State of the markets - Mar 13th 2023: Back to regular programming
Markets: Deciphering the latest macro signals and market cues for investors
On Friday, I published a brief overview of what happened with Silicon Valley Bank and why it was important for all investors, especially growth investors, to pay attention. Over the past 48 hours, there was a lot of hand wringing in the financial media as well as on Twitter about the what, the why, the how, the what-ifs and the why-nots. The FDIC, the US Feds and the US Treasury finally confirmed their plan to fully take over SIVB (and Signature Bank) and to make all depositors whole.
The financial system in this country works. It is able to handle black swans and grey swans and everything in between. The FDIC has people, processes and systems in place to handle such events - they have done it many, many times before.
And given my experience of this weekend, I am convinced that investors need to be wary of what they read on Twitter…there was a lot of unnecessary fear-mongering, misinformation and even fraudsters trying to take advantage of worried startups and small businesses. Be careful of where you source your information.
Now back to our regular programming…
Labor showing signs of weakening
The official US employment report from the BLS is a lagging indicator of the state of labor markets. We know that because they report on the previous month’s data. So it is important to track more current sources. Indeed, the job posting site, reported last week that total job postings were down 5.2%mom in Feb after declining 3.4%mom in Jan. The ASA Staffing Index also reported a 4.5%yoy decline in Feb. The divergence between these leading indexes and the official labor reports is increasing…in the direction that we, investors, prefer.
Labor market weakening is one of the few remaining signals that the US Feds is looking for before it decides to pause rate hikes. We are now seeing early signs of this happening.
Share buyback blackout and Q1 earnings
Corporate share buybacks will start entering their pre-earnings blackout period in little over a week. Yes, I know…it seems too soon. This quiet period is different for each stock depending on when they publish their Q1 report.
US companies are expected to spend about $1T buying back shares in 2023. These 2023 share repurchasing programs are just getting started and will provide much needed stock price support to markets through the year….
….and especially over the next 2 weeks before Q1 reports start coming out.
Look for upward stock price pressure in companies that have announced share buyback programs AND have the financial strength to do so. Keep an eye on the calendar too.
Health-checking the stocks in our portfolios
Over the weekend, I walked paid subscribers through a health-check process that I am using to guage the risk level of my porfolio holdings. Even though the SIVB issue is moving towards resolution, it is important for investors to review their stocks to understand if they could be negatively impacted by the next market storm.
My investing process, my stock-scoring algorithm has always given more credence to stocks that have healthy balance sheets, expanding margins, improving cashflows and declining shareholder dilution. I use GAAP numbers (I ignore non-GAAP metrics) so that I can compare apples to apples and tie things back to the accounting books of record. Using my approach, I came up with a list of specific questions and fundamental metrics to complete this SIVB-health-check. I also conducted some forensics using the SEC’s Edgar website. The findings were quite interesting to say the least.
Take a closer look at the holdings in your portfolio and check if they are cashflow-healthy enough to withstand SIVB like challenges. Do not assume that all is ok, dig a little through the financial statements and SEC filings. Identify the stocks with a highest risk profile and keep them on a short leash. Adjust your % allocation to these risky stocks accordingly.
This is what happens when the US Feds raise interest rates. Things break. Silvergate Bank and now Silicon Valley Bank are two things that broke recently. Likely more things will break or at least crack in the near future. Hard to tell what’s next and where.
But here is the silver lining in this whole situation…
Interest rate hikes are usually halted and even reversed, when things start breaking. This tells the US Feds that they have tightened enough and it is time to take the foot off the brakes and let things run by themselves.
I believe we are closer to this point then ever before.
In fact, some Wall Street firms are already telling their clients that the FOMC might not raise rates at the upcoming March meeting. I disagree with this, I think a 0.25% hike is coming. However, market expectations are already shifting.
In this market, we cannot be strongly bearish or bullish. We have to be ready to change our stance as market flows and investor sentiment shift. Stocks and bonds will continue to be pushed around until rate hikes are paused. We need to be flexible…be like water (Bruce Lee, 1971).
Mon Mar 13th - Earnings: GTLB
Tue Mar 14th - Feb CPI report, Earnings: S, STNE
Wed Mar 15th - Feb PPI report, retail sales report, Earnings: ADBE, PATH
Thu Mar 16th - Jobless claims report, Earnings: FDX, DG
Fri Mar 17th - Quad-witch quarterly options expiration, consumer sentiment report
Upcoming important events
Mar 21st to 22nd - Next US FOMC meeting
Markets will go back to fretting about inflation and interest rate hikes on Tue (CPI report) and Wed (PPI report). That will be followed by two days of heightened volatility due to the quarterly options expiration at the end of the week
Cheers and good luck out there!
Beachman’s posts from last week
State of the markets - Mar 6th 2023
Beachman’s plan for the week - Mar 6th 2023
Stocks to own now: Part 1 **New research series**
Roadmap to Beachman’s substack
I find the Twitter space pretty toxic at present and am considering canceling. Regarding SVB, the feds did what they had to do which was make the depositors whole; these people did nothing wrong and should not be penalized. As to the bank managers and equity partners; it appears they were asleep at the wheel...gross incompetence. One wonders how many mid size banks have a similar issue with their books or is this a 'one off'. The Credit Suisse thing is a little scary though, a $700 billion bank with international exposure. Not sure who will backstop them if depositors start running for the exit.