Week of Aug 1, 2022

Opening Remarks:

We are starting August on the heels of a 3-day rally that signified the end of a positive month for stock markets. Labeled by most institutional investors as a bear market rally, the S&P500 index rose by 9% during the month of July and by 5% only in the last three days of the month. These investors hold the view that the markets can sink significantly during Q4-2022 and going into 2023.
Other investors, most of which retail, disagree with the view above and have interpreted the recent earning reports as a signal that the market has bottomed. They believe that a lot of pessimism is already priced in the markets and that decent earnings which are not far off the estimates demonstrated a recovery. Perhaps the dovish interpretation of Chairman Powell’s remarks on rate hikes contributed to this rally. See the chart below:

Source: Yahoo! Finance
The index has recovered from the June 2022 lows but is still 14% lower than January 2022 highs.

What to expect during the week?
More earning reports, economic data, and possible geopolitical tensions. Stay tuned.

Monday, Aug 1, 2022

S&P U.S. manufacturing PMI (Manufacturing Purchasing Managers’ Index) was released today. As per S&P: “At 52.2 in July (June: 52.7), the latest US Manufacturing PMI indicated the softest growth in two years. Production levels and new orders fell amid weak client appetite, ongoing supply chain disruptions and inflationary pressures.” Click here to read the full report.

Tuesday, Aug 2, 2022

Job openings in June 2022 decreased to 10.7 million (a decrease of 605,000 openings) according to the data release by BLS. The largest decrease were in retail trade (343K), wholesale trade (82K) and in state and local government education (62K).
Quits and layoffs did not change significantly in June.

Uber released its earnings report with results that exceeded market expectations. Stock prices increased by 19% only in one day. Uber’s CEO highlighted the following: 1) focus on profitability; 2) Uber is recession resistant; 3) prudent hiring practices; 4) Uber will stay in the mobility business in India, but no comment on whether they will maintain their ownership in Zomato which is the largest food delivery company in India; 5) collaboration with other companies internationally.

AMD’s results were more or less in line with the market estimates. However, AMD’s forward guidance changed and projected lower growth and some difficulties in Q3 and Q4 of 2022. The share price dropped by 5.82% during after hour session. AMD has significant exposure to consumers and the initial data indicates that consumer demand is softening. In addition, AMD is the 3rd largest buyer of TSMC’s products, and the recent (and growing) tensions between the US and China over Taiwan add to the uncertainty, hence impacted the share price.
Compared with Intel, AMD is in a much better position. But Intel’s poor performance impacted AMD’s share price as well.

Starbucks (SBUX) released its Q3 earnings report (for the period ending July 2, 2021). The comparable store sales increased 3% which includes 9% increase in North American operations offset by 18% decline in international operations. Most of the international decline is attributable to China where Covid-related closures resulted in a 43% decline is sales.
318 new stores opened.
Operating expenses were higher due to inflation and higher wages.
The margin The operating margin decreased slightly in North America (2% decrease) and a significant decrease internationally (reduced from 19.4% in 2021 to 8.5% in 2022).
Starbucks announced programs boosting employees’ benefits.

PayPal and Pinterest share prices increased after the announcement that Elliott Investments has acquired ownership interests in these two companies. On Aug 1, Elliott disclosed that it is the largest shareholder of Pinterest, resulting in an 11% increase in share prices. On Aug 2, Paypal announced that Elliott Investments has invested $2 billion in the company. Elliott Investments Management is the largest activist fund in the world.
Earlier in the year, Elliott expressed interest in Suncor, a Canadian oil and gas company, resulting in a surge in share prices. But after some of the investors expressed skepticism over the proposed plans by Elliott, the share prices declined.

Robinhood is planning to reduce its headcount by 23%. Interestingly enough, this announcement did not result in a significant drop in price in after hour session.

Wednesday, Aug 3, 2022

S&P500 was up by approx 1.5%. The majority of investment managers believe that this is a bear market rally; however, in the past couple of days, some have indicated that it is possible that the market hit the bottom. One thing is for sure: there is a lot of money still sitting on the sidelines waiting for an opportunity. And the catalyst for the sudden optimism are the earning reports that are not as dreadful as they were thought to be. Perhaps Chairman Powell’s remarks also contributed to this optimism.

