Welcome to Q4.
We can all agree that Q3 will not be missed — our Q3 predictions here.
1️⃣ Below is a quick view of the S&P 500’s performance during Q3.
If you look at the bottom of the image above, you’ll find the Relative Strength Index (RSI). For those unfamiliar, the RSI is a momentum indicator that is essentially telling you (from a technical standpoint) if stocks are “overbought” or “oversold” at that time.
The thin black lines in the RSI chart are at 70 and 30 (out of 100). If the RSI is above 70 — stocks are considered “overbought.” If the RSI is below 30 — stocks are considered “oversold.” The RSI currently sits at 28.45 at time of writing.
2️⃣ With that being said, below is a look at S&P returns after 25%+ sell-offs:
As you can see, investing (for the long-term) after big drawdowns is typically a great idea.
3️⃣ So are we bullish?
Nope. We view this as a “seems like a bad time to be short” time period. If you are finally bearish on the market now — welcome to the club.
In fact, we just saw the highest level of put options (betting on the market to go down) on record since the back half of September:
In the short-term, we think the market likely sees some relief.
Especially when we look at the historic trends of stock market performance at the beginning of October, specifically during midterm election years:
4️⃣ So what are you saying?
We lean short-term (next couple of weeks) bullish and bigger picture bearish. A lot of funds and money managers have gotten wrecked this year. They have clients and constituents that pay a pretty penny for capital preservation. We think a little bear market rally is on deck soon — which will mostly be used as institutional exit opportunities before a bigger collapse to the downside.
You’ve seen all the things we’ve written since the end of last year. You know we haven’t hit the bottom yet. If JPMorgan CEO Jamie Dimon is saying “something worse” than a recession may be coming — you shouldn’t have too much comfort in this market.
Sure, we think things are oversold and may rally a bit. But let’s recognize the big picture — market drops can be much more brutal than this one has thus far:
Remember the 15 Reasons We’re Headed Toward a (Very Bad) Recession post we published in June? Let’s rapidly reflect on just a few of them:
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Supply Chain — Improving but still iffy, especially w/ China & Russia.
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Inflation — The Fed’s preferred inflation gauge (PCE) had terrible results last week. Still white hot.
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Fed Rates — Essentially guaranteed to keep rising for at least a couple more quarters.
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Bonds — Yield curve is still deeply inverted. And the scary part is that 11 other countries around the world have even deeper yield curve inversions than the US.
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Gas Prices — Largely lowered due to the draining of our strategic oil reserves. Not sustainable.
5️⃣ What’s the play?
As we’ve said many times — timing the market is hard and generally not the best way to approach investing. However, we just lived through a period of a rapid rise in the markets and now we’re in the middle of a large plunge. Timing is much more important to discuss in unique times like these.
We plan to go into deeper detail in some of our paid posts in the near future, but below is our TLDR general plan:
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S&P 500 at ~3600 (Current level) — Fine to do some DCA’ing for the long-term, but we’re not really very interested.
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SPY at 3300 (-8% from current levels) — We begin buying stocks that have high free cash flow yields.
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SPY at 3200 (-11% from current levels) — We’ll continue with more meaningful buying, deploying large amounts of cash.
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SPY at 3100 or lower (-14% from current levels) — If we are blessed with this low of an entry, we’d be hammering the buy button for the long-term.
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A light week of earnings to kick off Q4. October is historically considered to be one of the strongest months for stocks — especially during years with midterm elections.
Monday (10/3): N/A
Tuesday (10/4): Acuity Brands, NovaGold, SGH
Wednesday (10/5): Resources Connection Inc, RPM International
Thursday (10/6): Accolade Inc, Conagra Brands, Constellation Brands, Levi’s, McCormick
Friday (10/7): Tilray
Consumer Goods Inflation, Directly from Major Players:
Remember — hearing the impacts of inflation from government-sponsored data collection is important, but it can also be too widely measured and lack clear detail.
