The week ahead 02/06/2023
The million dollar question…
Are we at the “Return to Normal” or the “Return to Mean” in today’s market?
It’s impossible to know for sure.
That’s why we look toward “The Four E’s” to make our best guess.
We all know that the earnings of companies get negatively impacted by difficult economic times. We also know that analysts adjust their EPS estimates to account for negative projections. In fact — during the month of January, analysts lowered EPS estimates for the first quarter by a much larger margin than average.
The Q1 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q1 for all the companies in the index) decreased by -3.3% (to $52.41 from $54.20) from December 31 to January 31.
In any given quarter, analysts usually reduce earnings estimates during the first month of the quarter. However, this recent decline in the bottom-up EPS estimate was larger than the 5Y, 10Y, 15Y, and 20Y average.
Takeaway — This is the most telegraphed recession of all time. We all expect some hits to earnings, and analysts have adjusted their outlooks accordingly. For the market to reach serious lows, there will need to be some serious misses.
As we broke down yesterday, they’ve already arrived with the likes of Apple (AAPL) & Amazon (AMZN) last week. Let’s see if they persist.
The Manufacturing Purchasing Managers’ Index (PMI) is below 50.
The yield curve is inverted.
Financial conditions are likely to get tighter.
Credit card debt is at an all-time-high.
The Conference Board expects GDP to be negative for three straight quarters.
The housing market is getting smacked.
64% of Americans are living paycheck-to-paycheck.
And… well — you get the point.
Don’t get us wrong here. The stock market is not the economy. However, the stock market is painting a picture that the economy will have smooth sailing within 6-9 months. We’re simply not convinced that it will happen.
A big blocker here is the unemployment rate being at 53-year lows.
However, unemployment is often at relative lows prior to the start of a recession. We’ll see if this will tick up over the coming quarters:
Takeaway — The economy may be in better shape than some ‘maximum-doomers’ care to admit, but we are not anywhere close to being out of the woods. Supply chain issues still persist in parts of the macro economy and many of our 15 Reasons for a Recession from last June are still present. Time will tell.
Above shows Goldman Sachs’ projection of inflation being tamed by the summertime, which is quite optimistic. Take a look at what a BlackRock ‘C-suiter’ had to say on Friday. This is exactly what we alluded to when calling out the overly-optimistic outlook of the current ‘base case’ of the market:
Takeaway — “If we look at market pricing so far this year, it’s not even pricing in a soft landing. It’s pricing in takeoff. It’s pricing inflation to come down. It’s pricing growth to avoid a recession altogether. It’s also pricing in central banks cutting rates starting mid this year. So that is really markets are priced for perfection.” — Wei Li, BlackRock Global Chief Investment Strategist
Earth? Yes — as in “what is going on around it?!”
A big part of what we do is bring global affairs and international relations updates to our investing-focused audience. We believe a big mistake made by investors is thinking that issues are “on the other side of the world and don’t impact us.”
We put in a lot of effort to bring you the most important tidbits each week, and some new friends are helpful:
Introducing International Intrigue — a newsletter that’s written by former diplomats and gives you a free daily brief in <5min.
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Key Earnings Announcements:
Disney wants cash flow improvements, Chipotle has been under fire for poor customer service / portion sizes, and Cloudflare seems well-positioned.
Monday (2/6): Activision Blizzard, Chegg, Pinterest, Take-Two Interactive, Tyson Foods
Tuesday (2/7): BP, Chipotle, Dupont, Enphase, Fiserv, Fortinet, Hertz, Lumen Technologies, Paycom, Prudential, Royal Carribean, The Carlyle Group
Wednesday (2/8): Affirm, CVS Health, Dominion Energy, Goodyear, MGM Resorts, Robinhood, Uber, Under Armour, Walt Disney, Wendy’s, Yum! Brands
Thursday (2/9): AbbVie, Cloudflare, DexCom, Duke Energy, Expedia, Hilton, Kellogg’s, Lyft, PayPal, Pepsi, Philip Morris, Ralph Lauren, Toyota
Friday (2/10): Enbridge, Global Payments, Honda, Magna International, Newell Brands
What We’re Watching:
We’ll be looking to see if Disney has improved its free cash flow growth since its Q4’22 / Full Year report in November.
Chipotle Mexican Grill (CMG)
Chipotle has been one of the greatest investments-from-IPO of our lifetime, but there are plenty of haters festering in the shadows.
The first ‘story’ of this company was exponential growth, which mirrored that of Starbucks during its prime store-count-rise. Then it was bolstering Chipotle delivery — which captured over $43 million in revenue during the first 9 months of 2020 alone.
Now, a lot of investors worry that an increasing amount of labor force concerns (both slightly humorous and more serious) will stymie the growth of retail success.
Cloudflare surged +15.6% last week after a research note from MoffettNathanson said the company has a massive opportunity in supporting AI workloads. The note also identified Cloudflare’s support of Apple’s iCloud Private Relay, which is now out of private beta. We’re excited to hear about these two growth catalysts when NET reports on Thursday.
Investor Events / Global Affairs:
A devastating earthquake, market warnings from some big heads, wishing for the truth out of Russia / Ukraine, and Super Bowl Sunday costs a pretty penny.
Earthquakes in Turkey + Fatal Explosions
Our thoughts and prayers go out to the 2K+ that are expected to have died in a magnitude 7.8 earthquake this morning (followed by a second 7.5 magnitude tremor). With its epicenter in Southern Turkey, the impact extended severely to Syria — while also being felt in Cyprus, Egypt, Israel, and Lebanon.
