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Your Quiver | Thursday, April 20, 2023

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

Simple Math

Revenues down + costs up = margins and cashflow down. We’re seeing a number of companies learn the math this earnings season, most recently Tesla which posted ->20% decline in net income/earnings y/y. That’s what lowering car prices does to you, folks. And with $TSLA being 15% of the XLY, you can guess how that’s being impacted today.

Even Simpler Math

5% > 0.4%. So, why isn’t everyone making the switch to free lunch? Strong-yielding online savings accounts earn more than 5%. The average retail bank average savings account rate is 0.39%. Only 22% of savers, per Bankrate, are earning 3% or more on their accounts because they’re sticking with local banks, not trusting online stuff, or discouraged because they don’t think they have enough savings to matter. Or maybe they want another toaster (note—as a youngster I did receive a toaster when opening up a bank account, which would have gladly been traded in for a stuffed animal back then). More than 33% have more credit card debt than emergency savings, which is the highest ratio on record.

Earnings Summary

From a headline perspective, it may sound good. About 16% of S&P companies have reported so far, per CNBC, and 62% of them beat expectations, per FactSet. But there’s been a dearth of profit forecasts and guidance, which should be ringing some alarm bells. AT&T and AMEX disappointed. Lower free cash flow and higher reserves to cover bad loans are never encouraging. The Philly Fed manufacturing index fell more than expected, to its lowest level since pandemic lows. Jobless claims rose w/w. Home sales are down. Remember that reported earnings represents the past. Ongoing security prices care about the future.

Showcase Showdown

I think everyone is just hoping that our politicians get it together and stop this debt ceiling nonsense, but is that really a good strategy? The White House says no deal—just raise the ceiling like you did in the last administration. The GOP says major cuts are necessary to play ball. The problem is timing. Both sides thought they had until August to fluff their feathers for their constituents. But, given lower tax receipts, we may be looking at a July or earlier deadline before America defaults. The Treasury General Account is shrinking fast. Don’t expect the VIX under 17 to remain if both sides keep playing chicken.

Gimme Credit

SMID businesses are facing tight credit conditions post banking crisis. We can see a big drop in the NFIB credit availability index. Why care? SMID businesses drive a lot of our economy (and jobs), and businesses need credit to run and to grow. Credit spreads aren’t showing the same story, though. So, it sounds like we’re nearing the time to short high yield. We may not see it work out until the fall, but you can’t enter the position once it becomes consensus.

US Market Dynamics

The elusive 4150 level of the S&P 500 remains. As expiry heads toward us and SpaceX’s rocket blows up, we’re back down to 4130. Even though UST yields across a lot of the curve edged up this week, and even though the market remains at solid highs, we’re not seeing investors reduce their risk into the heart of earnings season. In contrast, they appear to buy when the market declines—but not with both fists of money. The 72bps range for the S&P means they’re throwing down some change, not all their dollars. Friday’s double witch expiration for options may be the source of the gravitational pull to 4150, a popular strike price, so we’ll see whether earnings support that target. Starting next week, we expect tech companies will gain more of the focus as they begin to report.

Deepfake Detection

AI is getting powerful, a little too powerful. It can trick people (got me) into believing an image of Pope Francis wearing a down, puffy jacket is real. Digital tools’ reliability to identify faked images seem to be struggling with keeping up with the rapid pace of AI content generation. Platforms like Facebook and Twitter aren’t (at least yet) required by law to detect and alert any deepfake content on their platforms which can leave consumers of the content in the dark… While the Pope in his fake Balenciaga jacket is harmless, potential geopolitical or personal brand deepfakes can pose a serious threat in the future.