Capital 19 Catch-Up

Weekly Index Movement

S&P500-0.0%
Nasdaq-0.6%
Aussie All Ords-0.5%

While equities escaped the week with just modest losses, they felt heavy for most of the week.  As things stand now, both the S&P 500 and Nasdaq remain stuck in a sideways range and have stalled out at their February highs and remain well off their highs from last August.  For all the talk about whether we’re in a new bull market or still stuck in a bear, at this point it seems like neither.  If you want to call it a bear market, it looks about as savage as a koala, and if you’re going to go the bull route, it’s raging more like a cow than a bull.

Despite not a lot of movement, there were a few things that caught my eye this week and I want to start in Australia.

We are going to have a major shake-up of the RBA after the publication of the 51-page report.

I have to admit that I could not put myself through 51 pages of tedium in detail, but I did scan it. The general gist is – the RBA does some things good, but is too beholden to the leader so they want to replace him with a board of 8 experts.

Experts? Who do we have on the board now? Amateurs? Novices? Apprentices?

And when have you ever seen a board of people reach better decisions than a single knowledgeable voice?

This change is very bad for us.

I do feel sorry for Philip Lowe, although I suspect he will be happy to get out of there. When you think about what he did, managed the economy through unprecedented lockdowns to keep it moving and then reducing inflation on the other side without causing a recession, you would think he should be applauded.

But no. It’s all his fault because he said interest rates would be on hold until 2024 and he was wrong. Never mind that every other country in the world said the same thing. No, Phil, it’s time you go because of that one sentence. You should have known better. Does anyone expect our new team of experts to do a better job?

Maybe I’m getting worried over nothing, but all I can see happening is indecision and delays.

But luckily for us, China might be about to sort everything out anyway. Assuming we can stay friends with them.

The Chinese economy grew at 4.5% last month, as the recovery gets underway. Retail sales in the country were up +10.6% on last year and Manufacturing investment up +7%.

All good signs for us.

Which is probably why Rio Tinto just delivered their best quarter for iron ore shipments ever, exporting 82.5Mt. BHP iron ore shipments also hit a record for the first nine months of the year.

I think we are still in the early stages of a commodity cycle so I’m happy to hold my miners. Especially as they keep sending me massive dividend cheques.

Looking over the Pacific we had good insight into their so-called banking crises with the earnings announcements by several smaller banks.

First Horizon, a mid-market bank announced earnings that showed small misses across margins, eps revenue, and deposits but in general it is clearly not in the midst of a major crisis.

Western Alliance announced net interest margins topping estimates and income beating by 3%. Deposits missed by 3.5% but rose by 4% in the last two weeks as flows stabilised.

Zion Bancorp – deposits dropped 3.4% QoQ. While provisions and charge-offs were below estimates and net loans were slightly below estimates.

First National Bank reported a similar small deposit miss.  ROE and Net interest margin both topped estimates.

Imagine, if you will, I had just told you that deposits at small, regional banks were down 3-4% this quarter and we had not had any bank failures.

Would you be in the slightest bit concerned?

There is no banking crisis and never was. Just some very poorly run companies getting into trouble. But poorly run companies always get in trouble, so there is nothing unusual happening here.

For those who bought Charles Schwab – it reported last week. Earnings came in at $0.93 as compared to $0.77 a year ago. Cash deposits were down 30% on a year ago. But that is no suprise as you earn very little interest in a US brokerage account. So their clients moved funds into places that do. This drop in deposits is not critical for Schwab as they do not need them to capitalise a lending business. The drop in earnings from this was more than offset by higher interest margins across the rest of the business.

Overall, a result slightly better than expected that highlighted why this business is different to regional banks. The stock is still a buy.

Whilst I am on the banks, I might need to start including Apple in the segment. Last week they launched a 4.15% Apple savings account in conjunction with Goldman Sachs.

You can now hold your money with Apple, pay for things with Apple and get buy-now-pay-later from Apple.

And here I was thinking they just made phones?

Apple is maximising a loyal client base. It is hard not to like the company. They have built a loyal following and now keep finding ways to extract money from that following. Just imagine what would happen if they sold an Apple car?

Everyone should have Apple as a core holding in their portfolio. If you do, you would be up 15% this year already.

Elon wouldn’t like them selling an Apple car though. He had a bad week. Twitter removed the blue tick from anyone who does not pay $8 a week. (But Elon is personally paying for William Shatner, Le Bron James and Stephen King. Yeah, I know, I thought that was weird too.) His new rocket got off the launch pad but blew up and Telsa reported underwhelming numbers.

Telsa’s margin is down under 20% as they slashed costs to compete with other offerings. But Elon thinks cost reductions are coming which will push his margins back up.

In general prices for large caps are not cheap right now trading at what is realistically a 20 multiple.

But small caps look a lot more interesting.

This chart is from Morgan Stanley

The sector is looking cheap on a relative basis and this is exactly where our Top 30 Strategy goes looking for growth, so if you want some ideas check that out.

The week ahead will provide investors more data on how some of the biggest players in corporate America started the year, with tech giants including Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOGL), and Meta Platforms (META) all set to report quarterly results.


Investors will also closely watch Thursday’s release of the first estimate of first quarter GDP, which is expected to show the US economy grew at an annualized rate of 2% in the year’s first three months. If this suprises to the upside, it might actually be damaging for stocks as the expectations of interest rate cuts later this year will reduced.

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.