You simply have to take a look at some of this breathtaking footage.
Interestingly — the strongest earthquake in at least 40 years in Buffalo, New York (magnitude 3.8) came this morning. There’s speculation that it occurred as a result of tectonic shifts from the Turkey-based earthquake.
Amazingly, a Canadian earthquake researcher predicted an earthquake of this caliber to take place three weeks ago. More amazingly — a Dutch researched for the Solar System Geometry Survey (SSGEOS) predicted the specific location of this earthquake three days ago! Incredible!Sooner or later there will be a ~M 7.5 #earthquake in this region (South-Central Turkey, Jordan, Syria, Lebanon). #deprem
Market Warnings Calls from Five Reputable Investors
It’s always fun to see what some important folks are saying about the markets. Here’s a compilation of some anecdotes from CEOs and investors — many contemplating what could lead to a “black swan” event. These are pessimistic, but are not to be taken as a source of truth. We’re simply sharing!
Elon Musk — “We’ll probably have a pretty difficult recession this year… When there’s a recession and people panic in the stock market, then the value of stocks can drop sometimes to surprisingly low levels.”
Nassim Nicholas Taleb — “The stock market is way too overvalued for interest rates that are not 1%…I think that we may have a collapse in many, many prices… It doesn’t rain money anymore…Disneyland is over.”
Jeremy Grantham — “If something does break and the world falls into a severe recession, the market could fall a stomach-turning 50% from here… At best there is likely to be at least a further modest decline.”
Michael Burry — “Sell.”
Mark Spitznagel — “It is objectively the greatest tinderbox-timebomb in financial history — greater than the late 1920s, and likely with similar market consequences.”
Death Toll from Russia / Ukraine War
This one sure is interesting…
The New York Times reported last week that the number of Russian troops killed and wounded is approaching 200,000 — claiming that Putin is failing miserably.
Meanwhile, Israel’s national intelligence agency (Mossad) had painted quite a different picture:
Russia — 18,480 deaths | 44,500 wounded | 418,000 soldiers | 3.5M reservists
Ukraine — 157,000 deaths | 234,000 wounded | 734,000 soldiers | 100,000 reservists
There’s also an interesting inclusion of 2,458 deaths of NATO soldiers and 234 deaths of NATO military trainers (U.S. & U.K.)
Considering we have no idea what’s true and what’s not… some truthful clarity would be nice.
Worse Before Better:
Serhiy Haidai, the governor of the Luhansk region in eastern Ukraine, says that “starting from February 15th, we can expect [a major offensive] at any time.”
This comes at a time when the Ukraine Defense Ministry has been accused of embezzling public funds by paying 2-3x above supermarket prices to purchase food for troops. A top prosecutor in Ukraine was even caught vacationing in Spain, despite martial law banning Ukrainian men ages 18-60 from leaving the country without permission.
All of this comes supposedly ahead of Russia’s next big offensive.
Be sure to sign up for International Intrigue for more global affairs hits as they unfold.
Super Bowl LVII
WOOO! FOOTBALL. Enough of the negative stuff. Cheers to all of you that will be looking forward to this throughout the week.
Fun Facts for the Big Game:
Both teams have scored exactly 546 points this year. That’s wild.
The lowest average cost for two adults to attend this year’s game — including tickets, airfare, lodging, parking, two hotdogs, and two beers — is over $18,098.
The price of the cheapest, last-row ticket to the Super Bowl as of last Friday was $5,003.
The price of one Bud Light at the Super Bowl is expected to be $17.50.
The game is expected to be broadcasted in over 170 countries.
Major Economic Events:
A relatively light week for economic activity — with Consumer Credit, the University of Michigan data leading the way, and a barrage of Fed speeches in focus.
Monday (2/6): N/A
Tuesday (2/7): Consumer Credit, International Trade Deficit, Speeches by Fed Chair Powell (at the Economic Club of Washington) & Fed Vice Chair Barr
Wednesday (2/8): Speeches by Fed Gov Cook, Fed Gov Waller, Fed Vice Chair Barr, ATL President Bostic, MN President Kashkari, & NY President Williams
Thursday (2/9): Initial & Continuing Jobless Claims
Friday (2/10): UMich Consumer Sentiment & Inflation Expectations, Speeches by Fed Gov Waller & PHL President Harker
Consumer Credit is in Focus:
Hedgeye CEO Keith McCullough sees a credit crunch as being a major catalyst for downside in the market. JPMorgan Chase built up its provision for credit losses to $2.3 billion last quarter. Bank of America built up $1.1 billion. The major banks expect to see credit defaults — and we’re hoping that the data this week indicates that they’re overreacting.
Which stocks moved the most last week.
Our friends at LevelFields scrub through thousands of data points each week to determine how events impact stock prices.
Peloton (PTON) saw some new signs of life via subscription revenue and CEO Barry McCarthy said the results could be a potential “turning point.”
Nordstrom (JWN) saw some serious love as serial investor Ryan Cohen took a stake in the struggling retailer. Known for starting Chewy (CHWY), and taking stakes in GameStop (GME) and Bed Bath & Beyond (BBBY) — this could get interesting.
Meta (META) announced a $40 billion stock buyback during its earnings report last week. This is interesting, considering the company’s earnings release noted that “cash, cash equivalents, and marketable securities were $40.74 billion as of December 31, 2022.” Meta is betting on itself in a big way (or just really bad at math), and it’s very attractive to investors.
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