The expected bear market rally may have finally taken hold this week, as news broke of some Fed officials thinking it was time to pause interest rate hiking and monitor the economic damage. Bond yields came down and markets rose on the news the Fed might not be driving a bus with no brakes down the hill afterall.
Earnings season helped distract investors from the macroeconomic data, including the supply chain issues in the U.S. heartland (we expand on this in detail in our newsletter for Level 2 members).
American Express and Bank of America reported better than expected earnings. More importantly, their CEOs said they were not seeing any reductions in consumer spending. However, AmEx stock slipped on news it was setting aside more money to cover future loan losses. Similarly, BoA beat expectations, though profit fell -8% as they shifted money toward potential future loan losses. Keep on eye on Visa and Mastercard earnings this week as they will likely report similar.
Thus far the big banks have proven more resilient than expected, making more money off bond trading and interest income. Other parts of the market have not been as fortunate. News spread last week on social media that social media isn't doing so well. Snapchat reported 6% sales growth and declining ad spending from its clients. The figures sent the stock plummeting -28%. The news also drove peers Meta, Pinterest and Twitter down, in advance of their coming earnings for Q3 this week.
The algorithms seem to have forgotten Elon Musk is buying Twitter at $54 per share, regardless of how Snapchat does. The stock dropped to $50/share, which leaves some room to profit +8% if the deal goes through as expected.
Is the bottom in? No, but there are signs that the worst is behind us. 90% of fund managers now believe inflation has peaked, and consumer sentiment is up 20% from June lows. Histrically, both are signs we're bottoming. The process can take 20 months. Stay strong.
What's the best way to play it? Trade the events and use the bullish sentiment over the next month as the S&P climbs back towards 4,000. If you use options, it's almost a good time to sell covered calls. If not, leveraged ETFs like SPXL could help make back some money short term. Energy stocks will keep crushing it, as will defense contractors. We hope you didn't miss Lockheed Martin's monster move last week we alerted you to (+16%).
Lockheed Martin Stock Goes Supersonic
Following a slight earnings beat, Lockheed Martin announced authorization of a 14% stock buyback. The stock responded, rising over 9% on the news day and 16% over the course of the week. Analysts upgraded their price estimates (after the stock had risen already) in response to the positive news and reaffirmed revenue guidance from the CEO.
With Russia attacking Ukraine and choking the rest of Europe's energy lines, Lockheed's missile systems and fighter jets are selling like N95s in 2020. A Republican controlled House will likely boost more revenue flows their way from the Pentagon, should Congressional control change as expected in a few weeks.
We sent a special announcement out on how we were trading the LMT news for triple digit gains to members that upgraded to our Level 2 plan. The service is new and created by request of members so pardon the annoucements. There's more detail below about it.
FDA Breakthrough Status, And All That Jazz
Jazz Therapeutics stock jumped +4% after the company announced a new partnership to bring a tumor-killing therapy with recently granted Breakthrough Therapy status to the market. The agreement grants JAZZ the exclusive rights to sell the drug, if approved by the FDA for sale.
The FDA grants Breakthrough Therapy status when a new therapy's life saving potential far exceeds what is available in market. This is a long-term investing opportunity if it plays out as JAZZ expects and an opportunity to support a critical therapy for very common forms of breast cancer.
A Major Cause of Inflation is Eliminating Inflation
Yes, you read that right. What the chart below shows is the savings rate of Americans since 1980 as a percentage of disposable income. Note the huge spike created by COVID lockdowns and federal stimulus which drove savings rates to all-time highs. Unlike the inflation of the 1970s, which was created by supply issues, inflation in the 2020s was caused (mostly) by increases in demand, as everyone spent their money on homes, home furnishings, hobbies, revenge travel, and oh yeah, overpriced stocks. Logistics issues also contributed to rising prices, of course, and those have also decreased rapidly.
The bright spot from an inflation firefighter perspective is that the excess savings are gone (I know, sounds weird to say that), so we're all more price conscious and less willing to pay that 30% Door Dash surcharge now. Three-hour Costco trips for 10-pound shrimp bags are in again.
The nouveau-thriftiness will help drive down demand, which drives down prices as balance is restored to the force (supply and demand) tapering inflation.
L3Harris To Repurchase Stock
L3Harris (LHX), another defense contractor, authorized the repurchase $3 billion of its stock on Friday. The news sent shares climbing steadily over the course of the day before settling up nearly +3.5%. The stock is likely to continue climbing next week, and is up over 9% the past three months, breaking out of it trading pattern.
Defense stocks are, well, defensive when it comes to worrying about economic conditions. Asset managers are allocating more defense stocks to their portfolios with earnings growth forecasts looking anemic for most sectors of the market for 2023. Leidos, General Dynamics, and Northrop Grumman were all up last week.
Novel Ways to Trade Buybacks (part 3)
Sell Put Options
When a company announces their intention to start repurchasing shares, the share price should increase. If the stock peaks pre-market or in overnight hours and you think you missed the opportunity to buy into the stock longer term, you can sell put options 20 minutes after the open as the stock takes its first pullback.
Why do this?
If you sell put options, you make money from the value of the options. If the stock goes up, the put is not exercised and you keep that money. If the stock goes down, you get the stock cheaper than you would have buying right after an event catalyst.
You have to get approved by your brokerage firm to do this, which is just a paperwork exercise.
Key Earnings Announcements This Week
- Apple Inc (AAPL) - gauge of consumer demand
- Caterpillar (CAT) - gauge of construction demand
- Chevron (CVX) - gauge of oil demand
- First Solar (FSLR) - gauge of solar demand
- Hertz (HTZ) - gauge of travel demand
- L3Harris (LHX)
- McDonald's (MCD) - gauge of future medical device sales? (kidding, sort of)
- Cohu (COHU) - a litmus test for the semiconductor industry
- DQ - a gauge of solar cell demand
- Hilton (HLT) - a gauge of future travel demand
- Haverty Furniture (HVT) - a gauge of consumer demand
- LPL Financial (LPLA) - gauge of financial services demand
- Mastercard (MA) - gauge of consumer spending
- Facebook (META) - gauge of ad spending and interest in the metaverse
- Visa (V) - gauge of consumer spending
- Microsoft (MSFT) - gauge of currency exchange rate headwinds
- Acher Daniels (ADM) - gauge of agricultural product demand and profit margin
- Ford (F), General Motors (GM) - gauge of supply chains and consumer spending
- Halliburton (HAL) - gauge of how good life is in the energy sector
- KLAC, AMD - semiconductor demand check
- Capital One (COF) - gauge of consumer spending
- ENPH - solar demand and growth stock appetite check
- Google - ad spending gauge
- Invesco - trading demand
- Jetblue - travel demand in focus
Economic Reports Due
- Housing Price Index AUG (Oct 25)
- Jobless Rate (Oct 27)
- Personal Income & Spending (Oct 29)
- Michigan Consumer Sentiment (Oct 29)
The LevelFields Team