LeveFields Weekly News 22 Jan 2023

Bad News is Bad News Again - A few weeks ago, bad economic news was good news for markets, as it meant the Fed was winning in the battle over inflation taming.

Bad News is Bad News Again

A few weeks ago, bad economic news was good news for markets, as it meant the Fed was winning in the battle over inflation taming. Each economic report showing cooling demand led to market rallies. It felt wrong to cheer for bad news, but that is exactly what investors were doing.

Based on last week's market reactions to slowing retail sales and an abysmal earnings report from Goldman Sachs, we're starting to edge out the upside down. Bad news is simply becoming bad news - except when it comes to unemployment numbers.

The silver lining of this is there is widespread agreement inflation is "mostly dead" and investors are looking at the extent of the "most anticipated recession in history."

The S&P 500 and NASDAQ 100 indexes ended the week in the green, but the Dow Jones Industrial Average fell -2%. St. Louis Fed President Bullard and JPMorgan CEO Jamie Dimon kept the bulls in their cages last Wednesday by stating they believed the Fed would takes rates above a 5% interest rate - a level many feel is too high and would create more economic strain than is necessary i.e. blowing the soft landing.

What's Next?

The Fed will meet in a little over a week to determine the next interest rate hike. It's most likely that they will continue saying the same thing - inflation is still too high, we need to hold rates in restrictive territory longer - and that will put a cap on this month's rally.

The latest unemployment claims report showed a decrease in claims, which also contributed to the bear case that the Fed will keep raising rates since the labor market is solid in the U.S.

Recent layoff announcements from a slew of large firms including Google, Amazon, Microsoft, Wayfair, Intel, and Capital One may alter these reports in the future.  Generally, layoffs have been positive events for the stock prices of large cap, profitable companies.


Events move stock prices. Often, we're able to forecast the direction of the stock price following an event based on historic behavior of investors. But macroeconomic factors can muck it up.

This past Monday, the news media publicized an activist investor that recently opened a large position in Chinese retailer Alibaba (BABA). This is normally a very positive catalyst short and long-term. But various economic reports including a China GDP report showing the Chinese economy slowing much more than expected killed the trade's momentum in the short term.  Shares of BABA, JD, and BIDU all fell on the news.

This is why we use win rates. It is hard to account for the X factors that can affect the broader markets. If the scenario events are followed enough times, the wins will exceed the losses considerably.  If the sample size of traded events isn't large enough, a poor economic report, a new war, a horrible natural disaster, a new policy, a lawsuit, etc. can change the course of the trade.

In our own trades, we attempt to manage this downside risk by making many smaller, consistent trades, by having a longer time horizon where possible to give the event time to impact the stock price, and by using options to mitigate the downside at times.

The lesson here: don't give up on the strategy when one or two events don't work out. BABA eventually rose to end the week higher than it began, rising 7 points in 2 days after its drop.

Trading and investing is a game of numbers or probabilities. This is true for long-term investors too.

Investing in any company is a gamble because we never really know what is happening inside the company. We get a snapshot from earnings reports, but they are not forward looking. At any point, as we saw with Goldman, things can change. We believe the best way to understand a company is by monitoring their actions - the events.



Furniture is so 2020

Furniture retailers were hot in 2020 as we hunkered inside and spruced up our homes with the extra savings accumulated from doing nothing.  Remember when couches were on back order for months?

The situation has reversed and retailers like Wayfair (W), which rose following an announcement of mass layoffs last week, are now the ones sitting around. The latest retail report from the U.S. Census showed furniture sales down -2.5% from November.  

Netflix Mic Drop

After being written off in April last year as a business in serious decline due to weakening subscriber growth, rising costs, and growing competition from Disney, Amazon, and Apple, Netflix CEO Reed Hastings delivered a blockbuster number of new subscribers in its earnings report last week which sent the stock up 9%. They added 7.7 million subscribers, beating estimates of 4.7M.

Founder and CEO Hastings then announced his departure after nearly doubling the share price from its low in May. Boom.

META Boomerang

META keeps being listed a top idea for 2023 by pundits and large asset management shops - many of the same ones that called for dumping it in 2022. Shares are now up 19% over the past month.

Tales of the Crypto

Signature Bank of New York stock shares shot up 8% over a few hours on news it was increasing its dividend by 25 percent. The event was significant, as it reflects management's confidence the company could continue growing revenues and earnings despite taking a beating from the depleted value of its crypto bank holdings. SBNY closed Friday around 128/share.

We sent an alert to Level 2 members last week, included below describing the turn of events. If you're looking for a bit more help choosing your trades, this is one of the major benefits of the Level 2 membership.

The Signature Bank of New York (SBNY) just raised its dividend by 25% and reported very strong earnings. This happened after the stock's price has crashed -67% over the past year due to its large exposure to crypto holdings.

The bank's earnings missed estimates slightly, but the fact that they reported a year over year increase in income of 38% following a crypto crash is a huge testament to the bank having exceptional management that successfully navigated what could have been horrible financial losses.

If that wasn't strong enough, they boosted the dividend showing their confidence in the company's forward progress. SNBY is trading at a very low P/E of 6. Given the company is stabilizing and divesting from crypto, they will likely get analyst upgrades soon which will further boost the share price.

As such, SBNY looks like a buy, and we're going to buy the equity as it provides a healthy dividend of $2.40 per share per year. If it retraces to historic averages in the P/E ratio, the exit price for the trade is 165. Shares are up pre-market and trading around 122, so we're looking for a gain of about 35 percent.


Key Earnings Announcements This Week

January 23

  • Logitech International (LOGI)
  • With consumers' demand for personal computers declining and workers returning to the office, LOGI earnings may reflect such factors.  However, they often beat expectations.
  • Other Notable Earnings:
  • Baker Hughes (BKR)
  • Bank of Hawaii (BOH)

January 24

  • Microsoft (MSFT)
  • With recent mass layoffs at tech companies, Microsoft announced last Wednesday that they would be laying off 10,000 employees as well as a cost-cutting plan. Analysts expect a decline of 7% in MSFT's earnings.

  • Other Notable Earnings:
  • 3M (MMM)
  • General Electric (GE)
  • Johnson & Johnson (JNJ)
  • Lockheed Martin (LMT)
  • GE
  • Haliburton (HAL)
  • Raytheon (RTX)
  • DR Horton (DHI)
  • Danaher (DHR)
  • Verizon (VZ)

January 25

  • Tesla (TSLA)
  • With a return over the last six months of -50.99%, Elon Musk's controversial purchase of social media platform Twitter, and increasing short selling from investors: Tesla's earnings will have the street's attention after market close Wednesday.

  • Other Notable Earnings:
  • Boeing (BA)
  • AT&T (T)
  • General Dynamics (GD)
  • ASML (semis)
  • Abbot Labs (ABT)
  • Nasdaq (NDAQ)
  • Hess Oil (HES)
  • NextEra (NEE)
  • General Dynamics (GD)
  • Kimberly Clark (KMB)
  • Norfolk Southern (NSC)


January 26

  • American Airlines (AAL)
  • MasterCard (MA)
  • JetBlue (JBLU)
  • Valero (VLO)
  • Blackstone (BLX)
  • Archer Daniels (ADM)
  • Tractor Supply (TSCO)
  • Dow Chemical (DOW)
  • Northrop Grumman (NOC)
  • Rokwell Automation (ROK)

January 27

  • American Express (AMEX)
  • Colgate (CL)
  • Chevron (CVX)
  • Booz Allen (BAH)

See More in the Earnings Calendar

Economic Reports:

  • Jan 26:  New Home Sales
  • Jan 27: US PCE

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