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Market Outlook

A Steep Fall on weaker PMI???

The big drop of 2% in the S&P and 3% in the Nasdaq Comp was ostensibly on the weaker manufacturing PMI number, which came in below expectations at 47.2 v 47.5, and was the weakest in 7 months. However, looking at the broader picture the same manufacturing index has been below 50 for 21/22 months – we have been in a factory recession for a while now. The American economy is 70% services and consumption so by itself manufacturing indices are not a great indicator of the overall economy. The only silver lining was the employment index, which is part of the same study – that was slightly better for August at 46, compared to 43.4 for July. 

Why did the market fall so steeply then – there were declines across the board, no industry/sector spared – the rout was complete. The advance decline ratio was terrible at 770 to 2,029 for the NYSE and and a worse 963-3,346 for the Nasdaq. 

Besides the PMI I suspect there were other techical forces at play.

We opened after a long break and thin volumes due to summer vacation and thinnly manned trading desks.

Now that interest rate cuts are confirmed the health of the economy will the prime focus.

Computerized, algo trading was a huge factor yesterday – the VVIX, which simply put is a derivative of the VIX (Volatility index) shot up to 137.64, triggering and escalating selling in a doom loop. The exposure was very high in semis and M7 dominated ETF’s, and given Nvidia’s relative small beat and subsequent poor stock performance after earnings exaggerated the situation. The leveraged product rebalance, was especially painful [given] the concentration of the assets, with semi and big-tech vehicles selling into the lows of the day.

The VVIX outperformance compared to spot was as high as August 5th – the day of the Japanse carry trade crash….

Given that we’re only two days away from the payrolls report on Friday Sep 6th, I suspect that we could see a further drop till there is some vindication that the economy is not going to hell. Traders, and investors are understandably worried about a possible recession and the market has been stretched for a while. There’s no point being caught in algo trading/volatility trading crossfire.

We’ll take a look at unemployment claims and the ADP report tomorrow, I’ll update after that.

Categories
Aerospace Stocks

Boeing Is Still Volatile

Boeing (BA) (Aerospace)$175 – Hold for now, signs of improvement suggest buying on declines but do expect some near-term volatility in the stock prices.

Despite challenges, Boeing is showing signs of improvement in order inflow and production rates for the Boeing 737 MAX, shaping up for a promising balance of the year.

The problems on the Starliner – space exploration was very expensive, painful and a huge burden, which is still continuing. Boeing’s space adventure might be close to over regarding transportation of payloads and crews into space.

Kelly Ortberg, like any CEO, has to prove himself worthy of the CEO position of The Boeing Company. It would be unrealistic to expect that with Ortberg now in the CEO role, things will change overnight.

However, I do believe without focusing on the financials and granted that the FAA and Boeing remain focused on safety and quality, the airplane orders and deliveries will tell a story about how Boeing is progressing on its core principles. The orders tell a story about confidence in Boeing, while deliveries tell a story about the ability of Boeing to increase production at the quality standard that is required and desired.

Categories
Market Outlook

July PCE Inline

Happy 4th of July with American flags on a blue defocused background.

Inflation monthly report for July as expected, YoY gain slightly better.

  • July Core PCE Price Index: +0.2% M/M vs. +0.2% consensus and +0.2% prior.
  • +2.6% Y/Y vs. +2.7% consensus and +2.6% prior.
  • PCE Price Index: +0.2% M/M vs. +0.2% consensus and +0.1% prior.
  • +2.5% Y/Y vs. +2.5% consensus and +2.5% prior.
  • Personal income: +0.3% M/M vs. +0.2% consensus and +0.2% prior.
  • Personal outlays: +0.5% M/M vs. +0.5% consensus and +0.3% prior.
Categories
AI Stocks

Alphabet Antitrust Ruling

Alphabet (GOOG) (AI) $164

Yes, I did recommend Buying around $140-160. I own some and last bought in the mid $150s. 

The anti-trust judgement has hurt but lets look at some possible outcomes. The judge is still deciding about remedies and this in my opinion a Behavioral Remedy is a likely one. 

