Happy New Year!
Living through 2022 certainly met the definition of living in interesting times - perhaps too interesting. It's been a roller coaster ride punctuated by events: revenge travel, war in Ukraine, oil hits $130 per barrel, an energy crisis in Europe, tech stocks lose favor, an RSV outbreak, a monkeypox outbreak, a baby formula shortage, heatwaves, droughts, Roe v. Wade overturned, COVID worry ends in the U.S. and begins anew in China, hurricanes, burning Teslas, Elon buys Twitter and loses a fortune, Eli Lily claims it can kill obesity with a pill, Republicans win control of the House, META drops -65%, Crypto meltdown, FTX scandal, protests in China over lockdowns, a new British PM, global population hits 8 billion, quiet quitting, boomeranging, inflation hits highest rate in 40 years, central banks tighten, the Chips Act, technology export embargoes to China, housing market freezes, shipping prices drop -75%, coal makes a comeback, personal savings get obliterated, markets crash across the world, and a new global arms race which now includes space begins. It's been a year.
The S&P 500 ended the year down -20%. The NASDAQ 100 ended the year -34% and the DJIA ended the year -9.4%. Where we go from here depends largely on the central banks, Russia, and how the Chinese handle the largest COVID outbreak ever.
The bulls are betting the U.S. Federal Reserve will become reasonable and begin cutting rates late in 2023 as the nation falls into recession. The bears believe the Fed will once again be slow to react to the economic data which shows inflation has already come down to 2.4% on a forward looking basis. If the trend stays, additional Fed tightening will fly us into deflationary territory and a recession.
Our take is they are both right: The Fed will be slower to act than they could be due to fears of repeating the lessons of the 1970s when the Fed cut interest rates too soon, which resulted in the economy reflating again quickly. Eventually, the data will show inflation long gone and the Fed will cut rates quickly to stimulate the economy.
What can we do?
For the past 9 months, we've recommended staying in cash and trading events until the bottoming process is finished. Stay the course.
Taking advantage of short term trends by shorting the market with the SH or SQQQ has proven lucrative. Leveraging scenarios to see what companies are doing well and which are cutting staff in an attempt to become cash flow positive are good ways to generate outsized returns.
We'll get into more trade ideas and trend analysis in our Level 2 Newsletter.
The layoffs will continue. The Fed's chart of employment growth (above) is pretty depressing. But we are entering an environment where the consumer has less to spend and is spending less and where companies are conserving capital and spending less. The layoffs are are inevitable consequence of shrinking demand and increasing supply - the cure for inflation.
Below, we give some ideas for leveraging layoff events for trading.
KNOWLEDGE CORNER: LAYOFF IT
Companies that have yet to turn a profit will continue to scramble as the rates for borrowing money increase, making borrowing expensive. As the interest expense rises and demand for new stock issuances decline, non-profitable companies will burn through cash levels faster, forcing them to cut staff. As the rate of revenue growth declines, such companies can find themselves in a free fall where they are burning through cash too fast. When unprofitable companies cut staff, it can be viewed as just the beginning of a downslide and the stock usually sells off.
Conversely, larger companies with more predictable or stable revenues and profits can trim staff to keep earnings growth stable or up. Not only does this cut costs, it's also a great excuse for companies to cut poor performers they were handing onto due to fears of not being able to find replacements. As the labor market softens, it becomes easier to hire people, alleviating such fears.
These companies are often rewarded for their shrewdness and for the potential for increases in productivity driven by the loss of perceived excess baggage by the market, driving share prices up.
HIGHLIGHTS FROM LAST WEEK
Given the holidays and market closures, it was a pretty slow week for the market. But a few events are worth highlighting.
Goldman put a timetable on their layoffs
Goldman Sachs stated they expect their announced layoffs to begin this month. While the company has benefitted from increases in trading volume for commodities and fixed income products, they've taken a major financial hit from an abysmal IPO market and lower wealth management fees.
Crocs Snapping Back
The most beloved ugly shoes, CROX, has been on a tear. The stock started 2022 at $132 a day, hit a low of $48 in July, and has since risen to $108.43 with most of the gains over the past two months. It's still trading at a reasonable P/E of 12 and web traffic to the site has been increasing steadily.
The stock was written off as a COVID purchase, lumped into the work-from-home in pajamas and Lulu lemon category. But the revenues continue to grow, showing the company is more resilient to trends.
GE Spins Off Healthcare Division
GE spin off its healthcare division as a new company, which will be included in the S&P 500. The stock (GEHC) will begin trading January 4th. GE is splitting up the company into 3 divisions: aviation, healthcare, and renewable energy.
Key Earnings Announcements This Week
- UniFirst (UNF)
- +11.57% (3 Months)
- Personal Services
- Uniform Rental
- The 5YR EPS growth rate for UniFirst is 2.29%.
- Following a -8.27% (1YR) performance, but a recent upward price movement of +11.57% (3 Months), investors will look for an outlook on customer growth within the rental industry during a recession environment.
- Bed Bath and Beyond (BBBY)
- -83.61% (1YR)
- Home Improvement Retail
- With a weak yearly price performance amidst BBBY's recent retail rally earlier this fall, the home improvement company has been under pressure recently after disclosing that it had received a letter from the SEC regarding its 2021 fiscal report.
- Helen of Troy (HELE)
- -56.25% (1YR)
- Household Products
- HELE has been focusing on its global restructuring plan, aimed at expanding operating margins, and is expected to post earnings of $2.65 P/S- a -28.8% Y/Y change.
Economic Reports Due:
- FOMC Minutes
- U.S Job Openings
- Jobless Claims
- Trade Deficit
- U.S Unemployment Report
The LevelFields Team