Eureka! Now that was a rally!
Bear market rally? Maybe.
Market-wide short covering? I think that there certainly was some of that.
I will say this, though, that the action was broad, and fairly deep. The S&P 500 and Dow Industrials both posted a second straight "up" day (three out of four), while after Thursday's close the S&P 500, Dow Industrials and Nasdaq Composite were all "green" for the week.
Plainly put, the Big Three large-cap equity indexes all closed higher on Thursday afternoon than they had last Friday -- and on increased trading volume, too. Can the indexes hold onto these weekly gains, even if Amazon (AMZN) and Apple (AAPL) both sold off overnight in response to their quarterly earnings reports?
I'll tell you what: If markets can hold onto the green for the week, that would be some impressive feat, not just after those two highest-profile earnings releases, but also after the Bureau of Economic Analysis released its advance (first of three) estimate of US economic growth for the first quarter that showed the economy to be in a state of contraction, or halfway to recording an official recession.
The BEA posted the first of three estimates for US economic growth on Thursday. The number hit the tape at -1.4% (q uarter over quarter, SAAR or seasonally adjusted, annualized rate), or if measured the way most global economies report changes to GDP, -0.4%. Halfway to recession.
However, most economists who did publicly opine came out immediately and stated that the contraction was largely due to a slowing in the building of inventories (as well as the trade deficit) and not actually a signal of potential recession. OK, but the other side of that token would be that almost all US economic growth over the final two quarters of 2021 was indeed driven by inventory building. Correct? If one downplays this contraction, one must also downplay growth over the first half of 2021.
The truth is that there are weak spots in this report. True, personal consumption expenditures hit the tape at +2.7%, which is not weak, but the consensus view was for +3.5%. The growing trade deficit was certainly a cause, as was federal as well as state and local spending. Defense spending posted a -8.5% number on top of the fourth quarter's -6.0%. Indeed, defense spending has not seen a positive quarter since the fourth quarter of 2020.
The scariest single line I found within this GDP report came on table 1, line 34: Disposable Personal Income. This line hit the tape at -2.0%, and last saw a positive number in the first quarter of 2021. That's four straight losing quarters for the common folk, despite record low unemployment. Not really surprising given that all the helicopter money had to come to an end at some point.
In theory, this one line could do much of the Fed's work in controlling consumer inflation on its own, as contracting discretionary income certainly would destroy demand to a certain degree, but we have not seen that just yet. Perhaps that is because both food and energy lie outside of core measures of inflation and these are the two areas where consumers will go into debt if they must in order to make purchases. These are also the two areas that have been forced into crisis-level global shortages by Russia's invasion of Ukraine.
What now for the Federal Open Market Committee?
On the one hand, the Fed has been positioning itself quite aggressively in preparation for an all-out assault on consumer inflation, which if permitted to run for a number of years would normalize both interest rates as well as the monetary base. This report should not alter the current trajectory of FOMC intentions, especially if it is its aggregate belief that this is but one quarter of economic contraction, though very few "professional" economists saw this negative quarter coming before it did.
How, in view of how inaccurate professional opinion has been, does the FOMC move forward with both an aggressive targeting of short-term interest rates and a just-as-aggressive plan to whittle down the balance sheet? How does the FOMC not maintain course given the current pace of inflation? These kids are in a lose/lose situation, partly of their own doing, but the US Congress, Russia and China all bear enough blame. Those truths do not lighten the load.
The weak US economic performance has not really altered futures markets trading in Chicago that handicaps the trajectory of the fed funds rate (FFR). These markets are still pricing in a 99% likelihood of a 50-basis-point hike on May 4 (next week), as well as a 90% probability of an additional 75-basis-point increase on June 15, then a 90% chance for another 50-basis-points on July 27. This would leave the target for the fed funds ate at 2% to 2.25% in less than three months. Today's FFR stands at 0.25% to 0.5%. Beyond July, these markets also have the FOMC tacking on additional 25 basis points at the September, November, December, February 2023 and March 2023 meetings. This would place the FFR at 3.25% to 3.5% one year from now, all while probably knocking more than $1 trillion off of the balance sheet.
I am not going to call those probabilities unrealistic. I'll let you do that for yourselves. I am going to say that if what is priced in does actually play out, that the US will not only be in recession, but probably deep recession, and that unemployment will be nowhere near the low levels currently enjoyed across the economy.
Do I have the answers? Does anyone? I have written up what I think is a smarter plan quite often. Monetary policy cannot make up for what is happening in either Eastern Europe or China, no matter how much "we '' want to be in control. Destroying demand in response to supply destruction will reduce standards of living. There is no way out of that, and enough demand will destroy itself as the fiscal spigot has been turned off.
