What roar is that? - 'tis the rain that breaks
In torrents away from the airy lakes
Heavily poured on the shuddering ground
And shedding a nameless horror round,
Ah! well-known woods, and mountains and skies
With the very clouds! - ye are lost to my eyes.
I seek ye vainly, and see in your place
The shadowy tempest that sweeps through space,
A whirling ocean that fills the wall
Of the crystal heaven, and buries all.
- "The Hurricane" (excerpt) William Cullen Bryant 1794-1878 (published 1904)
A Change In Temperature
The wind blew in from a different direction. It felt hot, it felt wet. What was this? A hint of despair? Not sure. A confident leader, sounding anything but.
"That hurricane is right out there down the road coming our way. We just don't know if it's a minor one or Superstorm Sandy... and you better brace yourself," Jamie Dimon, CEO of JPMorgan Chase ( JPM) warned investors and the public at large just one week after sounding less worried about the trajectory of U.S. monetary policy and external impacts such as the stalling Chinese economy and the war in eastern Europe at his firm's first investor day in over two years.
A week ago, Dimon had referred to these multiple threats as "storm clouds." On Wednesday, Dimon said: "I said they're storm clouds, they're big storm clouds. It's a hurricane."
Equities had opened on strength on Wednesday. These words, read instantly by high-speed, keyword-reading algorithms immediately put the whammy on any thought of broadly rallying stock markets shortly after the opening bell, though the major indexes would rally well off of their lunchtime lows throughout the afternoon.
Dimon was on a roll, though, and he kept on keepin' on:
On Oil: "We're not taking the proper actions to protect Europe from what's going to happen in oil in the short run. And we're not taking the proper actions to protect you all from what's going to happen to oil in the next five years, which means it almost has to go up in price."
On the Fed: "They do not have a choice because there's so much liquidity in the system. They have to remove some of the liquidity to stop the speculation, to reduce home prices and stuff like that. And you've never been through QT."
On the Bank: "I kind of want to shed non-operating deposits again, which we can do in size, to protect ourselves so we can serve clients in bad times. That's the environment we're dealing with."
After mentioning a few bright spots such as current labor market strength, Dimon added, "I think it's OK to hope that it will end up OK. I hope it. That's my goldilocks, I hope. Who the hell knows?"
Wow.
Mixed Message
Now, what if I told you that a much less dire sounding message was sent out to J.P. Morgan's clients by one of the firm's highest profile stars?
On the very same day that the CEO sounds like the sky is falling?
J.P. Morgan strategist Marko Kolanovic, who was ranked the number one equity-linked strategist in 2021's Institutional Investor survey wrote to clients on Wednesday. Kolanovic wrote, "We remain positive on risky assets due to near record low positioning, bearish sentiment, and our view that there will be no recession given supports from US consumers, global post-Covid reopening, and China stimulus and recovery."
Kolanovic then adds, "Bears are saying only the Fed making a U-turn can change the course of markets here. We think this is not true as what is needed is incremental change relative to the significant amount of tightening already priced into the market."
My Thoughts
That's what makes a market. I would think that messages emitted by one firm might be more in line with each other, but I find it refreshing that in this case they were not. I have worked at firms where one had to make sure that they did not contradict the narrative as passed down from above.
Clearly, the CEO is more concerned about the economy itself, and for good reason. Q1 GDP printed at -1.5%, and after Wednesday's significant miss for April Construction Spending, which came on top of a bevy of disappointing housing data for that month, the Atlanta Fed's GDPNow snapshot shows the second quarter running at just +1.3%. So no matter who tells you that we are fine, or that there is no recession in the data for 2022, the data clearly show that the U.S. economy is skating too close to the thin ice for comfort.
We often hear nonsense spewed by talking heads on whether or not the U.S. will head into a shallow recession or if it will be more severe. The truth is that recessionary behavior is as much psychological as it is business-driven. That behavior can be contagious. The labor force becomes less confident, hanging on to jobs with two hands instead of seeking out opportunity. Business owners try to cut back on expenses, including payroll. Less capital goods are purchased. There is no way to accurately predict other than in some vague fashion, ahead of time, how decision makers will react to a tougher environment, and how consumers will behave as standards of living contract.
On the other hand, Kolanovic makes a point. Markets have gotten ahead of policy. The neutral rate may be lower than we think. Lower than those voting on policy think. What kind of an impact does a Chinese economy returning to its former place in a globalized marketplace have? How much of an impact would a negotiated settlement between Ukraine and Russia have? Between NATO and Russia? While a sustained recession could not be good for the markets, there is a chance that markets stabilize, or maybe they already have, as the economy catches up.
Play the hand you're dealt. Adapt in order to excel. If comfort is found in higher cash levels and more in trading than in investing, then so be it. That's a matter of risk tolerance. Either way, you and I have the skills and talent necessary to tackle whatever is placed to our front. Fear? Fear is but for the wicked. So, let the wicked tremble before us.