July PMI, as reported by ISM, registered at 52.8 percent, which was 0.2 percent lower than June PMI of 53. A PMI of above 50 indicates growth. Let’s have a look at the details:
- New orders lower than June by 1.2%
- Production lower than June by 1.4%
- Price Index lower than June by 18.5% (at 60% compared with the prior month of 78.5%)
- Backlog of orders was down by 1.9% compared with the prior month
- Supplier deliveries were down and inventories were up. The employment index was at 55.2 % which is 2.1% lower than the prior month.
Overall, the details of the index suggest that we’re headed toward lower activities in the US economy.

China reacted to Nanci Pelosi’s visit of Taiwan. The reaction, as expected, was not in the form of aggression or interrupting any normal course of business. However, this move might have some ramifications for future economic growth.

Thursday, Aug 4, 2022

US Weekly jobless claims was released today at 260,000, which was 6,000 higher than the previous week of 254,000. We will observe this indicator closely. Currently, there are more job openings (2 job openings per 1 unemployed). But considering the working-age population that is not participating (hence not considered unemployed), then we will have 1 job opening per 1 person who is not employed. Therefore, it’s hard to tell where the economy is headed by only looking at one data point. This could be an indication of the start of higher unemployment if the up-trend persists. However, if the job vacancy remains high, it allows for workers to re-train or re-apply for new jobs.

US trade deficit narrowed in June, down to $79.6 billion from $84.9 billion in May; a decline of 6.2%. The main contributors were an increase in energy exports and a decrease in auto and food imports.

Bank of England raised its benchmark rate by 50 bps to 1.75% and predicted that UK economy will go into recession later this year or early next year. In our opinion, this is an honest and unambiguous communication that all central banks around the world should adopt. In June 2022, UK inflation was at 9.4%. Read the article on BBC for additional information.

Meta (Facebook) announced their plans to issue $10 billion debt at the rate of 1.65% above treasury. The company is currently debt free. It is expected that Meta uses the cash for investment in metaverse development as well as share buy-back. It’s unlikely that Meta attempts acquisition of another company, mostly because of the anti-trust matters that might arise. Meta does have sufficient free cash flow to service this debt. This announcement was welcomed by investors since orders for Meta’s debt reached $30 billion (three times more than the offering).
Meta’s decision comes a few days after Apple announced a debt offering of $5.5 billion which was also welcomed by investors and resulted in an increase of share prices on the day of announcement despite weaker than expected quarterly results.

Friday, Aug 5, 2022

Unemployment:
BLS (Bureau of Labor Statistics) released its Employment Situation Summary. Click here for original release.
According to the release:
- Total non-farm payroll employment rose by 528,000 in July; the market estimate was 250,000 (significantly more than estimated).
- Unemployment rate at 3.5%
- Job growth was widespread, led by gain in leisure and hospitality, professional and business services, and health care.
- Both total non-farm employment and employment rate have returned to their February 2020 pre-pandemic levels.
Noteworthy in this report:
- Labor force participation rate is at 62.1% which is down from last month (June 2022: 62.2%) as well as the pre-pandemic participation rate (Feb 2020: 63.4%). This is interesting because unemployment figure is calculated as a percentage of those who are participating (actively looking for a job; that is, they have not given up or are not willing to work). The decline in participation rate skews the unemployment rate, but since the amount is small it can be ignored. For your reference, the graph below shows the participation rate and unemployment rate since 2000. The participation rate (orange line) is still lower than two decades prior to COVID-19, meaning that there are more pople in the society who just don’t want to work anymore, and we have excluded them from our calculation for unemployment.
Also see our post on unemployment.

Quick note: on Aug 2, 2022 (see above), the release from BLS on job openings indicated a decrease in job openings in June (605,000 fewer job openings). This implied cooling down of the job market. But today’s release of unemployment shows a decrease of 528,000. So, it seems that the reason for lower job openings was the fact that those positions were filled.

CLOSING REMARKS:

Highlights of the week:
- Positive interpretation of Chairman Powell’s remark. Market reacted as if the Fed will pivot and cut rates by year-end. Stocks rallied. Some of the Fed members reiterated Fed’s commitment to curb inflation.
- Job opening was reduced significantly, but then unemployment is down almost by the same amount. A strong job market is definitely a factor that the Fed is tracking, indicating a more hawkish reaction by the Feds.
- As indicated in the chart below, this week was quite uneventful in terms of price movements.

The calmness of the markets in face of multiple lingering uncertainties, from geopolitics to inflation, suggests that we might have to brace for tumultuous weeks ahead.

We considered whether going long volatility is a good option if we expect that the markets will correct further down in the coming weeks. We will publish the results of our findings in another post.