The FOMC, in my opinion, only needs to move 25 basis points at a time, as 175 basis points over two months will surely have a severely negative impact on both consumer and business-to-business economic activity. The FOMC should, in my opinion, be aggressive on the balance sheet, but get mortgage-backed securities down to a very small part of the portfolio or even off the books before taking a severe hatchet to US Treasury holdings. I am told that some of you occasionally read Market Recon. I can only help if you actually heed my words.
Amazon Gets Thumped
Amazon reported its first-quarter results on Thursday evening. Amazon posted a GAAP loss per share of $7.56 (net loss of $3.8 billion) on revenue of $116.44 billion. The bottom-line print missed by almost $16 a share and presents as Amazon's first quarterly net loss since 2015. It is key to note here that Amazon included a pre-tax valuation loss of $7.6 billion in non-operating expense related to the decline in the value of Amazon's holdings in Rivian Automotive RIVN. Adjusted, Amazon EPS comes to $7.38, which is still about a dollar short of expectations, but at least positive. The revenue print was good enough for year-over-year growth of just 7.3%, and landed in line with estimates.
Online stores missed, Physical stores beat. Third-Party sellers beat, AWS grew 37% and barely beat, and Advertising grew 25%, but missed kind of badly. Oh, "Other" also missed printing at little more than half of expectations. Costs increased some $6 billion.
For the current quarter, Amazon sees revenue in a range spanning $116 billion to $121billion, which would result in annual growth of between 3% and 7%. The street is around $120 billion on this metric. Though guidance appears a bit light, it is key to note that Prime Day came in the second quarter in 2021 and will likely occur in third quarter of 2022, thus setting up the third quarter for a year-over-year revenue burst. Operating income for the current quarter is seen in a range of -$1 billion to +$3 billion. Wall Street was between +$6.5 billion to +$7 billion on this metric, so this guidance is undeniably ugly.
Apple Is Cored
Apple actually had a solid fiscal second quarter. Apple posted GAAP EPS of $1.52 on revenue of $97.3 billion. These top- and bottom-line results both beat the street as the sales number was good enough for annual growth of 8.6%.
Services grew 17%, but missed slightly. The App Store, Apple Music, iCloud and Apple Care all set quarterly records, while video, payment and advertising all had record fiscal second quarters. Within Products, iPhone beat, iPad beat, Mac beat, and Wearables, Home and Accessories missed. Apple's installed base hit a new all-time record. Services gross margin of 72.6% only underscores the importance of that segment as Products gross margin landed at 36.4%.
Apple did not provide quantifiable performance guidance, as has been its norm the past couple years. However, on the call, Apple did say it expects COVID-related lockdowns in Asia to impact supplies of components and silicon that will impact its ability to meet demand. This condition will suppress revenue generation by some $4 billion to $8 billion. That is substantially larger than the quarter reported and is the main reason for this morning's selloff.
My Trading Plans for Amazon and Apple
First off, I am currently long Apple I have not been long Amazon in weeks. I believe Apple's Tim Cook is one of the greatest CEOs of all-time. Amazon's Andy Jassy still has a long way to go in order to convince me of anything. I think I add to AAPL from $155 down to $150. Down just 2% to 3% ($159-ish), where the stock is trading overnight, I don't need to add. I am good up here.
As for AMZN, $2,671 (March low) is a huge level. At zero dark-thirty, it looks as if the stock will open below that level. That might be OK, as long as the shares can retake that level by the close. The concern is that there is really nothing on the AMZN chart to grab on to in between $2,671 and something like $2,200. I am not saying that nothing develops, but there is nothing there to point to now. I may trade AMZN today, but trading and investing are not the same thing.
Economics (All Times Eastern)
08:30 - Personal Income (Mar): Expecting 0.4% m/m, Last 0.5% m/m.
08:30 - Consumer Spending (Mar): Expecting 0.6% m/m, Last 0.2% m/m.
08:30 - PCE Price Index (Mar): Expecting 6.8% y/y, Last6.4% y/y.
08:30 - Core PCE Price Index (Mar): Expecting 5.3% y/y, Last 5.4% y/y.
08:30 - Employment Cost Index (Q1): Expecting 1.1% q/q, Last 1.0% q/q.
09:45 - Chicago PMI (Apr): Expecting 61.5, Last 62.9.
10:00 - U of M Consumer Sentiment (Apr-F): Flashed 65.7.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 695.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 549.
The Fed (All Times Eastern)
Fed Blackout Period.