The Weekend Edition # 119 - All Time High

Welcome to another issue of the Weekend Edition and the last one for 2023!

Thank you to all who’ve read and welcome to all the new subscribers this week!

Here's what we cover

• Market Recap - All Time High!

• Macro Roundup - Inflation & the Economy

  • MacroVisor Global Macro Outlook 2024

• Earnings Season - Margin Compression

• The Week Ahead - Calendars

• Closing Thoughts - Desensitized

Market Recap - All Time High!

January 16 - January 19, 2024

We’re still seeing buying concentrated in only the largest stocks and that signifies fear to me. People are still hiding out in a handful of stocks because of macro uncertainty at the broader level.

Finding a direction for the broader market is going to be very challenging at least until the Fed starts cutting rates because of all the speculation surrounding the timing and quantum of cuts. So while we advocate being flexible, we also think that there are still opportunities in the market to pick good stocks.

As for Sectors, as expected, Tech, and Comms led the way. But interestingly enough, Financials came in third even though earnings have had negative surprises.

Commodities

While equity markets rallied, commodities didn’t exactly fare too well. We’ve had yet another choppy week for Oil and Gold, with up moves caused by geopolitical tensions, being faded.

NatGas had yet another terrible week, while Iron Ore also saw significant pressure, mostly on account of growth in China.

Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Macro Roundup - Inflation & the Economy

The Fed’s Governor Waller spoke earlier this week and put a dampener on the timing and pace of Fed cuts. The market has been pricing in over 6 cuts starting in March, while his views seem to suggest a more gradual pace of 3 cuts. We’re still of the view that the Fed cuts from Jun / Jul and does three. He also put to bed the speculation surrounding liquidity issues leading to a faster tapering of QT. His view is bank reserves would need to fall to about 10%-12% of GDP which amounts to about $2.7T vs. the $3.4T current level.

We still don’t know if the Fed is cutting because a recession is expected. This is very much up for debate. But, if the Fed is cutting just to control real rates because of declining inflation and they have not overtightened, then stocks should get a boost.

But inflation still remains the main focus and that’s perhaps what sparked off this rally. The University of Michigan Sentiment reading came out higher than expected at 78.8, up from 69.7 in December. With an improved sentiment reading, came a drop in inflation expectations:

“Year-ahead inflation expectations softened to 2.9% after plunging in December. The current reading is the lowest since December 2020 and is now within the 2.3-3.0% range seen in the two years prior to the pandemic. Long-run inflation expectations edged down to 2.8% falling just below the 2.9-3.1% range seen for 26 of the last 30 months. These expectations remained slightly elevated relative to the 2.2-2.6% range seen in the two years pre-pandemic.”

The Atlanta Fed’s GDPNow estimate for the fourth quarter is 2.4%. We think what we’re seeing is a K-shaped economy for the US where the top quartile is still spending but the bottom 50% still feels the pinch from the cumulative effects of high inflation. So, there will be a slowdown in spending but, the US could technically avoid a recession.

That doesn’t mean recessionary forces are not acting upon different parts of the economy. So we’re seeing some industries in late cycle, some in recession and some in early cycle.

What we’re looking for are the industries that will move into the early cycle. So if we look at companies other than the Mag 7 and the chosen few, we’re likely to find great companies who are at a turning point for growth, whether this is due to a shift in the macrocycle or thematic views such as the broadening out of AI and adoption of technology.

We’re pleased to share our Global Macro Outlook 2024 presentation deck. Please feel free to share the link with others who may enjoy it.

MacroVisor Global Macro Outlook 2024

If you would like a PDF version of this, please email us at [email protected].

Earnings Season - Margin Compression

There’s been nothing very exciting coming out of earnings season, thus far. TSMC (Taiwan Semi) is possibly one of the few bright spots.

We’re seeing mixed results from the Financials but, mostly negative which is pulling down the average earnings growth.

Net profit margin thus far is at 10.7% which is the lowest level since Q2, 2020 (8.5%). With inflation falling we will see margin compression, and companies that commanded a premium for pricing power will see a pullback. But we’re still in the early innings of earnings season and there will likely be opportunities there to buy solid companies again that have re-rated lower.

The Week Ahead - Calendars

US Earnings

US Economic Calendar in Eastern Time (Source: Trading Economics)

Closing Thoughts - Desensitized

When you work on multi-million dollar deals, you often forget how many zeros there are after numbers. As a young associate, I remember telling my boss once that a client had asked for temporary funding of ONLY $3 million. My boss’ reply was “Do you have $3m in your bank account right now? $3m is not ONLY”.

The moral of the story: We often become desensitized.

I say this today because, on Friday, a company called SMCI went up by $112 from $347. That’s about 36% in one day. Some of the options on this were up 15,000%!

When we see numbers like this, we often start to become desensitized. We start to think that we can get lucky with other stocks and make returns such as these. It’s one thing to do the work and ride the trends, and yet another when we just blindly start throwing money at things in the hopes of getting lucky.

So, we not only need to remain vigilant, but none of this should stop us from doing the work to understand what we’re investing in.

Most importantly, we should never reach the point of becoming desensitized.

Here’s wishing you safe investing.

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.