Coming In Hot

By Crest Capital Advisors on April 14, 2022

Dow: (0.78%) to 34,451.23
S&P 500: (2.13%) to 4,392.59
Nasdaq: (2.63%) to 13,351.08
Russell 2000: 0.52% to 2,004.98
10 Year Yield: 2.83%
Outperformers: Materials 0.69%, Industrials 0.43%, Energy 0.32%, Consumer Staples 0.15%
Underperformers: Information Technology (3.82%), Communication Services (3.00%), Healthcare (2.93%), Financials (2.65%)

US equity markets ended the week lower, with a few moving pieces in focus. The mid-week rate reprieve didn’t last as Treasuries and stocks came under pressure to close the week. Some of the bullish talking points didn’t get much market traction, including peak inflation, peak Fed, better supply chain trends, economic normalization, and consumer resilience. The primary economic drivers of the week were Tuesday’s March CPI report and Wednesday’s PPI report. Analysts said the CPI report, which rose 8.5%, likely represents the inflation peak as good prices are expected to continue to fall as supply chain issues continue to ease. The PPI report was up 11.2% year over year and was the highest rate in the history of the index. The release noted more than half of the monthly headline increase for final goods was traceable to higher energy prices, though foods were also up significantly. Meanwhile, three-year consumer expectations slipped to 3.7%, down from 4.2% six months ago However, interest rates came under pressure again on Friday, with the 10Y US Treasury yield finishing the week at 2.830%.
This week also opens the Q1 earnings season. US Banks were the lead-off sector of the earnings season, and while most bank earnings were poorly received, the headlines masked some positive underlying trends in net interest margin and loan growth. However, while there is some optimism around this quarter’s earnings, that is somewhat overshadowed by fear around inflation, supply chains, a weakening consumer impulse, and geopolitics.
Markets will be closed on April 15th, we would like to wish everyone a Happy Easter and Happy Passover.

Tax Selling

Monday is Tax Day. It’s the time of year when we are all reminded of what we pay to live in the United States. We would not be surprised if some temporary tax selling is contributing to the recent weakness in equities. To be clear, this is just one factor. Real rates are rising, which puts downward pressure on multiples. The Fed is making it clear that it is draining money out of the system with the effect of cooling the housing market and pressuring stocks. This will not end with tax season. Yet, the $10 trillion increase in US shareholder wealth last year is a leading indicator of taxes paid at tax time. In years after 20%+ equity market gains, we tend to see some temporary pressure in stocks heading into Tax Day as investors sell stock to pay their tax bills. And there were plenty of gains that were pulled forward into 2021 in case taxes were raised.

Where Are the Earnings

As we enter the earnings period, the Street looking for a 4.5% year-over-year increase in S&P 500 earnings in Q1. However, S&P 500 revenue is expected to increase 10.7% in Q1, marking the fifth straight quarter of 10%+ y/y revenue growth. Inflation and supply chain pressures are likely to dominate the earnings season narrative once again following record or near-record mentions on Q4 conference calls. Pricing power is another focal point given the extent to which companies have been able to protect already elevated margins. Wage pressure is also likely to get scrutiny given the signaling for out-quarter margin trends. Geopolitical uncertainty is another high-profile issue amid the tangled web of secondary effects that could drive some semblance of guidance conservatism. For the full year, 2022 EPS will rise by 8.3%, and excluding the energy sector, they will be up 5.4%. Not the entire contribution, but certainly an important contributor.

Housing

We are often asked, what we think will happen to housing. Not only is it typically the average American’s largest asset, but it was also the centerpiece for the last major recession (excluding the Covid Coma). The latest weekly reading for the effective rate of a 30-year fixed-rate mortgage jumped to 5.31%. We are now approaching nearly double the rate from just one year ago and just shy of the 2018 peak rate of 5.33% before housing slowed and the Fed had to change course. A slowdown in housing appears to be inevitable.

The year-over-year percentage change in estimated monthly mortgage payments is greater than 30% currently and is the fastest growth rate since the late 1970s/early 1980s. What is noteworthy during that period is that the elevated growth rates of mortgage payments were sustained for multiple years. At the same time, housing as a percent of GDP grew due to increasing values outpacing benign GDP growth.

Another data point that speaks to a slowdown in housing market activity this year is the decline in open title order searches. Compared to 2021, the latest reading is down (26%) year over year. With home prices up significantly, and inventory limited, it’s unlikely housing will be able to provide the same boost to growth that it did in 2021. The multiplier effect is large for housing and many home-related industries are likely to continue to lag. Perhaps most important is the Fed has just begun tightening.