This week, we get to hear from Conagra Brands (market cap of ~$16B), Constellation Brands (market cap of ~$44B), and McCormick (market cap of ~19B).
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Conagra Brands (CAG) — Slim Jim, Healthy Choice, Reddi Wip, Earth Balance, Boom Chicka Pop, Orville Redenbacher’s, Hunt’s, etc.
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Constellation Brands (STZ) — Modelo, Pacifico, Corona, Casa Noble Tequila, etc.
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McCormick & Co. (MKC) — Cholula Hot Sauce, Frank’s RedHot, French’s, Old Bay, McCormick Spices & Herbs, etc.
As you can see in the graphic above, Constellation Brands still projects fantastic operating margins for its beer business. Recession or not, people still love beer (and Slim Jims, and popcorn, and spices, etc).
The question we’d like answered is how much do these companies think they’ll truly be impacted? The three are all generally projecting lower profitability, but will we see updated revisions downward in growth? We’ll report back in the Week in Review, with details straight from the horse’s mouth.
We believe Google’s smartphone growth should get more recognition, Costco hopes to hold the line on margins, Fortune 500 companies remain in the crypto game, and China’s partnership w/ Russia becomes more evident.
If you’re like us — you have Apple products and don’t really think much about alternatives. We’re not here to convince you to change the products that you use, but we are encouraging you to think about how much Google has grown in the phone / handheld devices game.
While we don’t see it getting much buzz, Google will be hosting its Google Pixel event this Thursday — with the expectations of a new Pixel 7 & Pixel 7 Pro arriving. Here’s a leaked commercial of the product if you’re interested in seeing it.
I Really Don’t Care, I Love my iPhone!
Us too, and most of North America agrees with you (see above). But we care about buying Google stock at beaten-down prices after a this next potential market dip. If Google can gain a more meaningful share of the North American smartphone market, its stock could see unanticipated tailwinds. Just look at this growth below!
We’re not saying this is something we’re well-versed on or is a reason to place bets, but we don’t think the market has priced in Google growing its hardware sales through smartphones — +230% market share growth year-over-year! If they can do it, this could be a very big storyline a year or two down the road.
We mentioned in yesterday’s Week in Review that discretionary spending is what Bank of America and many others believe will take the biggest hit from a consumer behavior standpoint. In other words, those $125 Nike shoes might get stockpiled in inventory because they’re selling way less — but that value packs of Goldfish crackers are likely to keep flying off the shelves.
There’s a reason why Costco is up +7.5% over the last 12 months and is only down -16.5% YTD. They sell items you need, and get an incredible amount of free advertising along the way.
So Why Not Pile Into COST?
Keep in mind — anyone in the ‘groceries’ category has to execute near-flawlessly. Making small mistakes in the amounts of cents in one or two areas can quite literally cause millions to be lost from the bottom line. As you can see from the above graphic, Costco saw memberships and gross margin drop from ‘21 to ‘22 — but their EPS still had remarkable growth. This signals having a management team that knows what changes need to be made during volatile economic times.
Costco has all the makings of remaining a long-term winner, but we’re looking closely at their margin management. Trading at a 15x EPS multiple and a 32x PE multiple is certainly not cheap. We’d love the opportunity to add to our Costco positions if they falter a bit over the coming quarters.
MetaBeat 2022 is a metaverse-focused event that begins tomorrow in San Francisco. Our main callout is that just because it’s a bear market (crypto market overall down -58.2% YTD) — doesn’t mean that there aren’t crypto winners being built during the tough times.
Winners continue to grow during times of difficulty and losers will fold. For example, we still love and hold Chainlink (LINK). They just announced their direct integration with SWIFT — the main messaging network through which international payments are initiated.
An Interesting Spread of Companies Seem to Still Care…
Crypto is certainly ugly right now, but seeing a diverse group of leadership from Chipotle (CMG), NVIDIA (NVDA), Proctor & Gamble (PG), & Walmart (WMT) at a metaverse event is pretty cool.
