Hello and welcome to the new subscribers!

By my count, it’s been over 90 days since I last wrote here. I wish that weren’t the case but 2022 has turned out to be a very good year for me professionally which has meant less time for personal writing (for myself/you).

I’ve been meaning to pick it back up with the goal of publishing something once a month, or some other equivalently low bar, but I constantly find myself stuck.

Since I’ve had my head buried in the markets I figured I’d break the ice with a quick daily wrapup of them. This is something I often do for myself at the end of the day.

I put this together quickly and without the intention of publishing originally, so it’s not exactly…refined. More just a bunch of thoughts furiously typed onto a Word doc. There’s no particular order or structure, simply insights and key takeaways sprinkled with some opinion.

I realize this post isn’t for everyone so if you’re one of those readers—sorry! At least the 3-month-old ice is broken. That increases the likelihood of me writing again soon. I think.

For the love of everything that is holy: THIS IS NOT FINANCIAL ADVICE. It’s basically just an idiot having an inner monologue with himself about a beast he barely understands.

Deutsche Bank’s Sanford C. Bernstein has turned positive on high-growth tech stocks. Not bullish—too much potential for negative revisions to earnings for that—but positive. According to him, tech is trading at a 28% premium to the market which is close to its historical average of 25%. He points to “best 5-year growth, highest quality ranking, highest ROIC, and second highest FCF margins among sectors.” (The highest is energy). Bernstein is recommending a barbell approach to tech: value and higher growth names. Likes AMZN DELL ORCL MU LRCX

The tech-focused Nasdaq has held up better than the S&P in recent days. The former has held support at its 21MA whilst the latter lost it on Tuesday. We’ll see if it can hold the lead through earnings. The 21MAs (21-day moving average) are the blue lines:

Speaking of earnings, a rising dollar is not great news for them. Morgan Stanley’s Mike Wilson’s back-of-the-envelope math says that for every positive percentage point in yearly gains for the DXY, investors should anticipate a 0.5x hit to EPS growth. Put otherwise—with the dollar +18% YoY—Wilson is saying we can expect a headwind of around 9% on earnings.

Tech and materials are the most exposed to the negative effects of a strong dollar as they generate much of their sales outside the US—59% and 50% respectively. On the other hand, healthcare, utilities, and financials remain the most insulated from a rising USD.

I wouldn’t rush into financials though. Big banks began reporting today and the outlook isn’t great. JPM missed earnings with profits falling 28%. It also halted buybacks. On the bright side, net interest revenues are expanding as expected in a rising-rate environment. MS also missed on both top & bottom lines—investment banking revenue fell by 55% YoY.

Yesterday we got higher-than-expected consumer prices. This morning we got higher-than-expected producer prices. Both of these have the markets all but convinced the Fed will hike interest rates this month by 100 bps rather than the unofficially-universally-understood 75 bps. I’m not so sure they will. Citigroup, on the other hand, now sees 100 bps as the “most likely outcome”. We’ll see.

Initial jobless claims rose again, continuing a 3+ month-long uptrend. It’s still low, but it’s trending in the wrong direction. Real wages also declined 1% last month to -3.6%YoY. The tightness in the labor market is starting to loosen up (a little).  

Goldman stress tested their oil assumptions and found only upside. Under their adverse scenario, Brent’s FV would still be $110-120/barrel in the second half of 2022 and 2023. That range was previously $125-135, but still. Their worst-case scenario has Brent’s FV at $90-105—in the range of where we’re at now.

A quick callback to earnings: energy has been dominating earnings upgrades while negative revisions have been concentrated in financials, discretionary, and communications.

There are also all of the existing tailwinds for oil—supply constraints—that Javier Blas laid out last week. Right now, oil prices are taking a hit for a number of reasons, a big one of which is the recent Strategic Petroleum Reserves (SPR) releases by the White House. Those are set to end or at least be reduced in size in October, ending that short-term relief on prices. In any case, oil inventories remain tight.

Also worth considering is that US crude production still remains under pre-pandemic levels by more than 1 million barrels per day (bpd). That’s more than some OPEC member nations produce.

Meanwhile, even if production does get back to pre-pandemic levels, we’re still vastly short on refining capacity, and this takes into account the fact that US refiniers are running are near-maximum capacity.

Refineries don’t exactly have a simple on/off switch—they take time to bring online.

Anyway, both Crude and Brent dipped well below key support (200MA) this morning but battled their way back up to reclaim it. We’ll see if they hold.

Worth mentioning, as it relates to oil, is the rate of global economic expansion. Global PMI accelerated to a four-month high in June. This, however, was due mainly to China’s (too slow for my taste) easing of (ridiculous) Covid-related restrictions which have been hampering growth. If we take China out of the equation, the rest of the world’s PMI has actually been contracting and fell to a 5-month low in June.

So yes, there’s a bit of give-and-take here. China’s reopening and restarting of its economy (it’s considering an unprecedented $220B stimulus bond sale to boost infrastructure) would represent a tailwind for oil demand and thus prices. On the other hand, contracting economic activity in the rest of the world suggests a possible (most would probably tell you likely) global recession, which would entail a deterioration in demand.

What else? Oh, I found this chart from Bill McBride at Calculated Risk very interesting and informative. It shows that while national housing inventories are rising very quickly, they’re still very low relative to 2017 through 2019, and even 2020.