30 Jan Capital 19 Catch-Up
Weekly Index Movement
| S&P500 | +2.5% |
| Nasdaq | +4.7% |
| Aussie All Ords | +0.6% |
January has been a complete reversal of what we saw in 2022 and last week was another illustration of that point.
The Nasdaq was the worst performing index last year and the Aussie All Ords the best. But now we have the Nasdaq flying ahead as the best index of 2023.
When a market bottoms we expect to see the worst performing stocks become the best performing stocks in the short term.
So does this mean we have seen the market bottom?
I think yes. But I am also not yet convinced it is time to load back into tech stocks. That will come when interest rates reverse course.
Talking of interest rates. Australia, we have a problem.
Inflation came in at +7.8% last week. That is the highest print since 1990, boosted by rising costs of food, petrol, and new dwelling construction. It means the RBA is almost certain to raise by 25bps when they meet next week and is the key reason the little aussie battler is trading up over 0.71.
The Australian inflation problem is being caused by you and I, ladies and gentlemen. We just seem determined to continue to spend no matter how much things cost
The US has brought inflation under control. But we can’t seem to. Does worry me a bit as it could cause some silly moves by the RBA if they feel they are behind the eight-ball.
There is no sign yet of a recession in the US. They printed GDP at +2.9% last week. New jobless claims came in at 183,000 which is very low. So all those stories you hear about tech firms laying off staff have made absolutely no difference.
And that is because the numbers they are firing are insignificant. From Q4 2019 to Q3 2022, Microsoft grew its headcount 53.5%, while Google added 57% more workers. Amazon and Meta brought on 93.5% and 94.3% more employees, respectively. Getting rid of 5% of them is makes no impact.
The really interesting news last week came from company earning announcements.
Microsoft (MSFT) earnings came in at $2.32 per share on revenues of 57.75B. Compared to Q4 of 2021, revenue was up 2% but earnings was down 7% due to an increase in expenses of 19%.
It was a solid result despite the headline numbers. That increase in costs is why they reduced the workforce. Next quarter we should see a reduction in expenses. The fact revenues grew really impressed me. I don’t know how the guys at Microsoft do it, but they perform every single quarter.
The stock price today is the same as it was in February of 2021. But back then, earnings were just $2.00 per share. So Microsoft represents better value now than it did then.
Just buy it today and come back in 3 years. You won’t be sorry.
In other news, Microsoft is buying a stake in ChatGPT for $10billion. If you haven’t tried ChatGPT I recommend you do. It is truly amazing Artificial Intelligence. It can write better than most humans and answer your questions. It has passed law exams from the University of Minnesota courses, parts of the U.S.Medical Licensing exams, and an exam from the University of Pennsylvania’s Wharton School of Business.
I don’t have the space here to say much more about it. Just take it from me – it is the future and lots of people will be losing jobs.
Microsoft competitors are now behind in the most exciting area of tech
I asked it to write this weekly update but unfortunately, it only has data as recent as 2021. So I get to keep my job. At least for the time being.
Another great result was one of my favourites – Chevron (CVX).
Chevron posted $6.35 billion, or $3.33 per share, of net income in the third quarter. That’s up more than 25% from the year-ago period’s $5.05 billion, or $2.63 per share profit. However, it dropped significantly from its $11.2 billion profit in the third quarter. Further, Chevron’s fourth-quarter profits missed the analysts’ consensus estimate by $0.20 per share after adjustments.
Lower oil and gas prices put pressure on its profits in the quarter. Chevron’s production also fell 3% compared to the year-ago period to 3.01 million barrels of oil equivalent per day
Oil is down to $80/barrel but is expected to head back to $100 as China re-opens. Even if it stays at $80, Chevron can continue to post these massive profit numbers.
The US government wants Chevron to use the profits to generate more oil and keep prices down. Chevron says “get stuffed Biden, why would I do something to lower my future profits? I’m using it to buy back $75billion of my own stock.”
Given the Chevron market cap is $346billion, that buyback will wipe out around 20% of its shares.
Buying Chevron now is buying an investment that pays you 3.4% a year in dividends but in theory, the stock price should rise by 20% as the buyback eliminates shares and it also means future dividends will be 20% higher.
Of course, this assumes Oil stays $80+ and I think that is a very high probability.
At the other end of the scale was Intel. Intel posted a brutal quarterly earnings report after the bell Thursday. There was bad news everywhere you looked: profits, margins and revenues all fell. In fact, it was the company’s fourth consecutive quarter of declining sales. The tech giant is struggling through a slump in demand for personal computers that has resulted in a costly glut of chip inventories. Intel didn’t give guidance for the full year, given uncertainty around inflation and a potential recession. It did say that it expects to post a loss for the current quarter, however, compared to $1.13 EPS in the prior-year period.
There is one to avoid.
Longtime Aussie Investors darling, Telsa (TSLA), reported earnings and beat on revenue and earnings. Sales were 1.2% above expectations. Margins were lower as the company cut prices and missed estimates for deliveries. However, production has grown 44% over last year.
The stock is still down over 50% from its highs, but up 50% from its lows and still too expensive for me to buy.
This week is going to be a big week.
On Thursday we have earnings by Apple (AAPL), Alphabet (GOOG) and Amazon (AMZN). But before that, we have the Fed meeting and interest rate announcement on Wednesday.
Powell will increase rates by 25Bps and then he will go on to use words to try and slow down expectations.
The market has raced ahead in 2023, expecting inflation to fall and crucially for the Fed to lower rates twice before the end of the year.
The danger with this expectation is it makes people feel more secure about their finances. That leads to more spending and hence inflationary pressures. Powell wants to avoid this at all costs. He does not want people feeling too confident just yet.
He will re-iterate that, although the pace of interest rate increases is slowing, there is still work to do and rates will remain higher for longer.
The market will ignore him and carry on about its business.
There isn’t a lot of upside to this announcement. That is already baked in. But there could be some downside if he is really aggressive with his speech.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.