The week ahead 10/31/2022
Happy Halloween 🎃
Before we jump in — there will NOT be a livestream tonight for Founding Members considering we’ll all be Trick or Treating with our kids or passing out candy.
The Wall Street Journal’s “Fed Whisperer” decided to make things extra spooky for you.
As mentioned more extensively in the Week in Review — Nick Timiraos is highly-regarded and has intel on the way the Fed feels about current market conditions.
Here’s what he said over the weekend on CBS’s Face the Nation:
“The problem for the Fed is that monetary policy takes time. It acts with a delay on the economy, so you can’t see your moves right away. The Fed this year has raised interest rates at the fastest pace since the 1980s. Normally, they raise rates by a quarter [percentage] point every six weeks or so. This year they’ve been going at three quarters of a percentage point, and when you don’t have time to see how that influences the economy — it’s like barreling down the highway, but using the rearview mirror to guide where you’re going. It raises the risk that you’re gonna drive off the road.
The problem here for the Fed is they can’t take a risk of not getting on top of this inflation because even though the risk of doing too much is a recession — the risk of not doing enough is that inflation just stays high, and you have to have a bigger downturn later.” — Nick Timiraos AKA ‘The Fed Whisperer’
Here’s another interesting way to look at things…
The graph above shows that the Fed’s balance sheet has hit its lowest level of the year, down $242 billion from its peak in April and nearly $100 billion over the last five weeks. This marks the largest five-week decline since July 2020.
What does that mean? That means the Fed is taking quantitative tightening (QT) more seriously. The Fed is reducing its balance sheet and sticking to its word!
But wait… how much was added to the Fed’s balance sheet before this?
That’s the golden question! The Fed’s balance sheet went from under $4T in late 2019, to nearly $9T at the beginning of 2022 (If you’re confused by the units on the left, there are ‘one million millions’ in a trillion dollars). This is important — as the previously-mentioned QT by the Fed (shown in the first chart) is actually just a drop in the bucket of how much balance sheet unloading the Fed should actually conduct (shown in the second chart).
The Fed’s two-day meeting concludes Wednesday 2pm ET with a good ole Jerome Powell press conference.
More on the FOMC can be found in the last section of this post!
Key Earnings Announcements:
Energy (killing it), Healthcare (doing fine), and Semiconductors (need a lifeline) are the three sectors in focus this week.
Monday (10/31): Alliance Resource Partners, Arista, Avis Budget Group, Global Payments, Goodyear Tire & Rubber, NXP Semiconductors, Onsemi, Stryker
Tuesday (11/1): Airbnb, AMD, BP, Chesapeake Energy, Devon Energy, Eli Lilly, Energy Transfer, Livent Corp, Marathon, Pfizer, Phillips 66, SoFi, Toyota, Uber
Wednesday (11/2): APA Corp, Cenovus, CVS Health, Estēe Lauder, Etsy, Fortinet, Generac, GSK, Humana, Lumen Technologies, Marathon Oil, Paramount, Progressive, Qualcomm, Robinhood, Roku
Thursday (11/3): Block, Carvana, Cheniere Energy, Cloudflare, Coinbase, ConocoPhillips, Crocs, DataDog, Mercado Libre, Moderna, PayPal, Peabody Energy, Peloton, Penn National Gaming, Royal Caribbean Group, Starbucks, Warner Bros-Discovery
Friday (11/4): BR Petrobas, Dominion Energy, Duke Energy, DraftKings, Enbridge, EOG Resources, FuboTV, Hershey
What We’re Watching:
The spread between Energy (+62.2% YTD) and Communication Services (-38.5% YTD) above is astonishing.
The charts below also tell an incredible story. The formerly high-growth sector of Semiconductors has been crushed this year — largely due to global supply chain issues and worry about demand for costly products. Energy, as shown above, has been the best performing asset class this year by a large margin. This shows that a transition to green energy may be important — but the short-term need for oil & gas is extreme. Lastly, Healthcare has done what you would expect this year. It’s held up just fine, but has bled a bit with the rest of the market.
We’ll report back on the barrage of names in these three categories to gauge if the Energy and Healthcare sectors pick up steam — while Semiconductors pray for a rebound (especially with uncertainty surrounding Biden’s approach to chip export restrictions with China).
Investor Events / Global Affairs:
Keeping it light this week, we spotlight Retail and Gaming.
Santa Claus is Comin’ to Town
On Thursday (11/3), the National Retail Federation (NRF) will hold a media call to reveal its forecast for the 2022 holiday season. After Amazon’s dismal guidance in last week’s earnings — major retailers like Best Buy (BBY), Dick’s Sporting Goods (DKS), Target (TGT), and Walmart (WMT) are all on high alert.
