds and equities.

The bears would point to 2001 and 2022.” — Bank of America

It’s also worth noting that 1975 was the end of the Vietnam war, which likely played a big factor in the “glorious year.”


  • Legendary Investor Investor Sees Remote Work as Permanent

Who Is Charlie Munger? What Is He Known for?

Charlie Munger, the co-pilot of Warren Buffet at Berkshire Hathaway, was asked about remote work in 2022. As is typically the norm for older business leaders — many expected him to be critical of the behavioral shift.

His response was quite the contrary:

I think a lot of that’s going to remain forever… I don’t think the average corporation is going to fly its directors around so they can sit at the same table for every meeting of the year… I don’t think we needed all these god**** meetings and airplane flights.

So I think part of what’s happening is quite constructive that it’ll make life simpler, cheaper, and more efficient… It may be a good think that more people are going to commute less.”

This interview is a bit old, but we find it to be extremely relevant right now as we see companies like Disney and Snap demanding for employees to return to the office.

It’s an interesting trend to follow throughout 2023 and we’re curious if it could lead to work-from-home stocks seeing another boom if companies concede that it’s simply not working too well — as reports have indicated about Goldman Sachs.


  • Japan — “Yields May Shoot Up Like a Kite Without a String”

The Bank of Japan has its two-day monetary policy meeting this week and the world is watching closely. With soaring government bond yields and a strong yen — many economists now expect Japan to scrap its yield curve control policy.

This move would come less than 4 weeks after the BoJ surprised the markets and widened its tolerance range for 10-year Japanese government bond yields.

“Since then, 10-year JGB yields have exceeded the upper ceiling of the new range — 50 basis points either side of its 0% target — a number of times.”

So far in January, the BoJ has bought 13 trillion yen worth of Japanese government bonds to hold its 0.5% cap (shown in the chart above). That’s nearly 26 trillion if they keep this pace through the end of January.

Expectations for 10-Year Yields Point to More BOJ Tweaks

Economists at Bank of America Global Research expect the BoJ to keep its benchmark rate unchanged at 0.1% (scarily dovish).

  • “I don’t think the BOJ will scrap their inflation target altogether, but they might announce a target range of 2-3%…We know that the PM [Prime Minister Fumio Kishida] has been calling for more flexibility with the inflation target, and this seems like a plausible compromise from the BOJ.” — Matt Simpson, Market Strategist at City Index

  • Japan’s core inflation is expected to hit 4.0% for December… a 41-year-high, although still well below levels seen in comparable Western economies. The central bank introduced its yield curve control mechanism in September 2016, with the intention of lifting inflation toward its 2% target after a prolonged period of economic stagnation and ultralow inflation.” — CNBC

  • “The BOJ, they hoped, could then strategize an orderly unwinding of [the yield control curve] under a new leader, pulling the trigger only when wages were rising enough to keep inflation sustainably around the bank’s 2% target, according to five sources familiar with the bank’s thinking. Instead, the BOJ’s tweak opened a flood of expectations that a major change was imminent. Less than a month later, bond sellers broke the 0.5% yield cap on Friday, forcing the BOJ into emergency bond-buying to bring the rate back down.” — Reuters


  • JP Morgan’s 2023 Predictions

JP Morgan is officially the first major bank of 2023 to call out the market rally as being a bit too much. Below is their take on the current rally, specifically within Europe:

“The positive catalysts that we were highlighting from October, and which helped drive a rebound of as much as 27% for SX5E – peak in bond yields, in inflation and in USD, China reopening and more benign European gas prices – are now in the open. — JPM Head of Global & European Equity Strategy

“Now, one could argue that this is just a re-iteration of the massive consensus view that 1H will be weak.” — The Market Ear

Here’s the rest of JPM’s 2023 predictions:

 
  1. The global economy is projected to expand at a sluggish pace of around +1.6% in 2023 as financial conditions tighten, the winter aggravates China’s COVID policy and Europe’s natural gas problems persist.

  2. The global economy is not at imminent risk of sliding into recession, as the sharp decline in inflation helps promote growth, but the J.P. Morgan Research baseline view assumes a U.S. recession is likely before the end of 2023.

  3. In the first half of 2023, the S&P 500 is expected to re-test the lows of 2022, but a pivot from the Fed could drive an asset recovery later in the year, pushing the S&P 500 to 4,200 by year-end.

**Since the GDP predictions above were released — the World Bank has projected GDP growth of 0.5% in the United States, 0% in Europe, and 4.3% in China. There is a serious bullish sentiment growing around China.

 

Major Economic Events:

 

Producer Inflation and Retail Sales will guide the storylines.


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Interesting — The shelter data from the most recent CPI report has a MAJOR trend difference when compared to Zillow’s rent index data. Source: Pantheon Macroeconomics

Monday (1/15): N/A

Tuesday (1/16): Empire State Manufacturing Index

Wednesday (1/17): Capacity Utilization, Fed Beige Book, Industrial Production, NAHB Home Builders’ Index, Producer Price Index, Retail Sales

Thursday (1/18): Building Permits, Housing Starts, Philly Fed Manufacturing Index, Speech by Fed Vice Chair Brainard

Friday (1/19): Existing Home Sales (SAAR), Speech by Fed Gov. Waller

What We’re Watching:

  1. Retail Sales

U.S. Retail Sales Month-Over-Month Change, 1-Year Chart

For the month of November (released in December), retail sales declined -0.6% MoM — significantly worse than market forecasts of -0.1%. This was the largest decline of 2022, and we’re eagerly awaiting if a delayed holiday-push elevates this data for December.

  1. Producer Price Index (PPI)

U.S. Producer Price Index Month-Over-Month Change, 1-Year Chart

The PPI — or “inflation for producers” — has consistently been rising by +0.3% MoM. In November 2022 (released in December), producer prices were up +7.4% YoY.

This was the smallest increase since May of 2022, but still came in higher than forecasts. This week’s PPI reading will reveal if the Fed’s actions have been somewhat uniformly impacting inflation across the board — or if there’s still more work to be done than currently expected.

 

Events-Driven Winners:

 

Which stocks moved the most last week.


LevelFields_event_driven_winners_10Jun2022

Our friends at LevelFields scrub through thousands of data points each week to determine how events impact stock prices.

Goodness Gracious, BBBY!

 

We weren’t even aware of Bed Bath & Beyond’s recent surge until we were notified by LevelFields.

Executives recently warned that bankruptcy may be unavoidable — and the stock consequently dropped to its lowest levels ever seen. The company’s earnings report last week showed earnings that were worse than expected, massive inventory issues, and collapsing liquidity.

We’ll be interested to see if the bounce of this potentially-dying stock has some room to run.

 

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Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

 
 
 
 
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