16 Oct Capital 19 Catch-Up
Weekly Index Movement
| S&P500 | +0.5% |
| Nasdaq | +0.1% |
| Aussie All Ords | +1.4% |
Stock market moves for the past couple of months have been dictated by bond prices. Or, more meaningfully, bond yields which have been climbing.
The 10-year bond yield went over 4.8% in the prior week, which is a move of over 1% from July’s 3.8%. All of this happened without the Fed raising short-term rates and was purely a case of the bond market finally pricing in the Fed’s promise of interest rates “higher for longer”.
But, as you know, I have been predicting the 10-year yield to top out and when it does for stocks to rally.
Yields fell last week to 4.6% and as you can see above we have a series of lower lows and lower highs signifying a new downtrend.
Now, don’t expect yields to collapse back to 3.8%. They will probably hover around this level for the next few months.
But it doesn’t matter, it means the yield headwind has dissipated and the focus can change to something else.
That something else will be individual company earnings as Q3 results have just started.
A number of companies reported last week.
Pepsi kicked off a new earnings season on Tuesday. The beverage giant beat analysts’ expectations and raised its outlook for its full-year earnings. It’s the first of the September-quarter reports to drop after a summer of spending for many Americans. The drinks and snacks giant pulled up prices to even out higher costs, confident that loyal shoppers wouldn’t dare switch to a supermarket alternative or, worse, a certain famous competitor. And the move paid off: organic sales – excluding brands that were bought or sold – bulked up by 9% last quarter from the same time last year. Full of reassurance, the beverage aficionado nudged its profit growth outlook up to 13%.
Wells Fargo (WFC) beat across the board. Revenues were 3.5% higher than estimated with net interest income beating by 2.8%. Net interest margins were 303 bps versus 293 bps estimated. While loan growth was weaker than estimated, a surge in provisions for loan losses that have been expected for the industry was more manageable than expected as provisions were 10% lower than estimated.
JPMorgan (JPM) followed with its own beat. Again, the story of higher-than-expected net interest margins and lower-than-expected provisions was notable. Total revenues beat by 1.9% including a 2.0% beat in the managed net interest income metric. Provisions were 45% lower than expected.
UnitedHealth (UNH) reported a top and bottom line beat as well as raising the lower end of full-year adjusted EPS guidance.
Fastenal (FAST) is always a helpful name to watch for read-throughs on the industrial economy. They supply fasteners and other industrial components to a wide range of businesses including construction and manufacturing. Daily sales growth ran around +4% YoY, a respectable if not booming pace, while margins were broadly firm including gross margin of 45.9% versus 45.5% estimated and operating margins slightly higher than forecast.
BlackRock (BLK) recorded a sharp miss in Assets Under Management (1.4% lower than estimated) on barely positive net inflows for the quarter. Institutional clients saw $37.6bn in outflows, while equity products saw a similar volume of net outflows versus $12bn of estimated inflows. Despite the flows challenge, revenues were in-line and adjusted EPS was 33% above estimates. CEO Larry Fink said “For the first time in nearly two decades, clients are earning a real return in cash and can wait for more policy and market certainty before re-risking. This dynamic weighed on industry and BlackRock third quarter flows”.
How do you summarise these numbers?
They show a healthy growing economy and the lower bad debt provisions are proving the consumer is resilient in the face of higher interest rates.
It’s about time the journalists stop with their fear-inducing headlines and accept things are ok. Nothing has broken yet and there are no signs something will break.
I hope you took my advice and loaded up in the last two weeks because there are more gains coming.
I particularly liked the comments by Blackrock’s Larry Fink – that investors can sit in cash and earn a decent return while they wait out uncertainty. What I hear from that is a lot of cash sitting on the sidelines ready to enter the market. You know how it will play out. Stocks will rally in the face of adversity and no one will believe it is sustainable until they are behind the market and are forced into buying at the new higher prices which will push the market to unexpected highs when the news will switch to how overvalued everything is. But that is a few months away. Get in now ahead of the crowd and get out when everyone else starts their buying.
Oil
I know, I know. I even go a week without talking about oil. The recent move higher is, of course, on fears of loss of production in the Middle East. The Biden administration is looking to expand embargos on Iranian oil. That could take 1 million barrels per day out of the market. The question is – will the Saudi’s step in to replace it? They could do, but I rather suspect they won’t.
This latest news is just another highlight of why you should be overweight Oil. There are constant impacts on supply and it doesn’t take much for Oil to jump 10%.
And no, oil is not going away fast.
This news item I came across is possibly the funniest I have seen all year.
Largest EV Charging Station In World Powered By Diesel-Powered Generators
I wonder if the electric car drivers can see the filthy black towers of smoke billowing into the air behind their eco-friendly charging cable.
Can anyone tell me what is a cleaner fuel? Using diesel generators to make electricity for cars or just pumping that diesel straight into an engine? My gut instinct tells me that no system is 100% efficient so I suspect making electricity and then using that as power is worse than just missing the step and using the diesel directly.
Same goes for charging your vehicle at home. NSW generates about 80% of household electricity from coal. The question is, is coal burning coal to produce electricity and then charging a car a lower carbon solution than just burning petrol inside an engine?
Until we make significantly more power from renewable sources I fear using electric cars could actually be making things worse.
Next Week
After weeks of Fed speak and rising yields driving stock action, corporate earnings will take center stage in the week ahead.
Results from Bank of America (BAC) and Goldman Sachs (GS) will provide a look at how the financial sector is responding to the rising rate environment. Meanwhile, Tesla (TSLA) and Netflix (NFLX) will highlight the start of tech earnings.
A September retail sales report is expected to show minor growth amid an otherwise quiet week for economic data.
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.