  1. He would ban the The Internet Services Agreement (ISA) between Google and Apple, wherein Google pays Apple a share of its search ads revenue in exchange for Apple preloading Google as the exclusive, out-of-the-box default GSE on its mobile and desktop browser. 
  2. There will likely also be restrictions on auction pricing, since this was clearly abusive.
  3. The proposal that Google not prefer its own services in search results will also likely be adopted.

This cost Apple roughly $20Bn in 2022. But as Eddie Cue from Apple stated” “No price that Microsoft could ever offer Apple to make the switch, because of Bing’s inferior quality and the associated business risk of making a change. I don’t believe there’s a price in the world that Microsoft could offer us. They offered to give us Bing for free. They could give us the whole company.”

Pretty strong words! We would end choosing Google Search anyway….

This cost Apple roughly $20Bn in 2022, but Google saves this money on Traffic Acquisition Costs. In the near term, I think Google comes out ahead, although the top line could see some decline as some folks choose another Search Engine. Loosing the search monopoly but still being a more profitable market leader.

If the judge suggest breaking up the company – then yes, its not so straightforward, and it will likely tank on the day of the news, and we’ll have analyze it from a different angle – simply because Search is the cornerstone of their entire business. But then there are the inevitable appeals.

I’m holding for now.

Categories
Retail Stocks

Dollar General Drop May Not Be Enough

Dollar General (DG) (Retail) $87 – Down 30% on weaker than expected numbers, avoid till we see some improvement.

Dollar General’s growth has been tepid at 4%, which is not surprising given its customer base that is highly exposed to inflation – their core customers are financially constrained. But what is even more worrying is that comparables or same store sales growth (best measure for retail/restaurant chains) was a even lower 0.5%. Perhaps the brains trust should not have been expanding stores in a difficult environment. That has hit profitability – down 20% as well.

  • Rising competition from Walmart, Aldi, and ultra-low-cost brands like Temu further challenges DG’s business model, especially in non-food categories.
  • Sentiment indicators suggest that sentiment for the poorest third of Americans is at levels we saw during the bottom of the Great Financial Crisis – not a good place to be.
  • Is the 30% drop enough? Guidance doesn’t seem to suggest so – The company sees net sales growth between 4.7%-5.3%,  down from previous expectations of 6.0%-6.7% growth. Same-store sales are expected to grow by no more than 1.6% – adjusted 1.1% lower. . 
  • The other problem with DG is that even on a historical 10 year the stock has returned only 38%, so you have to be really careful about buying it at the right price. I would wait to see some improvement.
Categories
Aerospace Stocks

Joby Aviation (JOBY)

Joby Aviation (JOBY) Aerospace

This is good news for JOBY.

https://seekingalpha.com/news/4145245-joby-aviation-pops-after-report-of-a-deal-with-virgin-atlantic?mailingid=36570770&messageid=2900&serial=36570770.7928&source=email_2900&utm_campaign=rta-stock-news&utm_content=link-1&utm_medium=email&utm_source=seeking_alpha&utm_term=36570770.7928

Categories
Alternative Energy Stocks

Canandian Solar (CSIQ)

Canandian Solar (CSIQ) 13.50 Hold – solar will see some benefits from lower interest rates as a sector, but it may be better to look at stonger US based companies, though.

Revenues have grown every year at single digits and it has ben profitable 2.96 to 7.61, profitable every year. The stock is down over 40% in the past 12 months and  negative in the last 5-10 years. 

Positives

Interest burden will come down with lower rates, after Powell signalled a lower interest rate regime from the next meeting.

They have a decent enough presence in the US markets and should there be more emphasis on renewable energy this will benefit.

Negatives

Solar panel producers face a glut from Chinese suppliers and this year was no different, plus Canadian was selling to the Chinese market, which was slow. It is a Chinese company even though the name is Canadian –  I suspect valuations will tend to be lower. 

80% of CSIQ’s solar manufacturing capacities are based in China and ~15% in Southeast Asia, with CSIQ already facing additional import duties beginning June 2024, attributed to the ongoing EU and US trade ban surrounding Chinese-made polysilicon products.

Lot of debt like most solar panel producers.

