The week ahead 11/07/2022
Elections are in full force.
And there’s only one thing that is for certain — volatility will remain. Before we begin, a big THANK YOU to US Service Members ahead of Veterans Day this Friday. We appreciate your sacrifices! If you, a friend, or a family member are a veteran — please have them send a quick email to firstname.lastname@example.org and we’d like to give you 3 months free to a Rate of Return subscription.
See below for a few callouts of what’s ‘on the ballot’ this Tuesday. These are completely unbiased and are a compilation of projections from leading sources such as JPMorgan, Reuters, and the WSJ.
Pharmaceutical and biotech stocks may benefit in a Republican victory, after Democrats recently pushed through a law aimed at lowering prescription drug prices. Pharma and biotech stocks as a whole have moved in the opposite direction of betting odds favoring a Democratic sweep, according to Goldman Sachs analysts.
According to Citi analysts, “Republican victory in the House or Senate likely means a legislative standstill, implying an incremental positive for the category.” The tech-heavy Nasdaq 100 Index has fallen by more than one-third this year.
Energy has been the leading sector of the year (by a mile), and as we mentioned in the recent Week in Review post — Biden’s administration wants to force oil companies to cut into their bottom lines to artificially improve gas prices. According to Citi analysts, “Policies to encourage more U.S. energy production could result from Republican control of both the House and the Senate.”
The difficulty for Big Oil investors is that many projects take years to develop (or even begin). It can be a major challenge for oil companies to make the right long-term decisions if they feel like their industry is going to be ‘canceled’ within the next decade. Energy is sure to remain a hot topic as this election season concludes.
“Defense spending is expected to rise regardless of how Tuesday’s vote plays out, given geopolitical tensions such as the conflict in Ukraine. But a Republican sweep sets the stage for spending to rise significantly,” according to UBS Global Wealth Management, versus ‘moderately’ if Democrats retain one or both chambers of Congress.
The outcome puts a focus on shares of defense contractors, such as Lockheed Martin (LMT) or Raytheon Technologies (RTX).”
“Once inflation goes above 5%, it has never come back down without the Fed funds rate exceeding the CPI” — Stanley Druckenmiller
The elections are doing a heck of a job taking media’s attention from the massive Consumer Price Index (CPI) print this Thursday.
The last inflation reading was +8.2% YoY. The current Fed funds rate is around 3.82%. If Druckenmiller’s note above reigns true for our current inflation situation — we’d better get used to either very high rates or simply get more comfortable with high inflation being the norm.
With Jerome Powell’s dedication to “slaying the inflation dragon” — we are expecting high rates for a longer time than most may currently think possible. Remember — a future ‘pause’ on rate hikes is not a reduction.
Below shows the CPI results from September’s reading (released in October) — with YoY inflation rising at +8.2%. This time around — Bloomberg analysts expect a headline inflation of +7.9% YoY and the Cleveland Fed estimates a +8.2% YoY rise in the CPI.
Results for the CPI have come in at or higher than the Cleveland Fed’s estimates 16 of the last 19 reports. Jerome Powell’s messaging at the FOMC was clear that we are nowhere close to having inflation under control. We suspect that he knows this will be a hot one.
DON’T FORGET CORE INFLATION:
Remember — the Core CPI matters just as much (if not more) to the Fed than the headline CPI number. Last month Core CPI, rather quietly, came in with its highest reading in 40 years at +6.6% YoY.
Analysts are expecting a marginal slow down to +6.5% YoY on Thursday.
Key Earnings Announcements:
Having your earnings call during the week of midterm elections AND the new CPI print is less than ideal…
Monday (11/7): Activision Blizzard, Berkshire Hathaway, BioNTech, Diamondback Energy, Kosmos Energy, Lyft, Mosaic, Palantir, Tripadvisor
Tuesday (11/8): Affirm, AMC, Builders FirstSource, Disney, Dupont, Lucid Group, Norwegian Cruise Line, Novavax, Occidental Petroleum, Planet Fitness, Plug Power, The Carlyle Group, Upstart
Wednesday (11/9): Beyond Meat, Canopy Growth, Celsius, Coupang Digital Turbine, Dutch Bros, Fiverr, Rivian, Roblox, The Trade Desk, Unity, Wendy’s, Wynn Resorts
Thursday (11/10): AstraZeneca, Brookfield Asset Management, Doximity, Nio, Poshmark, Ralph Lauren, WeWork, Yeti
Friday (11/11): Barings
What We’re Watching:
Big Daddy Buffett & Berkshire Hathaway
In typical Berkshire Hathaway (BRK.A) style, the company reported its earnings over the weekend. Operating earnings totaled $7.76B in Q3, up +20% YoY.
The company also spent over $1B in share repurchases, bringing the nine-month total to $5.25B. Class A shares of Berkshire Hathaway have only dropped -4% this year, versus the broader market’s -20%. With that being said, Buffett’s empire did suffer a $10.1B loss on investments during Q3’s market turbulence.
