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Your Quiver | Tuesday, April 25, 2023

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

Walking on Eggshells

Monday’s stock action was pretty pathetic, as the “miles driven” dropped to a low for non-holiday periods in the last 20 months, per UBS. Everyone is waiting for Big Tech to announce tonight and the Fed’s rate hike language next week. Investors’ neutral stance does leave them with cash to buy dips, but it also leaves them with the ability to grow that cash balance, so it’s a middling stance we’ve got right now, not supportive of additional strength unless actual good news is coming out.

Coming Home to Roost

That’s what Standard Charter’s CEO warned about ongoing issues in the banking center that could expose a new crisis down the road. He mentioned underlying and exacerbated flaws in their business models, a lack of appreciation of the seriousness of those flaws, and regulatory shortcomings. Tomorrow they report earnings, and since most of their profits come from Asia and EM, they are probably one of the relative winners in this environment.

Pecking Order

So far this earnings season, we’ve seen who is growing via price AND non-deteriorating volume. Coca-Cola. Pepsi +13% comp. McDonald’s +12% comp. That’s a much stronger strategic position than we’ve seen from companies outperforming on price alone (P&G). In fact, Micky D’s traffic rose for the 3rd straight quarter, versus industry trends of declining traffic with higher prices. Consumers trade down to cheaper meals during challenging (or perceived challenging) times. Pepsi even raised guidance today. So, consumers are still buying burgers, chips, soda, diapers, shampoo and coffee…but sending fewer packages, per UPS.

Egg on Their Face

Although First Republic beat on earnings, they have to cut their workforce by 20-25% and pursue strategic options. 1Q23 deposits were down -35%. Management “flew the coop” and ended their earnings call without taking questions. The stock is down -29% to a new low as we write this note.

No Spring Chicken

This economic cycle is no spring chicken, and investors are split on the trajectory of inflation from this point—which could have a major impact on central banks’ rate decisions and prices for risk assets. On one side we’ve got Allianz and TCW calling for inflation coming down, with central banks willing to pressure the economy. On the other side, we’ve got BlackRock and DoubleLine who think central banks will allow inflation to remain a bit higher so that they don’t damage the economy too much. Even within shops, there are disagreements, per BBG’s quote from DoubleLine’s Whiteley. BlackRock is betting on inflation-linked debt. Riddell from Allianz thinks that the damage to the economy will be hard and fast, which will cause inflation to drop much faster than folks expect—he’s long core duration given the risk of a severe downturn. TCW likes the front end of the yield curve, believing that the Fed will ease in a few quarters.

Playing Chicken

Treasuries are rallying again today. Given lower tax receipts, the Treasury is going to release an updated estimate of when the US goes into default if Congress doesn’t raise the debt ceiling. Credit default swaps for the US for 1-year increased to the widest on record; 5-year CD’s are at the highest levels since 2011. This is forcing a short covering rally. Hopefully our politicians will stop playing chicken and get this deadline behind us successfully.

Don't Count Your Chickens Before They're Hatched

When no one thinks volatility will rise…you know what to do.

Nest Egg

Consumers are worried about their nest eggs. US consumer confidence dropped this month to the lowest since July (from 104 in March to 101.3 in April) given negative economic views, falling far below consensus of 104.

Not What It's Cracked Up to Be

GM is going to end the production of its electric Chevy Bolt, the company’s first mass market EV, by the end of 2023. The battery cells need an upgrade, yet the timing is odd—they’ve had record production and sales lately—but they weren’t high enough for mgmt, and the recent fire recall did not help. The company will launch new EVs later in the year based on their new battery platform. With Tesla cutting prices seemingly every week, it’ll be challenging for profits industrywide. But the company beat expectations for 1Q23 and raised guidance, so we’ll see if that holds.

Fowl Play

The US is looking to sign an executive order in the coming weeks that will limit investment in key parts of China by US businesses. This overhang plus issues ranging from privacy concerns in Taiwan to TikTok to semiconductor chips/tech to those balloons we shot down have reversed the strength of Chinese equities from the fall, which rebounded post re-opening. BBG is noting a $100bn decline in value this past month, with the NASDAQ Golden Dragon China Index down -10% in April.