State of the markets - Jan 23rd 2023
State of the markets - Jan 23rd 2023
Markets: What I am watching and doing in the markets this week
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Current state
According to a recent BofA survey:
Investors are about 39% underweight US equities, the most since 2005
Cash levels fell to 5.3% from 5.9%, the biggest drop since June 2020
Fund managers are overweight cash and bonds
Retail investors are favoring Europe and emerging markets over US stocks and tech
Most crowded trades are long the US$, Chinese equities and oil
How is this useful information for us, investors? It tells us where the retail crowd is. It tells us where and when things might be topping, given current and upcoming macro economic trends. It tells what smart money and big money is doing.
Looking at the SP 500 chart below, the index is sitting above all the MAs that I track: 10DMA, 21EMA, 55EMA and 150DMA. Looks like it wants to squeeze a bit more this week before it pauses to digest the US Fed’s next action on Jan 31st.
Let me know what you think is the right play here. My opinion is at the bottom of this post for paid subscribers.
Sentiment
Investor sentiment has not moved much over the past week.
Other indicators
US $DXY - Still down and looking to go lower
Oil - Digesting a 10% run up since early Jan, however still in the “good” zone
Copper - Might be pausing after a solid run in 2023, maybe waiting for China to prove it’s reopening and demand intent
Orange Juice - Smallest Florida orange crop in about 90 years. It is estimated to be less than half of the 2022 crop, which was quite poor and a 93% decline from the peak in 1998. Eggs are already expensive. Now OJ getting pricey. Breakfast is still the most important meal of the day
Last week
A few key learnings from last week floated to the top of my notes:
Inflation
The Producer Price Index (PPI) fell 0.5% in Dec, much more than the -0.1% estimate and the 0.2% Nov increase. This was the largest decline since Apr 2020. Headline PPI was 6.2%yoy, its lowest since March 2021. The drop was most pronounced in energy and food prices.
Core PPI (excluding food and energy) rose 0.1% in Dec to 5.5%yoy and in line with estimates.
Earnings
AA - lower revenue and earnings due to high energy and raw material costs coupled with low aluminium pricing
GS - misses on the top line (revenues) and more significantly on the bottom line (earnings); major slow down in deals
MS - beat on both top line and bottom line; investment banking and wealth mgmt was strong
NFLX - beat on subscribers but NFLX tells us not to focus on that; Hastings stepping down as CEO. Refer to my NFLX earnings brief here
PG - slight beat on revenue and met earnings estimates; raised 2023 guidance however consumer weakness is a risk
UAL - beat on revenues and earnings; strong 2023 outlook
Labor
Jobless claims for week of Jan. 14 were down 15,000 to 190,000 vs the 215,000 estimate.
According to layoffs.fyi, more than 1,000 tech companies laid off employees in 2022, resulting in over 150,000 lost jobs. Just this past week, GOOG announced 6% layoffs…about 12,000 jobs. This was the first ever layoff for the company. MSFT also announced 5% more layoffs or 10,000 employees through March 31st 2023.
Real estate
Homebuilder sentiment rose by 4 points to 35 on the NAHB index…for the first time in 12 months. It is still below the 50 mark which is considered recesionary. The index was at 83 in Jan 2022.
Crypto
The founders of Three Arrows Capital, the bankrupt crypto hedge-fund firm, are seeking to launch a new exchange where creditors to insolvent digital-assets firms, including their own, would be able to buy and sell claims. Really?
Remember the George W Bush quote?
There's an old saying in Tennessee — I know it's in Texas, probably in Tennessee — that says, fool me once, shame on — shame on you. Fool me — you can't get fooled again.
In other news, Genesis is filing for Chapter 11 bankruptcy. They recently laid off 30% of their staff.
Consumers
US retail sales fell 1.1% in Dec, more than the -0.8% estimate and following a -1% Nov decline
China
New economic data from China, however I take all their reports with a grain of salt:
The nation’s population fell by 850,000 in 2022, 1st contraction since 1961
Q4 GDP growth was 2.9%, well below the Chinese govt’s goals for the year
Japan
Inflation in Japan hit 4%, the highest in 4 decades. The BOJ is under immense presure to abandon their YCC policy and raise interest rates to combat inflation.
Key market events
Mon Jan 23rd - US economic indicators report
Tue Jan 24th - Manufacturing and services PMI report, Earnings - MSFT, JNJ, GE, MMM,
Wed Jan 25th - Earnings - TSLA, NOW, IBM, FCX
Thu Jan 26th - Jobless claims, GDP report, Earnings - INTC, V, MA
Fri Jan 27th - PCE report, UMich consumer sentiment report, Earnings - CL
The next US FOMC meeting is Jan 31st.
Risks
As expected, markets dropped last week on Wed and Thu in anticipation of the Fri monthly options expiration. But all was well again on Fri. This cycle plays every week we have an options expiration event. So pay heed to the options calendar, even if you do not trade in options. They impact markets more than we understand.
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Here is what I plan to do with my portfolio…
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