According to the WSJ, Chinese companies that signed long-term contracts for natural gas from the United States are selling the excess supplies and making hundreds of millions of dollars. In this post last month, we touched on what seemed to be China and Russia colluding more by the day. It’s sad to see this become more clear.
‘West Vs. East’ is Happening Right Before Our Eyes.
“With demand down, Chinese companies that signed long-term contracts to buy U.S. liquefied natural gas are selling the excess and making hundreds of millions of dollars per cargo. Buyers include Europe, Japan and South Korea. Just 19 LNG vessels from the U.S. docked in China in the first eight months of the year, compared with 133 for the same period last year.
China is getting nearly 30% more gas from Russia so far this year, Chinese customs data show. The boost is due to a scheduled delivery increase from the Power of Siberia pipeline and from purchases of Russian LNG, typically at a steep discount, shipping data shows.” — Sha Hua, WSJ Reporter Covering China
Keep watching this relationship. It will likely become more and more important over time to the US.
Auto Sales & Construction Spending are expected to dip, the ISM Index and Factory Orders give us better understanding of the manufacturing industry, and the all-important Jobs Report will be watched closer than ever by the Fed.
Monday (10/3): Auto Sales, Construction Spending, ISM Manufacturing Index, Speech by NY Fed President
Tuesday (10/4): Factory Orders, Job Openings, Job Quits, Speeches by Cleveland Fed President, Fed Governor Jefferson, & SF Fed President
Wednesday (10/5): ADP Employment Report, International Trade Balance, ISM Services Index, Speech by Atlanta Fed President
Thursday (10/6): Speeches by Cleveland Fed President & Fed Governor Lisa Cook
Friday (10/7): Consumer Credit, Jobs Report + Unemployment Rate, Speeches by Minneapolis Fed President, NY Fed President, & Fed Governor Waller
It’s a Lose-Lose with the Jobs Report:
Our market is currently so backwards that there’s actually no winning with the jobs report.
See below from Fed Chair Powell’s Q&A in late September:
Question — Do the odds now favor, given where you are and where you’re going with interest rates, favor a recession, 4.4 percent unemployment is about 1.3 million jobs, is that acceptable job loss? And then, given that the data you look at is backward looking, and the lags in your policy are forward looking and you don’t know what they are, how will you know, or will you know, if you’ve gone too far?
Answer — I think that there’s a very high likelihood that we’ll have a period of what I’ve mentioned is below trend growth, by which I mean much lower growth and we’re seeing that now. …And then below trend next year I think the median was 1.2 percent… and it could give rise to increases in unemployment but I think that’s, so that is something that we think we need to have and we think we need to have softer labor market conditions as well… And if we want to set ourselves up really light the way to another period of a very strong labor market, we have got to get inflation behind us.
Interpretation — If the unemployment rate meets expectations of remaining at 3.7% this week, we believe the next rate hike will have an increased chance of being 75 basis points (+0.75%). If the unemployment rate does go up, the likelihood of abnormally large rate hikes goes down — but more people are obviously out of work. As it has been throughout the year, both upward and downward changes in the unemployment rate can be perceived as negative. We discussed this concept many times over the past few months (Examples here, here, & here — just use ‘Command F’ and search ‘unemployment’).
Reality Check — C’mon folks. Look at the chart above. The lowest level of unemployment since 1948 was 2.5% (in 1953). The Fed is clearly signaling that economic pain needs to increase enough for more layoffs to take place. Our friend Nate O’Brien even made a noteworthy tweet about this backwards situation. DocuSign does online document signing and has nearly 7,500 employees. Zoom is a virtual meeting software and has nearly 7,200 employees.
America over-hired during a bull market, and America (sadly) needs to aggressively reduce headcount as a result. We believe time will prove this to be correct.
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.
Stock buybacks lead the way for events-driven movers last week. Here’s a spot-on thread we enjoyed about the grand conundrum of stock compensation / how companies approach stock grants management:
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