Bank of America’s Forecast:
Comparable sales will rise +1.3% this year, versus +6.5% a year before.
Consumer spending will be substantially impacted by heightened prices of non-discretionary expenses like food, gas, and rent.
Discount retailers such as BJ’s Wholesale (BJ), Costco (COST), and Ollie’s Bargain Outlet (OLLI) could steal substantial holiday market activity this year.
AMD’s ‘Next Generation of Gaming’ Livestream
Amidst the market pain of semiconductors — AMD is doubling down on gaming. On a livestream event this Thursday (11/3)… “AMD executives will provide details on the new high-performance, energy-efficient AMD RDNA 3 architecture that will deliver new levels of performance, efficiency and functionality to gamers and content creators.”
The Creator Economy Includes Gamers:
As you can tell from gaming giant Electronic Arts (EA), the revenue streams for gaming have been forced to be diversified. Just selling the games themselves isn’t enough to reach high profit margins. AMD knows that this (addictive) space has room for innovation and that as the creator economy inevitably grows — so too does the secular growth trend of gaming.
Major Economic Events:
As we turn the page to November, all eyes are on the Federal Open Market Committee (FOMC).
Always keep in mind — the stock market is forward-looking and economic figures are backward-looking. As we’ve touched on many times before, we believe that the unemployment rate likely needs to grow higher before things truly reverse.
This fall, the stock market had its largest drawdown ever with an unemployment rate of less than 4%. In our opinion, we haven’t seen the extent of layoffs needed because companies haven’t felt the true pain yet. Sure — stocks have taken serious hits and that’s painful. But remember, the market is forward-looking. Economic changes (especially those stemming from monetary policy) can often take time to be felt.
We hope we’re wrong, but both more layoffs and higher gas prices are firm predictions that we currently won’t budge on.
Monday (10/31): Chicago PMI (Expected 47.0, Result: 45.2)
Tuesday (11/1): Construction Spending, ISM Manufacturing Index, Job Openings, Job Quits, Motor Vehicle Sales
Wednesday (11/2): ADP Employment Report, FOMC Announcement, Jerome Powell Press Conference, Rental Vacancy Rate
Thursday (11/3): Factory Orders, Foreign Trade Deficit, ISM Services Index, Unit Labor Costs
Friday (11/4): Jobs Report (Nonfarm Payrolls & Unemployment Rate)
Sitting, Waiting, Wishing:
That’s^ exactly what bullish investors are doing ahead of the next Fed meeting. Stocks were oversold and a relatively predictable rally has taken place. See the Relative Strength Index (red box) below. At the end of September, stocks had officially reached oversold levels (30 or lower RSI). As of Monday morning, the trend was getting closer to the overbought threshold (70 or higher RSI).
Of course, the RSI is just a tool — but its a favorite by technical analysts for good reason. There could be some juice left for this rally to go higher, but we’re effectively bearish until further notice. Q1 simply looks too ugly.
So what’s the Fed going to do?
The chart above may seem confusing, so let us simplify things for you. The darker the color, the more recent the projections.
So at the end of September, they saw a 56% chance of a +75 basis point (bps) hike and a 44% chance of a +50 bps hike. According to CME Group and their ‘FedWatch Tool’ today — the likelihood of 75 bps hike on Wednesday is coming in at 86%. Once again, the claims for a Fed pivot are unlikely to come true tomorrow.
However, it’s important to remember that midterm elections are one week from Tuesday (11/8 is Election Day). Who knows what could be said between now and then. Never discount how dirty and manipulative the game of politics can be, for either side of the aisle.
What’s keeping the rally alive then?
We believe the major things that could be bullish catalysts are:
Jerome Powell being softer in his delivery on Wednesday, possibly signifying a pause in rate raises due to global macroeconomic panic.
Janet Yellen’s Treasury buyback game plan coming to fruition (revisited in the most recent Week in Review)
Regardless — we’re bears for now…but hot damn are we getting excited to buy names like Amazon (AMZN) and Google (GOOG).
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.
Ten months into 2022 — American firms have announced repurchases totaling $1 trillion, up 8% from a year ago and on course for an annual record (according to data compiled by Birinyi Associates).
It’s going to be interesting to see how companies themselves attempt to prevent a sinking stock market through continued buybacks.
With the President of the United States ripping oil companies for buybacks and the “Inflation Reduction Act” set to hit companies with a 1% excise tax on stock repurchases beginning January 1st, 2023…. are we setting up for a major market slide and a market bottom before the year’s end?
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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.