Private Wealth

Weekly Research Briefing: Pumpkin Spiced Earnings

October 11, 2022

October means stacks of pumpkins and earnings releases. This third quarter earnings season will be especially spicy given the increased fear and uncertainty as investors overanalyze every comment related to forward guidance. Are customers accepting higher prices? Will increased prices be enough to offset higher costs? Is the labor supply adequate? How are inventories positioned? How will the strong U.S. dollar impact the business? How much of the debt is floating rate versus fixed? So many questions and answers that could bring a trick or a treat to every reporting stock price.

Corporate earnings might be top of mind, but Thursday's CPI release will bring out all the inflation ghouls and goblins. While the economists are looking for a small month-over-month increase, given the movement magnitude of the many underlying components, it could be anyone's guess as to what the final government statistic might reveal. No doubt there will be plenty of attention focused on the shelter cost component given the difficulty to predict this lagging metric.

October can be a tricky month for the markets. One would think that with the S&P 500 off almost 20% from its August peak, it would be prepared for another scary earnings season. But unfortunately, investors are still worried that earnings estimates could be cut further, and that the Fed may take interest rates up higher which could hit multiples. With corporate stock repurchasers out of the market until their earnings are reported, it could take some glowing outlooks to get investors back to buying equities this month. But with risk-free rates of 3-4%, many investors are choosing to sit on the sidelines until the fog and cobwebs clear.

While the markets sputter, the main street economy still hums with packed airports, sold out hotels and fully reserved restaurants. Meanwhile, the kids are making $22 an hour working part-time at the Spirit Halloween store and looking for that next holiday gig that will pay them even more. Friday's jobs data may have slowed a tad, but the U.S. jobs machine is still ripping and anyone who wants a job can still get one. And with interest rates moving higher, retirees with a fixed mortgage and a short duration bond portfolio are licking their chops. The disconnect between Main Street and Wall Street grows wider. Enjoy the changing weather and falling leaves. And good luck to your favorite baseball team.

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The earnings fire hydrant begins to open wide on Thursday...


Quarterly earnings estimates have continued to trickle lower all quarter...

But stock prices are focused on what the direction of estimates will be in the future. Have they been cut enough, or will corporations accelerate their guides lower?


Energy earnings are looking to be a big help to staunching the declines in the Q3...

Bank of America thinks earnings guidance will be much worse than expected...

The Fed continues to juggle its assessment of the U.S. economy as it plans the next rate hike on November 2...

(US) Fed Vice Chair Brainard: It will take time for tighter policy to affect the economy; Aug inflation readings were surprisingly high due to core goods : Fed should move forward 'deliberately' to assess how economy, employment, inflation are adjusting, to inform path of policy rate

  • Seeing tentative signs of labor market rebalancing
  • Fed is attentive to risks of further adverse shocks; Fed will take spillovers from policy into account
  • Fed is very aware that unexpected interest rate or currency moves could interact with financial vulnerabilities
  • Strong wage growth, high rental costs mean inflation from core services expected to ease only slowly

(US) Fed's Evans (non-voter): Sees target rate needing to rise 'a bit above' 4.5% by early next year and remaining there as Fed takes stock

  • Favors getting rates to place where Fed can 'rest and observe'
  • Without a period of restrictive policy to restrain demand, inflation would not fall to anything near 2% target
  • Fed needs to carefully and judiciously navigate to 'reasonably restrictive' policy rate
  • Good news that longer-horizon inflation expectations have generally remained within a range consistent with 2% target
  • US can lower inflation 'relatively quickly' without recession or large increase in unemployment
  • Labor shortages are having an unusually large influence on inflation, which could allow fast improvement on inflation as economy cools
  • JOLTS jobs data is going in the right direction but vacancies are high
  • FOMC is very clear in how it is clustered around a rate in the range of 4.5% next year
  • Sees Fed rates around 4.5% by March, on track to impose a lot of policy restriction


Some good news for the Fed...

*(US) AUG JOLTS JOB OPENINGS: 10.05M V 11.09ME (first reading below 11M since Nov 2021, and lowest since May 2021)


The JOLTS report showed the jobs-workers gap has now fallen from a peak of 5.9mn to 4.3mn today, roughly 40% of the way to the 2mn level that we think is required to slow wage growth to a rate compatible with the inflation target.

Goldman Sachs

But workers still confident in their ability to quit and find a new job...

@MacroAlf: One of the reasons why wage growth remains stubbornly high is that people feel very confident in quitting and get a higher paid job elsewhere.
Please notice how this % was very elevated in 2000 and 2007 as well - things can quickly turn in the labor market, but not there yet.