Elon Buys Into Twitter.. Part 2 – Real Life Business Drama

Forgive our indulgence with a continuation story from last week, but we here at CMD do enjoy watching real life business drama. Last Monday, April 4th, the world’s richest man disclosed that he had acquired 9.2% of Twitter. The next day, it was announced he would be joining the Board of Directors of the company bringing “great value to the company being a passionate believer and intense critic of the service which is exactly what we need “ – tweeted Parag Agrawal, Twitters CEO. It was also suggested he would help reshape the censorship that has been occurring on the platform and to improve the business model. That is where we left you in last week’s CMD.
Then the real fireworks started.
Over the weekend, Twitter’s newest Board member Elon Musk, tweeted out that “Most of these “top” accounts tweet rarely and post very little content,” than posing the question, “Is Twitter dying?” followed by a list of large follower accounts ranging from Barak Obama (131M followers) to Elon Musk himself (81M followers). He specifically called out number 6, Taylor Swift who has 90M followers and hasn’t posted anything in 13 months.” Then Musk took aim at Twitter’s new subscription service, Twitter Blue, suggesting changes to the fee structure and that there should be different statuses for public figures/official accounts.
On late Sunday, Agrawal announced in a statement on Twitter that Elon Musk had decided to NOT join Twitter’s Board. He added, “We also believed that having Elon as a fiduciary of the company where he, like all board members, has to act in the best interests of the company and all our shareholders, was the best path forward.” Elon’s only comment to this was on Twitter with a face emoji and a hand covering a smile.
On this past Monday, April 11th, Musk filed an SEC document indicating that Musk could “from time to time, acquire additional shares of Common Stock and/or retain and/or sell all or a portion of the shares of Common Stock held by the Reporting Person in the open market or in privately negotiated transactions.”
Which brings us to today and the date of publishing the CMD. Elon Musk, who was never going to be a “passive” shareholder in Twitter, offered to buy the social media platform for $54.20 per share in cash, according to filings with the Securities and Exchange Commission late Wednesday. Musk’s Twitter buyout offer translates into about $43 billion. He also suggested this was his best and final offer. The bid represents a premium of 18.2% to Twitter’s Wednesday closing price, and a 38% premium to where it traded before Musk disclosed his original 9.1% ownership stake on April 4th. “If the deal doesn’t work, given that I don’t have confidence in management nor do I believe I can drive the necessary change in the public market, I would need to reconsider my position as a shareholder,” Musk said. There are a number of humorous rationales as to the specific price Musk offered. We will offer one of the cleaner versions here: Inside the $54.20 is the number 420 which was the price Musk had famously tweeted was the secured funding price for Tesla to go private.
At the time of CMD publishing, Twitter’s Board had not yet responded but was considering what to do next.
Stay tuned. We are looking forward to seeing what comes next with a large bag of popcorn.

Crazy Stat(s) of the Week

Here are this week’s crazy stats:

• Used car prices (a leading covid inflation indicator) are down 5% in the last 2 months and could fall more than 10% y/y by Q4 2022. If used car prices decline by 40%, that alone would pull headline CPI down by (1.6%).
• A non-fungible token (NFT) of Twitter founder Jack Dorsey’s first-ever tweet could sell for just under $280. The current owner of the NFT listed it for $48 million last week. Iranian-born crypto entrepreneur Sina Estavi purchased the NFT for $2.9 million in March 2021. Last Thursday, he announced on Twitter that he wished to sell the NFT, and pledged 50% of its proceeds (which he thought would exceed $25 million) to charity. The auction closed Wednesday, with just seven total offers ranging from 0.09 Ethereum ($277 at current prices) to 0.0019 Ethereum (almost $6).

Quote of the Week

“The measure of intelligence is the ability to change”

-Albert Einstein

Calendar of Events to Watch for the Week of April 18th

Next week the Q1 earnings season moves into full bloom with some of the tech bell weathers reporting. On the economic calendar, we begin the week with a slew of housing reports and concluding the week with the April manufacturing data. Oh and did we mention, that tax day is Monday, April 18th.
Monday 4/18 – US NAHB Housing Market Index is due out.
Tuesday 4/19 – The main event of the week will be US Housing Starts giving back-to-back days of housing sector reports.
Wednesday 4/20 – Caping the housing reports, we get Existing Home Sales where economists are looking for a slow down of a seasonally adjusted rate from 6,020,000 to 5,750,000.
Thursday 4/21 – US Leading Economic Indicators for March will be reported where analysts are calling for a decline to 0.10% from February’s 0.30% growth.
Friday 4/22 – US April PMI data will be released giving participants the most up-to-date view on the manufacturing and services economy. In manufacturing, economists are forecasting a slight decline from 58.8 to 58.3 but still well into expansion territory. For services, economists are forecasting a slight gain from 58.0 to 58.1.

Source: FactSet