Customers struggle with financing of solar panels at their homes because of  high interest rates, particularly in the U.S. Solar loans are now around 9% after being around 4% for many years.

Categories
Biotech Stocks

Crisper Therapeutics (CRSP)

Crisper Therapeutics (CRSP) (Biotech) $48 High Risk/High Reward, 

Buy if you have the appetite for gene therapies or biotech companies.

  • Among the gene therapy/biotech companies, Crisper started with the most promise even reaching $199 at its peak. In a risky segment, Crisper has a better chance than most of its peers.
  • Positives
  • Cautious optimism following FDA approval for gene therapy targeting sickle cell disease.
  • Financial health of CRISPR is strong, with over 5 years of cash runway, but stock performance has lagged behind S&P 500 returns – stagnant, but in this industry its usually negative.
  • CRISPR’s partnership with Vertex Pharmaceuticals mitigates some operational risks associated with gene therapy.
  • Extensive pipeline including regenerative medicines (e.g., diabetes), in vivo approaches, immuno-oncology, and autoimmune targets 
  • Negatives
  • Given the uncertainties, CRISPR Therapeutics stock may not get a decent valuation till commercial success is evident.
  • Establishing niches in chronic and complex indications such as lupus appears to be a challenging task. 
  • Q2 2024 earnings revealed slow commercialization of Casgevy, with revenues significantly below expectations.
Categories
Enterprise Software Stocks

Intuit (INTU)

Intuit (INTU) $620 (Enterprise Software)

Buy on declines and hold, its expensive now but pays off in the longer term.

Intuit has never been cheap, always commanded a premium, so if you don’t get a decent return in the first year, the 5 and 10 year returns have been excellent at 142% and 706%, that’s around 19% and 23% per year.

I owned it for several years before cashing out and didn’t get a chance to buy back

Good growth, solid product line 80+% share of small and medium business accounting with QuickBooks. TurboTax is another market leader with 50% market share in their category.

Credit Karma and Mailchimp round out syngertistic product lines.

They will continue to grow revenues around 12% and earnings around 14% for the next 5 years.

Categories
Market Outlook

US Jobs Revised Lower For A Full year! A Stunning Change. 

The U.S. economy created 818,000 fewer jobs than originally reported in the 12-month period through March 2024, the Labor Department reported Wednesday. 

https://www.cnbc.com/2024/08/21/nonfarm-payroll-growth-revised-down-by-818000-labor-department-says.html

As part of its preliminary annual benchmark revisions to the nonfarm payroll numbers, the Bureau of Labor Statistics said the actual job growth was nearly 30% less than the initially reported 2.9 million from April 2023 through March of the following year. 

That’s about 65,000 less per month.  

For the most part, the Feds are aware and cognizant of revisions – not a new trend. In fact, this is a preliminary estimate. The final revision will be issued in February 2025. 

But the magnitude may be a little surprising. 

https://seekingalpha.com/news/4142166-job-growth-payrolls-preliminary-benchmark-revision

Job growth in the U.S. through March is expected to have been much weaker than estimated, which could spur calls for deeper interest rate cuts amid concerns that the Federal Reserve may have waited too long to start its easing cycle. 

The Bureau of Labor Statistics is expected to issue a preliminary benchmark revision to payroll growth for the 12 months ending March on Wednesday at 10 am ET. 

Economists at Wells Fargo expect the reading to be at least 600,000 weaker than initially estimated. JPMorgan expects a decline of about 360,000, while Goldman Sachs said it could be as large as a million. 

The revision may have some impact on Fed Chair Jerome Powell’s speech at Jackson Hole on Friday, given the Fed’s dual mandate of promoting maximum employment and stable prices. 

A large downward revision “could reignite concerns around a weaker employment picture,” said Charu Chanana, head of FX strategy, Saxo. “This is something that Powell may need to address, and if the jobs report on September 6 shows significant weakness, it could bolster the case for a 50-basis point rate cut.” 

“The revision shouldn’t alter our views of the current labor market too much as the direction and general magnitude of this revision has been known for some time, but a particularly bad revision would reinforce the case for easing,” said 22V Research’s Peter Williams.