Friday's jobs data left no room for the Fed to pivot. Bring on the 75bp hike for November...

The September solid employment report will keep the Federal Reserve on track to approve another large interest-rate increase at its meeting next month as officials seek to lift borrowing costs high enough to soften the labor market and ease inflation pressures.

Employers added 263,000 workers in September. While that marked a slight slowdown from the average pace of hiring in recent months, it is still well above the monthly gains of around 50,000 that economists think would keep the unemployment rate from falling.

The unemployment rate dropped to 3.5% last month from 3.7% in August. Average hourly earnings rose somewhat more slowly in September than in the prior month, increasing 0.3% from August and 5% from a year earlier.


Main Street is firing on all cylinders while the Fed is reaching for the parking brake...

There are two stories you can tell about the labor market right now. In the first, more optimistic, version, the gradual slowdown is akin to a healthy release of pressure. Employers have become a bit less eager to hire. Employees have become a bit less confident in their ability to demand raises. That will result in slower wage growth, which should allow the Fed to be more patient and less likely to slam the brakes on the economy.

The second version is darker. In this telling, the Fed has already been hitting the brakes pretty hard — five rate increases this year, including three supersize hikes in a row — and the job market has only just begun to slow down. Wage growth is still well above what the Fed considers consistent with its goal of 2 percent inflation. If policymakers want to get it down further — and indications are that they do — they will have to get even more aggressive, even at the risk of putting more people out of work.

NY Times

The bond market gives 75 bps an 80% likelihood...

Fed speak since the September FOMC meeting has shown the committee is unusually aligned around the need to continue with jumbo rate hikes, despite growing global economic and financial risks...

CME Group

Much attention will be focused on the CPI data on this Thursday...

Meanwhile, continued evidence out of the ISM data last week that bottlenecks are open, and prices are slowing.

*(US) SEPT ISM MANUFACTURING: 50.9 V 52.0E (lowest since May 2020); PRICES PAID: 51.7 V 51.8E (lowest since June 2020)

Sub Indices:

  • New Orders Index: 47.1 v 50.5e
  • Employment: 48.7 v 53.0e
  • Inventories: 55.5 v 53.1 prior
  • Backlog of Orders: 50.9 v 53.0 prior
  • New Export Orders: 47.8 v 49.4 prior

Markedly absent from panelists' comments was any large-scale mentioning of layoffs; this indicates companies are confident of near-term demand, so primary goals are managing medium-term head counts and supply chain inventories.


Sub Indices:

  • Business Activity Index: 59.1 v 60.9 prior
  • New Orders Index: 60.6 v 61.8 prior
  • Employment: 53.0 v 50.2 prior
  • Inventories: 44.1 v 46.2 prior
  • Prices Paid: 68.7 v 71.5 prior (lowest since Jan 2021)


And where auto prices are quickly moving from shockingly high to negative on a year-over-year basis...

@conorsen: The Manheim used vehicle price index fell 3.0% for the full month of September, down 0.1% YoY now:

And don't forget the strong U.S. dollar adding downward pressure to inflation...

“While the strong dollar is curbing exports, a beneficial effect from the greenback’s strength is being seen via lower import costs. With supply chain delays also easing substantially again in September and shipping costs falling, upwards pressure on firms’ costs has moderated sharply, which will feed through to lower goods prices to consumers.” - S&P Global Market Intelligence Chris Williamson Chief Business Economist

The Transcript

Food/spice company McCormick noted that cost inflation is moderating relative to their price inflation...


To make airports, hotels and restaurants even busier, here comes the return of corporate travel...

@modestproposal1: ISI on September hotel RevPAR:
"What sticks out to us? After a few head-fakes over the last 2.5 years, the handoff from pure leisure to the more corporate dependent month of September went smoothly."

Hertz confirming that business travel is coming back strongly...

“Well, right now, leisure travel has been well past where we were in '19. Interestingly, corporate travel is coming back to kind of 80% to 90% of where we were. We see our backlog roughly two or three months in front of us. What is of note on the leisure side is for the holiday period, we are seeing very strong, very early bookings into the United States by European travelers, mostly into Florida, for the Christmas period. And that's running at about 2x what it was this time last year. And so bookings have been positive out through the next couple of months, but equally to your question, in through the holiday period where it's proving quite strong” - Hertz CEO Stephen Scherr

The Transcript

The PC market, however, has stepped in a pothole of marshmallow sauce...