We’ll be interested to see how Activision Blizzard (ATVI) does during its earnings call, as Buffett still has a big bet out on the company’s acquisition by Microsoft (MSFT). You can read more about that here.
Dutch Bros Coffee
You may have read my Seeking Alpha review of Dutch Bros from back in August. I noted that Dutch Bros was valued absurdly high at the time and that if the stock went below $30 / share — I’d consider adding meaningfully. We’re not there just yet, but Dutch Bros is absolutely a company that’s on our watchlist as the market is likely to sink lower over the coming months. We remain excited about this one for the long-term.
Investor Events / Global Affairs:
Apple was briefly worth more than Alphabet, Amazon, & Meta combined, Zoom Video hopes its Investor Day provides some relief, and China sends mixed signals.
Apple Carrying the Team
Very briefly last week, the market cap of Apple (AAPL) was worth more than Alphabet (GOOG), Amazon (AMZN), and Meta (META) combined. As mentioned yesterday, we’d expect Meta and the others to join the long list of companies engaging in layoffs (above).
We still expect a market slide in the coming weeks or months — and it seems Apple would need to take a hit for that to happen.
“Take a look at last quarter. Apple FCF: $20 billion. Google FCF: $16 billion. Meta FCF: $0.3 billion. Amazon FCF: -$5 billion. Now of course one quarter doesn’t paint the full picture. But Apple is posting massive FCF like clockwork. The others are not.” — Joseph Carlson, Finance YouTuber
Zoom Video Investor Day
What a ride it’s been for Zoom Video Communications (ZM) investors. The company will hold an Investor Day on November 8, 2022 during its premier customer event, Zoomtopia.
This will be an in-person event in San Jose and offered virtually on Zoom Events. The Investor Day will be hosted by members of the executive team and will cover Zoom’s business strategy, opportunities, metrics, and initiatives.
We’d be shocked if layoffs weren’t coming soon and we’re still not interested in buying ZM stock. The stock trades at ~20x earnings and has ~25% of its market cap held in net cash. That’s solid — but we prefer Google Meet anyway. We’ll report back on developments from the Investor Day.
China Considering ‘Zero Covid’ Pivot as Economy Sinks
Chinese leaders are ominously messaging that they may slowly move away from ‘Zero Covid’ policies — with the goal of striving for some semblance of the pre-pandemic levels of activity in China.
“Domestically, officials have informed retail businesses that the frequency of PCR testing—a staple of China’s Covid regime—could be reduced as soon as this month, in part because of the high cost of mass testing, according to people familiar with the matter. The people said the government is planning to reduce the thousands of PCR testing stations that have been set up across the country as part of the campaign to institutionalize testing, citing the cost.” — WSJ
Still — none of this is confirmed and it appears to be China’s way of trying to bolster more economic growth. Goldman Sachs believes that China is still “months away” from reopening — something that could greatly impact Apple (mentioned above). In October, China’s exports to the rest of the world shrank unexpectedly.
“With growth slowing in the U.S., Europe and China, economists are downbeat about the global economy’s prospects this year and next. The International Monetary Fund warned last month that “the worst is yet to come,” saying it expects global gross domestic product to expand 3.2% this year, before slowing to 2.7% in 2023.” — WSJ
Major Economic Events:
Election Day, Veterans Day, Inflation prints, Small Biz readings, Consumer Sentiment, and a barrage of Fed leadership speeches.
Monday (11/7): Consumer Credit (Level Change), Speech by Richmond Fed President on Inflation
Tuesday (11/8): ELECTION DAY, NFIB Small Business Index
Wednesday (11/9): Speech by NY Fed President at Swiss National Bank Event, Speech by Richmond Fed President on Outlook, Wholesale Inventories (Revision)
Thursday (11/10): Consumer Price Index, Federal Budget, Speech by Fed Governor Wallet on Central Bank Digital Currencies (CBDCs)
Friday (11/11): VETERANS DAY (Bond Market Closed, Stock Market Open), Speeches by Cleveland, Dallas, Kansas City, Philadelphia, & NY Fed Presidents, UMich Consumer Sentiment
Confidence of Business Leaders at All-Time-Lows:
In mid-October, The Conference Board released its CEO Confidence Index. “The recent survey asked CEOs to describe the economic conditions they are preparing to face over the next 12-18 months. An overwhelming majority — 98% — said they were preparing for a US recession. Moreover, 99% of CEOs said they were preparing for an EU recession.”
With the confidence of business leaders at record lows, we’re interested to see how key indicators like the Small Business Index and UMich Consumer Sentiment turn out this week.
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.
As We’ve Mentioned Before:
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…. will there be major stock buybacks through the end of the year to avoid future tax penalties?
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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.