The week ahead 09/12/2022

Apologies for the delay! We’re traveling and wanted to make sure this post was worth your while. Now check out how ridiculous this is…

Here’s a chart of the government’s spending based on Mandatory vs. Discretionary spending.

  • Mandatory payments are essentially things that will 100% happen — entitlements (government-guaranteed freebies) and paying the interest on our debt.

  • Discretionary payments are things that the government allocates money toward, but aren’t perfectly calculated. Examples include housing, community-improvement, education, and disaster relief.

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Now check this out… the government is openly admitting below that mandatory spending will be 100% of what tax revenue is spent on by 2032. In other words, within the next ten years — the government is fine with all money brought in by taxes being used for entitlements and paying off the interest of the government’s own debt.

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We can’t express enough the extent of mind-boggling money management here. From a financial accounting perspective, the US government would ‘theoretically’ be a terribly failing business by any reasonable metrics. In other words — this “company” would already be considered completely bankrupt.

Of course, the government won’t only spend money on entitlements and paying off its own debt. Consequently, more printing of money can be reasonably expected as the years go by.


The US Dollar keeps getting stronger relative to other countries… we don’t seem doomed at all, right?

It’s important to remember that all of this is relative. The USD is doing well, because other currencies are doing worse. It’s not because we’re ‘knocking it out of the park’. You can actually thank the Fed for that one — as the raising of rates began much earlier than that of the European Central Bank, for example.

We have a horrible amount of outstanding credit and loans, but our Debt/GDP ratio has remained in better shape than other world superpowers for many years.

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Those same countries are also seeing a collapse in the working citizens that will contribute toward GDP. The United States isn’t in a great position either, but the human demographics throughout the world are a bit more dire than most realizeElon Musk talks about this frequently.

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Does this mean the stock market will be horrible for years to come? Nope, because the stock market and the economy are very much independent things. We’re talking about the economy here, and it sure looks like the days of sustained, +2% GDP growth targets will be a thing of the past.

Less workers contributing to GDP + 100% of government tax revenue going to freebies & interest payments + government entitlements being nearly impossible to reverse once in place = a tough situation for macroeconomic growth.

 

The Investing Week Ahead — Too Long, Didn’t Read:

 

⚡ Adobe & Oracle are the two earnings reports of note this week.

⚡ Starbucks Investor Day is drawing a lot of attention.

⚡ Prices for consumers, prices for producers, & gauging small business pain.

 

Key Earnings Announcements:

 

This week we’ll be watching just two reports from major names.

  • Adobe (ADBE)

Despite beating analyst expectations during its June report, Adobe’s weak guidance has sent shares on a downward slide. Since June, both EPS and revenue estimates have been revised down over 20 times by analysts.

In any event, the Wall Street consensus on ADBE appears to still be a Buy rating.

Consensus Revenue Estimates: $4.44B

Consensus EPS Estimates: $3.35

Track Record: Adobe has beaten both top and bottom line estimates for 8 consecutive quarters.


  • Oracle (ORCL)

Oracle is set to report for the first time since closing its deal to buy Cerner — a medical records giant. Commentary is also expected about the hundreds of staff that have reportedly been cut from its advertising & customer service divisions.

Wall Street currently has a Hold rating on ORCL. The stock is relatively inexpensive from a valuation standpoint, and despite growing at a slower rate than other tech giants (i.e. MSFT) — earnings per share have still roughly doubled over the last ten years. ORCL trades at an ~11x EBITDA multiple, while its net profit multiple is ~14x today.

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  • Consensus EPS Estimates: $1.08

  • Consensus Revenue Estimates: $11.45B

  • Track Record: Oracle has beaten both top and bottom line estimates in 7 of the last 8 quarters.

 

Investor Events / Global Affairs:

 

Time for a coffee chat, United Airlines is scooping up air taxis, and ESPN should bolster Disney’s growth.

  • Starbucks (SBUX) Investor Day

With one of the most anticipated company investor days of the year — Starbucks will provide comprehensive details on its new business strategies and introduce its new CEO, Laxman Narasimhan, to the public. Previously, Starbucks had outlined a long-term 10%-12% EPS growth rate, which could be at risk of being revised.

