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Your Quiver | Friday, May 26, 2023

CIO | Nadine Terman @SolsteinCapital details what she's seeing in global financial markets.

Hopeful Hints

Every media outlet seems to be reporting that negotiators are close to an agreement to raise the debt ceiling in exchange for capping federal spending for 2 years.

Resilient Consumer

This comes on the heels of the PCE index (which deals with consumer spend) rising by more than expected in April to 0.4%. The Fed looks at this figure when deciding on its rate path, so higher spend = higher inflation = higher rates.

Marvell's Marvel

Marvell Tech popped 23% after the chipmaker forecasted a large revenue increase from AI. Coming on the heels of Nvidia’s print and jump, it is not surprising.

Should We Say "AI" Again?

You know employees in charge of presentations are figuring out any way to mention AI. Take a look at GOOG’s chart shared by BBG after showcasing AI tech.

AI Mentions

BBG mentioned that on earnings calls in 2023, roughly 500 companies in 27 sectors have made over 3,500 references to generative AI and/or ChatGPT. Highest mentions? In Software & Services, Media, Commercial Services, Semis and Consumer Services (leisure, gaming and education services). In all of these sectors except for semiconductors, labor is a big cost, so AI could reduce that cost. The article also talks about how >75% of the workforce in the Software & Services and Media sectors could be impacted by competitive AI.

Narrow Leadership

Although the NASDAQ 100 popped +2.5% yesterday, decliners outpaced advancers by a 51:49 margin. The corresponding ratio for the S&P 500, which increased +0.9%, was 3:2. So, this makes it difficult for investors to buy into this market increase. Thanks to ASR for the chart below:

Marginal Margins

So, we’ve got margins in the US down (from a cycle peak of 16.2% (which was within 30bps of the 40yr high) to 13.8%., per ASR, but they’re still above their 3yr low of 10.2%. In the Eurozone, margins are also down to 10.2%, but from a lower level of 11.5%, and versus their 3yr low of 5.8%. So, if you’re asking whether margins could be pressured more, the answer is yes. As revenue growth slows and costs remain high (e.g., labor), the hand puppet’s mouth starts to close…reflecting lower profits and margins. This is the opposite scenario of 2021, when revenues accelerated, and cost increases were minimal.

Digging Deeper

OK, more on margins. Energy now has almost the same profit margin as Tech for the first time since the GFC (18.8% vs 19.5%), per ASR. You know that won’t be sustainable, though, as Energy over-earned, and Tech is close to 3yr lows. Where else looks iffy? Travel & Leisure is at its 3 yr peak. Basic Resources, Chemicals and Consumer Products also may be at risk. In the Eurozone, sectors are also key to review. Tech is at the bottom of its 3yr range too, and it has lower profitability than Consumer Products (Luxury Goods) and Food, Beverage & Tobacco, per ASR. Cyclicals with considerable downside to trough margins include Energy, Basic Resources, Autos and Chemicals.

Attention K-Mart .. 'er .. RH Shoppers

Despite the bluster and bombast about building a luxury brand with fancy hotels and yachts, RH struck a more circumspect tone on its earnings call last night. Management flagged its upcoming discounting, while seemingly blaming other businesses for pursuing short-term outcomes at the expense of long-term outcomes, implying that they lack strategic vision. Don’t tell that to Costco, which is doing just fine, sans fancy hotels and over-priced boats.