January 14, 2022

The Morning Call: Reversals Everywhere. The Valuation Schism?

Good Morning Everyone,

US Equity Markets are down again after a sell-off yesterday that erased all the gains made during the week. Economic data this AM was disappointing and the first taste of earnings from the banks were nothing to write home about – but we still will. Treasury Yields are higher with the 10-year ~1.75%. The USD is still showing signs of weakness with the DXY dropping from the 96s last week to the lower-95s today. Again, one of the themes of the year we talked about in our Focus 2022. WTI is up, trading in the $83s and trying to continue its bullish run, it’s up ~5% over the past week and ~17% M/M. Keep in mind that US markets are closed on Monday for Martin Luther King day.
 
With so much price action, we must follow the charts. We were disappointed by the lack of strong follow-through after Monday's One-Day Reversal. Please read Cam Hui's latest piece, "Time to Turn Defensive". We did not hold the Rally. The Rotation from Growth to Value forges on. The Semi's had a one-day reversal. Were up 2% then closed down -2%. The S&P has got 50-60% of their stocks below their 50-DMA. The Hi-Beta Low-Earnings stocks are still under pressure. Key support is at 4420, their 200-DMA. That would be a -7% correction. Yet the 14-month RSI divergence with the Wiltshire 5000 could mean a "Bear" market. Down 20%. Thnx Cam.
 
We've had a barrage of Fed governors speak. Brainard said that the FED had been caught off guard by the surge in Inflation. That getting Inflation back down is the most important job. San Francisco's Daly suggested Hikes as early as March (the end of QE). Chicago's Evans agreed with the “Dot Plots” indicating 3 Hikes. Philly's Harker said we need to normalize rates. Indicating 3 Hikes. But he did not rule out 4 Hikes. We are still on the side of 3.
 
The Banks are reporting. Not the broad earnings gains we had hoped for. As stated, Retail sales were also much weaker than expected. It seems to have had an impact on Banks. They're mostly down. This is a quarterly pattern of "Sell on News". The exception this time is Wells Fargo. Revenue was 11% higher than forecast. The recovery of credit kosses was 20% better than the forecast. Net interest margin was 2.11%. Expected 2.04%. All-round good numbers confirming their recovery. The next to recover should be Citi. Sometime this year. But when? We think this is a "Buy the Dip" group. Blackrock's AUM was up 1.6%, more than expected. Earnings up 2.7% also beat. That's why the Banks are piling into the Sector. Stable and rising fee Income. More on the Banks later.
 
The House Builders got smoked. The 30-year went from 3.22% to 3.45% in a week. That's the highest since the Pandemic. 11% Y/Y increase. The Case Shiller House Price index was up 15.5% Y/Y. As long as that metric persists Housing will keep going regardless.
 
“Pandemic Exhaustion” is showing. It's a driving force behind “the Great Resignation”. Many of those who quit are searching. Not for a job to go back to. But for "Meaning". Albert Camus wrote that people's ongoing pursuit is for meaning in their life. That continuous striving, he thought, was the key to happiness. Agree? Let me know.
 
Headline Retail Sales came in -1.9% lower in December, estimates were for -0.1%. Core was even worse coming in -2.3% lower, estimates were for 0.2% growth. The triple whammy of Omicron, Shortages and Inflation dampened the allure of shopping to the American consumer. Biggest declines were seen in non-store retailers (-8.7%), furniture stores (-5.5%), sporting goods (-4.3%), clothing (-3.1%), electronics (-2.9%) and general merchandise stores (-1.5%). Consumer Sentiment fell from 70.6 to 68.8, consensus was 70. Consumer Expectations fell from 68.3 to 65.9, consensus of 66.5. Industrial Production came in -0.1% lower vs. forecasts of 0.3%. Overall, very disappointing numbers.
 
This is NOT a call to vacate markets. Read Focus 2022.  The USD is already down more than 1%. Buy Canada.


Earnings Update

• JPMorgan Chase reported EPS of $3.33 beating the $3.01 consensus. The Company took a $1.8 billion net benefit from releasing loan loss reserves, EPS would have been $2.86 without these reserves. Management also lowered guidance due to ‘headwinds’ including wage inflation. Stating that they will likely cause the bank to miss its 17% return on capital target, “as the headwinds likely exceed the tailwinds,”. The Stock is currently down over 4% as a result.


• CitiGroup reported EPS of $1.46 slightly beating consensus of $1.38. The Stock is currently down over 2% as the Company reported a 26% drop in net income, citing an increase in expenses, which was reflected in an 18% Y/Y increase in operating expenses for the quarter. The results included a “pre-tax impact” of about $1.2 billion related to the sale of its consumer banking businesses in Asia. But, even with out it, expenses have grown more than expected.


• Wells Fargo posted the best numbers of the four banks today. EPS came in at $1.25, excluding certain items, topping estimates of $1.13. The top-line came in at $20.9 billion beating estimates of 18.8 billion; and the bottom-line increased 86% from $3.1 billion to 5.75 billion, also beating estimates. The Company took a $875 million net benefit from releasing loan loss reserves. Wells Fargo has a vast retail banking pipeline and large deposit base which makes them attractive to investors in a rising rate environment. The stock is currently up over 4% on the day.


• BlackRock reported an adjusted EPS of $10.42 besting the consensus of $10.15. The Company’s assets under management spiked from $8.68 trillion to $10.63 trillion Y/Y in Q4, cementing them as the first public asset manager to reach to $10 trillion in AUM. They also reported record net cash inflows in the process. However, the stock is currently down just over 2% on the day.


• A majority of the remaining financial institutions are on deck next week. Stay Tuned.

Invest the Money.
 

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