(Justin Vaughn, Editor, Options Trading Report)
Peaks and Valleys marked a turbulent week as inflation ruled investors and traders. The markets floundered with anticipation of the release Thursday of the (dreaded) CPI figure for September, at 8.2%, just a bit below August’s 8.3%, hardly a positive. A smattering of corporate earnings in the financial area were somewhat negative as big banks showed lower profits and listless growth. As earnings emerged from several sectors, a majority to the positive, the markets picked up ‘steam.’ Most notable was Netflix (NFLX), as the company added new subscribers, showed added earnings growth, and made major changes in subscribing regulations. Several ‘blue chippers’ reported better than expected earnings refuting the likes of many economists and strategists’ estimates. All of which gave traders and investors a measure of ‘new confidence’ boosting the indices into positive territory. Tuesday was more of the same as the two-day mini rally began to subside. As strategists have noted, the valuations have not yet fully reflected the market conditions. As more earnings reports come forth from a broader representation of companies, a truer picture of the ‘real’ economy will emerge. Wednesday’s opening was ‘rocky’ as the overall concerns about controlling inflation rose to the fore, and flattened the indices. To date 69% of the reported earnings so far released were positive as opposed to the five-year average of 77%. Some economists interpret those numbers to be a sign that the economy is trending downward. Hardly convincing to many. The underlying fears in the marketplace are now becoming ‘more real,’ as the realization of more strong interest rate hikes are on the horizon. Traders and investors are hard-pressed to ‘set’ investment directions. “I think the broader issue in this earnings season is really not just how companies are doing, but the macro issues with interest rates and Fed policy, said Jimmy Chang, chief investment officer at Rockefeller Global Family Office. By Thursday noon indexes were nicely up , with the Dow Jones Industrial Average flirting near 300 points and the S&P 500 and Nasdaq Composite up just a bit. As the afternoon wore on the market turned again, finishing slightly negative. Even with much ‘doom and gloom’ earnings reports continue to dispel recession fears and continue to buoy all indices.
Turbulence in the U.K. Prime Minister Truss is on thin ice, as fellow lawmakers plot to remove her. Her dramatic economic policies and proposed tax cuts were all ‘cut-down,’ as she attempted to salvage the flawed initiatives, offering apologies. Her budget plans and tax cutting ideas weighed heavily in the financial markets. Her Home Secretary, Suella Braverman abruptly resigned on Wednesday fueling speculation that her time is short. “I am a fighter, not a quitter,” Truss told lawmakers, as she was mocked repeatedly. “I acted in the national interest to ensure we have economic stability,” she proclaimed. Add in a country facing inflation of over 10% and rising, her woes are massive.
The Dilemma in the American Housing Markets…As mortgage rates skyrocket to near 7%, home starts, remodels and all buildings are severely affected. Last month home starts were off 7.7%, according to the Commerce Department, with that number certain to grow in the coming months. America’s housing shortage is staggering; at the end of 2020 the U.S. is 3.8 million homes short, with little hope for a construction surge.
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RUMBLINGS ON THE STREET
Randall W. Forsyth, Writer of “UP & DOWN WALL STREET”, Barron’s Bernanke, Diamond, and Dybvig made important contributions to the understanding of banks’ role. Reforms made since the financial crisis have greatly strengthened major banks, making them more resilient. So much so that Janet Yellon, the current Treasury Secretary, with a doctorate in economics, declared in 2017 as a Fed chair that she didn’t believe there would be another financial crisis in our lifetimes. That prediction doesn’t seem based in science, dismal or otherwise.”
Erica Snyder, president and CEO of Hunter Associates in Pittsburg, Barron’s “The most important thing in this environment is quality and consistency of earnings, earnings growth, and free cash flow.” She adds, “One of the positives for investors is that, in a more normalized interest-rate climate, they can actually earn income on their fixed income again. When we look forward over the next decade, that may be one of the biggest opportunities.”
Jim Reid, Multi-asser strategist, after Thursday’s wild market turnaround, Barron’s The term roller coaster is one of the most overused lazy terms to describe markets, but the last 24 hours are best summed up by being a major roller coaster ride…”
Nancy Lazar, chief global economist at Piper Sandler, Barron’s “Delinquency risk is rising, especially for low-end consumers who have exhausted their excess savings.” She adds that credit card loans are now 6% above their pre-pandemic high, with 60% of that debt carried for one year or longer at rates high and climbing.