[AMD] Cuts Q3 Rev $5.6B v $6.68Be (prior $6.5-6.9B); Macroeconomic conditions drove lower than expected PC demand, significant inventory correction across the PC supply chain - The PC market weakened significantly in the quarter,” said AMD Chair and CEO Dr. Lisa Su. “While our product portfolio remains very strong, macroeconomic conditions drove lower than expected PC demand and a significant inventory correction across the PC supply chain. As we navigate the current market conditions, we are pleased with the performance of our Data Center, Embedded, and Gaming segments and the strength of our diversified business model and balance sheet. We remain focused on delivering our leadership product roadmap and look forward to launching our next-generation 5nm data center and graphics products later this quarter.


And Micron is also feeling the effects of the slowed tech hardware environment...

“Our fiscal Q4 financial results were impacted by rapidly weakening consumer demand and significant customer inventory adjustments across all end markets. We are responding decisively to this weak environment, by decreasing supply growth through significant cuts to fiscal 2023 CapEx and by reducing utilization in our fabs." - Micron Technology CEO Sanjay Mehrotra

The Transcript

PPG, the big paint and auto glass supplier, is getting hit by Europe & China...

[PPG] Reports prelim Q3 5-7% below low-end of prior $1.75-2.00 outlook (implies $1.63-1.66) v $1.82e; Sees Q4 segment earnings growth 20% with soft demand conditions in Europe, China expected to continue into Q4

- In comparison to its forecast at the beginning of the third quarter, company sales were impacted by further softening demand in Europe. In addition, sequential quarterly demand recovery was lower than expected in China due to a resumption of certain pandemic-related restrictions. The sales volume declines were most pronounced in September and resulted in a reduction in the earnings benefit from higher selling prices and reduced manufacturing efficiencies versus the prior forecast.

- Softer demand conditions are expected to continue into the fourth quarter along with continued higher levels of unfavorable foreign currency translation impact. Raw material cost inflation remains at historically elevated levels but has begun to moderate in some regions. The company is expecting selling prices to be up by between 10% and 12% compared to the prior-year fourth quarter, and up between 18% and 20% on a two-year stacked basis. The company anticipates fourth quarter year-over-year segment earnings growth of near 20%, as year-over-year segment margin recovery momentum accelerates.


Lighting supplier, Acuity, however, is doing fine across its construction end markets...

[AYI] Reports Q4 adj $3.95 v $3.35e, Rev $1.11B v $1.11Be

- Adj Op margin 15.3%, -50bps y/y

- CEO: "We continued to deliver strong results in the fiscal fourth quarter, concluding what has been a very good fiscal 2022,” stated Neil Ashe, Chairman, President and Chief Executive Officer of Acuity Brands, Inc. “We had strong demand across our end markets, and we demonstrated our ability to capture price and drive volume through product vitality and service in both our lighting and spaces businesses throughout this fiscal year."


You wouldn't notice it from all the news headlines, but high yield credit is not falling into the floor...

Interest rate risk has exceeded credit risk since June. It is a positive sign for equities and other corporate risk appetites that credit is not deteriorating.


Banks are also holding on well, suggesting no downturn in the credit cycle ahead...

@hmeisler: Bank Index relative to SPX.
Banks were in the doghouse during summer rally but have held up relatively well since Aug high.

Small caps continue to outperform the Nasdaq...


Interesting market dynamic...

Wayne Whaley shows that since 1950, the S&P 500 is 18-0 from the November during the midterms through the following six months.


Difficult for equity portfolio managers to keep their seats if they don't have exposure to energy stocks...

One wonders where oil prices could move once China reopens its economy...

As I have been repeating for years, Portland, OR is the food capital of the U.S...

Not only do they grow, raise, or fish most everything, the city has more cuisine diversity than any city that I know outside of NYC and San Francisco. No sales tax is icing on the cake for all chefs and diners.

Americans today apply the term “foodie” to anyone who loves gourmet dining. But foodie culture isn’t limited to restaurants. Foodies enjoy discovering new and unique flavors wherever they can find them, including in their own kitchens and less prominent establishments like street food stalls. For these people, the experience of eating is elevated to a hobby or even a lifestyle.

Naturally, being a foodie can be quite expensive, especially during the heavy inflation of 2022. Restaurant prices rose 8% just between August 2021 and August 2022. Even cooking your own gourmet meals can be pricy, as grocery store prices rose 8.3% between August 2021 and August 2022.

Fortunately, culinary hotspots across the U.S. offer plenty of affordable options for cash-strapped foodies. These wallet-friendly cities cater to diners who prefer to cook at home, explore the local flavors or both. To determine the best and cheapest foodie scenes, WalletHub compared more than 180 U.S. cities across 29 key indicators of foodie-friendliness. Our data set ranges from cost of groceries to affordability and accessibility of high-quality restaurants to food festivals per capita.


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