Over and Out
Meta Platforms ( FB) COO Sheryl Sandberg is stepping down from that position after 14 years on the job as CEO Mark Zuckerberg's number two. The position will be filled by current CGO (chief growth officer) Javier Olivan. In other news, Meta will change its ticker from FB to META as of June 9.
Sandberg, who did announce her decision to leave on her Facebook page, did not outline reasons for the change. Facebook, or Meta has been caught up in a number of unpleasant issues over recent years, including the Cambridge Analytica data privacy scandal, Russian disinformation campaigns, and more broadly, the proliferation of misinformation. This has often painted the firm's management in a negative light, and Sandberg whose job it was to minimize the platform, was no exception.
The stock closed at 16 times forward-looking earnings on Thursday night, down 50.9% from the highs of last September. Is this good for the stock? Probably, in my opinion, at least for the short run, given the public's negative perception of management.
I bought the dip last night ($186) and sold the shares at $189, not willing to stay long overnight in case there was more news. If that was indeed... the only shoe to drop. I would think that this stock could potentially be initiated in the $180's with an intent to build a small-to medium-sized long position.
Softer Oil
The Financial Times (among others) is reporting this morning that Saudi Arabia has indicated to the West that it might raise production should Russian output fall significantly under the weight of global sanctions.
OPEC+, which includes Russia and 22 other oil producing nations meets today (Thursday). Oh, maybe it matters... Soviet, I mean Russian foreign minister Sergei Lavrov is in Riyadh this week.
On Energy
I think it is significant that companies across the S&P 500 showed earnings growth of 9.2% on revenue growth of 13.5% for the first quarter, while companies across the energy sector SPDR ETF ( XLE) showed earnings growth of 268% on revenue growth of 60%. Looking ahead, for the second (current) quarter, consensus view is for S&P 500 earnings growth of 4.1% on revenue growth of 9.7%. Consensus for the energy sector is for Q2 earnings growth of 195% on revenue growth of 38%.
Despite the extreme outperformance, the S&P 500 currently trades at 17.1 times forward-looking earnings, while the Energy sector trades at 10.6 times, easily the least-valued equity market sector by the public as well as the investor class. This would be due to the ESG-style investing trend and the social pariah that public companies driving revenue through the production, refining, transporting or just plain burning of fossil fuels have become.
The fact is that "green energy" in its broadest sense is not ready to meet demand. Not even close. Perhaps still a generation away. Yet, due to a lack of investment by the sector in exploration, production and oil services, there is now a general scarcity that can go either way.
Oil markets were already tight before Russia invaded Ukraine. A China that gets back on-line, would only increase a global demand that current sources are openly having trouble keeping supplied.
Trading/Investing
Across the Energy sector, I remain long, am expanding longs (mostly in U.S.-centric operations) in (there are some warts among my selections, highlighted below):
Chevron (CVX) : My blue-chip energy go-to. Integrated oil & gas. Trades at 10 times forward-looking earnings, yields 3.25%, current ratio of 1.43, tangible book value of $72.19 per share, Q1 free cash flow of $3.15 per share.
APA Corp. (APA) : The old Apache Oil. Global operation with large exposure to the Permian Basin. Trades at 4.7 times forward-looking earnings, yields 1.06%, current ratio of 1.23, tangible book value of $-0.05 per share, Q1 free cash flow of $1.48 per share.
Pioneer Natural Resources (PXD) : Perhaps the best of the lot. U.S., Permian based. Trades at 8.6 times forward-looking earnings, dividend varies, current ratio of 1.54, tangible book value of $96.81 per share, Q1 free cash flow of $6.86 per share.
Civitas Resources (CIVI) : Carbon neutral oil & gas. Operating in the Denver-Julesburg Basin. Trades at 5.5 times forward-looking earnings, yields 2.13%, current ratio of 0.5, tangible book value of $54.60 per share, Q1 free cash flow of $1.50 per share.
Away from Energy...
Added exposure to Livent Corporation ( LTHM) on the Goldman Sachs story inspired weakness.
Took some profits in Costco ( COST) , Still long.
Watching PepsiCo ( PEP) for an add. Will not act above the 200-day simple moving average ($165). Would love to take a 6% discount to that line.
Economics (All Times Eastern)
08:15 - ADP Employment Report (May): Expecting 278K , Last 247K.
08:30 - Initial Jobless Claims (Weekly): Expecting 210K, Last 210K.
08:30 - Continuing Claims (Weekly): Last 1.346M.
08:30 - Unit Labor Costs (Q1-rev): Flashed 11.6% q/q annualized.
08:30 - Non-Farm Productivity (Q1-rev): Flashed -7.5% q/q annualized.
08:30 - Factory Orders (Apr): Expecting 0.7% m/m, Last 2.2% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +80B cf.
10:30 - Oil Inventories (Weekly): Last -1.019M.
10:30 - Gasoline Stocks (Weekly): Last -482K.
The Fed (All Times Eastern)
12:00 - Speaker: New York Executive VP Lorie Logan (Dallas Fed Pres.as of 22 August) .
13:00 - Speaker: Cleveland Fed Pres. Loretta Mester.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: ( HRL) (0.47)
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