Ahead of the event and after the new CEO hire, Barclays is bullish on SBUX:

“We view Starbucks as a premiere, large-cap, high- growth, global consumer company led by a dominant US retail & consumer product platform, significant international growth led by China & a best-in-class digital platform.”


  • United Airlines (UAL) Air Taxis

United Airlines ordered 200 Eve Evtol aircraft.

As consumers complain about heightened airline tickets, increasing delays, and low employee retention at airlines — United Airlines is out here buying air taxis.

One of the aviation industry’s biggest players agreed to buy 200 electric air taxis from Eve Air Mobility (EVEX), a startup backed by Embraer (ERJ). United also committed to investing $15 million into Eve Air Mobility — which was just listed on the NYSE in May.

United said it expects the first deliveries of the aircraft as early as 2026.

The announcement follows an agreement to purchase 100 electric aircraft from Archer Aviation (ACHR) for $10 million just one month ago.

Other airlines — including American (AAL) — have also invested in or committed to purchasing electrical vertical-take-off-and-landing aircraft — “EVTOL aircraft” for short. The argument is that the new technology could reduce emissions, particularly on short routes such as commutes to the airport.


  • Disney’s Rumored Spin-Off of ESPN Flakes Out

Over the past few weeks (especially with the rising price tags of college football across the board) — there have been many rumors of Disney spinning off ESPN as its own company. Last month, major investor Dan Loeb and his hedge fund — Third Point LLC — wrote a letter to Disney CEO about taking over ESPN for the company.

“We have a better understanding of ESPN’s potential as a stand-alone business and another vertical for [Disney] to reach a global audience to generate ad and subscriber revenues…We look forward to seeing [ESPN chief James] Pitaro execute on the growth and innovation plans, generating considerable synergies as part of The Walt Disney company.” — Dan Loeb

The speculation has apparently fizzled after Disney CEO Chapek announced to their annual meeting crowd that he has big plans for ESPN to be a significant growth engine for Disney.

 

Major Economic Events:

 

It’s Inflation Week.

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Monday (9/12): NY Fed 3-Year Inflation Expectations

Tuesday (9/13): Consumer Price Index, Core CPI, Federal Budget, NFIB Small-Business Index

Wednesday (9/14): Producer Price Index Final Demand

Thursday (9/15): Business Inventories, Capacity Utilization, Import Price Index, Industrial Production Index, Retail Sales

Friday (9/16): University of Michigan Consumer Sentiment

What We’re Watching:

  1. Prices for Consumers (Previous — 8.5%, Expected — 8.1%):

You know how important this is. The Consumer Price Index (CPI) will give us a glimpse into if the Fed is validated in its extremely hawkish sentiment of late. Given the continued decline of gas prices, we wouldn’t be surprised to see the expected number actually be beaten. Just remember — regardless of if the inflation numbers start to marginally improve, we are far from through with the effects. This will take a very long time to correct and the Fed knows that.

  1. Prices for Producers (Previous — 9.8%, Expected — 8.9%):

Often forgotten by retail investors, the Producer Price Index (PPI) is equally important to the CPI. While it may not move the markets as directly — the Fed is keeping close tabs on how much pain is felt by those producing goods throughout the country. We’ve seen very little relief and consistently beaten projections with the PPI month after month. Let’s see if it can make a move to the downside.

  1. Small Biz Index

The small business index serves as a bellwether for those that are often most impacted by inflation. With a significant amount of recent layoffs in the small business / startup space — we wouldn’t be surprised to see this move lower.

“The uncertainty in the small business sector is climbing again as owners continue to manage historic inflation, labor shortages, and supply chain disruptions…As we move into the second half of 2022, owners will continue to manage their businesses into a very uncertain future.” — Bill Dunkelberg, NFIB Chief Economist.

 

 

Events-Driven Winners

 

Buybacks trigger a flurry of stock surges.

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

GameStop (GME) announced that it has launched its digital asset wallet to allow gamers and others to store, send, receive and use crypto and NFTs across decentralized apps without having to leave their web browsers. With a market cap well over $8 billion — it sure seems like a meme stock like GameStop has some serious potential for downside ahead.

 

If you’re starting your investing journey or want to change to a cleaner, social-focused investing platform, consider visiting Public.com.


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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