After four days of slowly declining prices, surprisingly strong earnings results from the banking sector drove stocks higher on Friday. In particular, Citigroup Inc. (C) surged some 20% on news of earnings that far surpassed analyst estimates. For the overall market, the week finished more or less unchanged.
Following a strong 20% rally earlier in July, the ARK Innovation ETF (ARKK) slumped in price by 6% over the last week.
The big concern weighing on the market was the continuing fear of inflation. For the first time in decades, the Federal Reserve was openly discussing a rate hike of a full percentage point, up from 0.75%, at their next meeting on July 26. By the end of the week, however, President of the Atlanta Federal reserve, Raphael Bostic, commented that he was not on “Team Go Big.”
Additional dovish comments by St. Louis Fed President Bullard left investors betting that the upcoming rate hike would be at most 75 basis points – high enough to tackle inflation, but not too high to risk a dip into recession and further dampen consumer spending.
The ongoing debate about the Fed raising rates is not merely a technical discussion among academics and economists. If the Fed moves too slowly and inflation continues to run at record levels, consumer spending will slow dramatically and depress future corporate earnings across the board.
On the other hand, if the Fed moves too far too quickly in raising rates, there are fears that may trigger a recession, dampen any outlook for a strong recovery and further depress the housing market.
The importance of the outlook for rates was clearly seen over the last week in global currency markets. Both the UK pound sterling and the Euro hit 20-year lows with the Euro at one point trading at slightly below $1.00. The weakness of European currencies is partially due to concerns about an impending energy shortage and sky-high heating costs later this year due to Russian supply threats that may trigger a recession.
Additionally, the European Central Bank is clearly lagging behind and is highly reluctant to aggressively raise rates in comparison to the Fed.
The likelihood of a wider monetary policy separation between the US and Europe led speculators to bet heavily on sharply increased US dollar interest rates, which was the key driver behind the dollar’s rally.
Play of the Week
Twelve companies led the activity of LevelFields over the past week announcing a dividend increase with an average event stock price increase of 1.79%.
At the head of the mover’s list with a one-day event impact of +6.78% was Sachem Capital Corp. (Corp).
Similar to a bank, Sachem is a financial services provider specializing in issuing secured loans and managing loan portfolios as well as making opportunistic real estate investments.
- Higher interest rates are generally favorable to lenders – which was clearly a factor behind the banking sector announcing better than expected results beating analyst estimates.
A close second in terms of event impact was Methanex Corporation, (MEOH), a Vancouver-based producer of methanol. Shares rallied by 6% on the announcement of a 20% dividend increase.
- Methanex is the world’s largest producer of methanol and has seen solid cash flow growth over the last year. The stock is becoming a favorite of value-orientated buy-and-hold investors.
Did You Miss?
The activist investment management fund Elliot Management Corp. has increased its stake in Pinterest, Inc. (PINS). The share price rallied by 16.17% on the news. Elliot is now the biggest investor in the company with a 9% holding.
Pinterest is a social media platform best known for its free photo-sharing functionalities that have become popular with eCommerce retailers seeking to showcase their product lines. The last year has been rough on the stock with the share price falling by some 70%. While Pinterest does indeed draw massive foot traffic, it still has not figured out exactly how to generate revenues from its popularity as a shopper’s destination.
Further, Pinterest is facing stiff competition with huge growth in visits to TikTok and Twitter.
In past years, Elliot has previously pushed for radical management change by taking large positions in other stocks, such as eBay, Inc. (EBAY) and Twitter, Inc. (TWTR).
Over the last week, eight companies announced mass layoffs with an average event impact on stock price of +2.14%.
LoanDepot, Inc. (LDI) announced it will be cutting some 2,000 jobs by the end of this year. The one-day event impact actually saw the shares rally by +16.44% as investors applauded cost cutting in advance of economic slowdown. In 2021, the company employed 11,300 staff with that number eventually expected to be reduced down to 6,500.
Similarly, Microsoft Corp. (MSFT) announced job cuts affecting less than 1% of its 180,000 workforce, driving a one-day event impact of -4%. However, the company does expect to have an increased headcount globally by year-end.
Tesla, Inc. (TSLA) also implemented a minor reduction in staff, announcing that it would lay off 229 employees and close its office in San Mateo, California.
Victoria’s Secret (VSCO), shares dropped on news that it is eliminating 160 executives on its management team, roughly 5% of total staffing, as it seeks to save $40 million in annual costs.
Electric truck manufacturer Rivian Automotive (RIVN) announced layoffs and plans to trim its workforce by 5%. The company, backed by Amazon, has struggled to produce vehicles due to supply chain issues, but is poised to ramp up production of its pickups and SUVs. Given the share price fell from 170 to 23, some investors bought the dip, banking on outsized performance as high gas prices increase EV adoption.
Where Are They Now?
Last June 23, Smith & Wesson Brands (SWBI), one of the largest firearms manufacturers in the US, announced a dividend increase of 25%. The increase was made after the release of mediocre annual results showing a decline in annual revenues and net income compared to the year before.
However, two factors spurred a rally in share price. The dividend increase alone caused a one-day event impact of +14.5%, with a full peak to trough rally of 20%. A further driver behind the price was the Supreme Court's decision to strike down a New York law limiting gun owners from carrying firearms outside the home. The ruling has big implications for a number of states, such as Maryland, with similar laws.
The usefulness of firearms increases if gun owners are able to carry them outside the home for protection, so investors bought more SWBI, anticipating the elimination of these gun control laws would spur additional purchasing of handguns.
Since the initial pop in share price when the stock hit $16.44, the shares have since given back all of their gains and settled down to $13.15 – just off a 52-week low of $12.78.
A dividend increase will certainly provide a quick boost in performance,. However, investors clearly must do their homework in deciding if a stock is worth holding for any length of time purely on the basis of a recently announced dividend increase.
Highlights from the LevelFields Calendars section and beyond:
One Initial Public Offerings (IPOs) is scheduled for this week:
Thursday, July 21: Vrax Biolabs Group, Ltd. (VRAX)
Two Stock Splits are scheduled for this week and popular large caps usually increase in price after a split:
Monday, July 18, Alphabet, Inc. (GOOGL)
Friday, July 22: Game Stop Corp. (GME)
Notable Earnings Results Announcements:
Monday, July 18
Bank of America Corp. (BAC), Goldman Sachs Group (GS), Charles Schwab Corp. (SCHW), Synchrony Financial (SYF),
Tuesday, July 19
Johnson & Johnson (JNJ), Ally Financial (ALLY), Signature Bank (SBNY), Citizens Financial Group (CFG), Mercantile Bank Corporation (MBWM), Cambridge Bancorp (CATC)
Wednesday, July 20
July: M&T Bank Corp. (MTB), Nasdaq, Inc. (NDAQ), Northern Trust Corporation (NTRS), Abbott (ABT)
Thursday, July 21
American Airlines Group (AAL), AT&T Corp. (T), Dominos Pizza, Inc. (DPZ), Blackstone (BX), Fifth Third Bancorp (FITB), Marsh & McLennan (MMC)
Friday, July 22
Verizon Communications (VZ), American Express Co. (AXP), Regions Financial Corporation (RF)
After a round of better than anticipated results released by several major banks at the end of last week drove a short rally in equity prices, more bullish news may be in the pipeline as more big banks announce results this week. American Airlines and American Express, both highly exposed to consumer travel, also will release results. Investors could get a good forward-looking indicator of the direction of consumer spending.
The LevelFields Team